Simon ThomasPartner – Baker & Partners, Jersey