Strict duties imposed on directors must be discharged, even if they are nominee directors. The Central Bank of Ecuador v Conticorp [2016] 1 BCLC 26 decision illustrates the dire implications for a director who merely follows instructions and by so doing fails to discharge his duties to the company.

Directors duties

"...A nominee director is not entitled to forego, or surrender to another, any exercise of his discretion, however paltry the amount he may be paid."

The Privy Council (the Board) heard a claim against a group of companies and individuals who were alleged to have dishonestly assisted in causing the assets of the Appellant to be transferred to the first Respondent and for the benefit of the Respondents to the detriment of the Appellant.

The Central Bank of Ecuador decision is a very important one as it can be relied on to assist with establishing (i) the circumstances in which an appellant court may be justified or in fact required to intervene to interfere with a decision based on concurrent findings of pure fact; conclusions of primary fact; or one where a party is exonerated of want of probity; (ii) establishing dishonest procurement or dishonest assistance of a director whether acting as a nominee or shadow director.

Summary of facts

The Appellant, Interamerican Asset Management Fund Limited (IAMF/the Appellant) was incorporated in Bahamas and brought a claim against an Ecuadorian company Conticorp SA (Conticorp) and a group of subsidiary companies alleging that Conticorp, through its principal shareholders and owners, controlled all of IAMF's decisions and affairs and that although the Appellant was presented to the world as an independent investment management fund with Mr Michael Taylor (Mr Taylor) as its sole director and nominated investment adviser, it was no more than an instrument executing the Respondents' instructions.

The individual defendants to IAMF's claim were the principal shareholders and owners of Conticorp holding 51 per cent of Conticorp's shares. These four brothers, Ecuadorian nationals, are referred to as the Ortega Trujillo family and are lawyers by profession. Conticorp owned Grupo Financiero Conticorp SA (GFC) whose principal subsidiary was Banco Continental SA (Banco Continental) which in turn owned Banco Continental

Overseas NV (BCO Curacao). GFC as well as Banco Continental were both Ecuadorian companies while BCO Curacao was incorporated in the Netherland Antilles.

The Appellant held assets in the value of US$192 million which comprised cash, shareholdings and portfolios of loans granted to Conticorp and its related companies.

In 1995, at a time of severe financial difficulty for Banco Continental and BCO Curacao, the Appellants, by three transactions, transferred or surrendered its cash, portfolios and shareholdings to Conticorp in exchange for shares which, the Appellant alleged, were not or could not honestly have been thought to have value, or at least value commensurate with that of the cash, loans and shares which the Appellant was surrendering and the risks its was incurring by accepting what were known as global depository receipts (GDRs) ([2016] 1 BCLC 26, paragraph 15: "GDRs are a means of making shares more marketable internationally. An institution is engaged to hold a company's shares and to issue GDRs guaranteeing title therein to purchasers".). The three transactions were carried out in the context of a very volatile economic environment where there were rumours of the recipient banks collapsing, triggering mass withdrawals from the public.

The first transaction in December 1995 involved loans with accrued interest valued at US$51,128,812.42. The sale was ostensibly for cash but there was an agreement by which Conticorp agreed to sell IAMF GDRs reflecting entitlements by IAMF to 115,752 shares in GFC. The value placed on the GFC shares by these transactions was for US$55,595,685.60, each GFC share was valued at US$480.30. For this transaction, the cheque delivered in ostensible payment for the GDRs was just endorsed back to pay for the transfer of the loan portfolios. IAMF had to transfer an additional US$4,466,873.14 to meet the difference between the face value of the loans and the value put on the GDRs received in return.

The second transaction in January 1996 similarly involved loans with accrued interest valued at US$42,527,174.70 for which the sale was ostensibly for cash but was, by agreement, a sale by Conticorp of GDRs to IAMF of 51,248 shares in GFC. The value placed on the GFC shares by this transaction was US$39,387,000 ie each GFC share valued at US$768.56. For both transactions, the cheques delivered in ostensible payment for the GDRs were just endorsed back to pay for the transfer of the loan portfolios.

The third transaction in March 1996 had two parts:

  1. By the first part, IAMF agreed to sell Conticorp loans with face value of US$45,265,660 plus accrued interest in return for payment of US$46,202,807.20 which Conticorp had the option of paying for by delivery of GDRs representing 76,695 shares in GFC.
  2. By the second part, IAMF and Conticorp agreed to set off various debts resulting in a net payment due from Conticorp to IAMF of US$9,658,576 and IAMF agreed to sell shares in several property companies due from Conticorp for US$37,969,273.56 making the total payment due from Conticorp to be US$47,627,850 which Conticorp could pay for in cash or by issuing GDRs representing 79,060 shares in GFC to which this value was assigned. The assigned value of the GFC shares under each part of the third transaction was US$602.43 per share.

The first, second and third transactions together referred to as the Three Transactions.

IAMF's claim before the High Court of Bahamas spanned a 42 day trial period where the Court heard arguments concerning the probity of the Three Transactions on the basis that the Respondents had dishonestly assisted breaches of trust by IAMF's sole director who signed, on the Respondents' instructions, all the documentation by which the three transactions were implemented.

IAMF's case was that the Three Transactions were agreed in disregard for IAMF's interests and were for the benefit of Conticorp and its related companies, whose debts were being in effect forgiven for the benefit of the Respondents.

In the High Court, IAMF argued that the Court should find that Mr Taylor as sole director of IAMF, was in breach of his fiduciary duties in agreeing the Three Transactions, in that he simply followed instructions given by the Respondents through Ansbacher (IAMF's administator) without further thought. It was IAMF's case that the Respondents dishonestly procured or assisted in that breach of duty or alternatively, the Respondents were or are liable in deceit and or conspiracy.

Adderley J, delivering a 333 paragraph judgment, dismissed IAMF's claim challenging the probity of the Three Transactions though he found that Mr Taylor was in breach of his statutory and fiduciary duty role in relation to the Three Transactions. The judge said it mattered not that he was paid US$2,500 per annum and that he was a nominee director for many other IBCs as was the usual practice in the industry.

On an appeal lasting seven days and producing a 97 paragraph judgment, the Court of Appeal also dismissed IAMF's claim finding that there were no grounds for challenging the probity of the Three Transactions.

Before the Board, IAMF appealed the lower courts' decisions alleging dishonest procurement or dishonest assistance by the Respondents of the Three Transactions. The Board, in its careful analysis spanning 176 paragraphs addressed the circumstances in which the Board may be justified or in fact required to intervene to interfere with a decision based on concurrent findings of pure fact; conclusions of primary fact; or one where a party is exonerated of want of probity.

Findings

As the Board was satisfied that the circumstances of the case justified and in fact required that it intervene, it made the following findings:

On dishonest assistance

To make a finding of procuring or dishonest assistance, the Board affirmed the decision Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476 which established in summary that a defendant must be conscious of those elements of the transaction which makes his participation transgress ordinary standards of honest behaviour though there is no requirement that he should have thought about what those standards were. To establish dishonest assistance therefore, the applicant must first show that there has been a breach of fiduciary duty by the director and that the defendants must have dishonestly assisted him in so doing.

The Board noted that whether an individual has dishonestly assisted a breach of duty by a director of another company or has de facto control of that company has nothing to do with circumstances in which the corporate veil may in law be pierced. It also doesn't depend on whether or not the concept of a shadow director is recognised as relevant in the country's company law.

"Acting as an officer of one company, a person may dishonestly procure or assist a breach of duty by the director of another company, in which case such a person may make liable for dishonest assistance both himself personally and the company of which he is an officer. Otherwise, individuals acting as officers of a company could never commit any wrong, tortious or equitable" (Paragraph 50).

To find dishonest assistance, the Board considered that the relevant factual questions to be answered were: (i) whether the respondents procured or assisted Mr Taylor's breaches of duty; (ii) what knowledge they had when giving such assistance; and (iii) whether any honest person(s) in their position giving such assistance with that knowledge could have believed that the relevant transaction was in IAMF's interests. 

On duties of a nominee director

The Board found that Mr Taylor had breached his duties as director of IAMF and affirmed the following regarding the duties of directors generally:

  • A director must act bona fide in the best interests of the company;
  • He must positively apply his mind to the question what the company's interests are;
  • He must exercise independent judgment and not fetter his discretion;
  • A nominee director is in no different position as outlined in the decision Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 where Lord Denning stated that there is nothing wrong with a director being nominated by a shareholder to represent his interests "...so long as the director is left free to exercise his best judgment in the interests of the company which he serves. But if he is put upon terms that he is bound to act in the affairs of the company in accordance with the directions of his patron, it is beyond doubt unlawful."
  • A nominee director is not entitled to forego, or surrender to another, any exercise of his discretion, however paltry the amount he may be paid;
  • In assessing whether a director has breached a duty to the company, it is not relevant to consider whether the company has suffered a loss. The question of loss is only relevant to determine what relief is available.
  • The Board noted that under the Bahamian International Business Companies Act, the director must "act honestly and in good faith with a view to the best interests of the company" and must also "exercise the care, diligence and skill that a reasonable prudent person would exercise in comparable circumstances."

Facts supporting a finding of breach of duties

The Board found that Mr Taylor had breached his duties for the following reasons:

  • The Board noted that from the outset, Mr Taylor was provided with a letter by which he was notified by the President of BCO Curacao, Mr Luis Ortega of the five people who were authorised to "give" him "full instructions regarding the operation" of IAMF;
  • It mattered not that his remuneration was US$2,500 per annum and that he was a nominee director as was the usual practice in the industry;
  • In considering the evidence available to the Court, the Board found that IAMF at all times acted and acted only on and in accordance with the instructions of the Respondents. When Mr Taylor he signed all documents he was required to sign, he blindly and ignorantly gave effect to others' instructions, and this was so whether or not he was, in the event, fortunate enough to receive only instructions which were in the Appellant's best interests. It was his duty to understand the Appellant's affairs and to apply his own mind to the Appellant's interests.
  • Significant to the Board was its observation that there was no evidence or likelihood that any independent advice was taken on behalf of IAMF regarding the purpose or prudence of its liability of entering into any of the Three Transactions. The Board noted for example the values assigned by the Three Transactions to the GFC shares were not reconcilable with a conclusion that the transactions could have been entered into with IAMF's interests in mind.
  • The Board found that the Three Transactions were, as and when entered into, not transactions which persons in the Respondents' position could, in the light of what they knew, honestly have considered to be in IAMF's interests. In fact, the Board was satisfied that no separate consideration was ever given to IAMF's interest when the transactions were devised and instructed.

In conclusion, after the Board's careful assessment, it allowed IAMF's appeal and found the Respondents jointly and severally liable to IAMF for dishonestly procuring and assisting Mr Taylor in breach of fiduciary duties toward IAMF in entering into the Three Transactions. The Board found IAMF was entitled to recover from the Respondents the face value of the cash, loans (with accrued) interest and shares it transferred and surrendered to Conticorp by the Three Transactions. The parties were given liberty to provide submissions on what the Board calculated was to be repaid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.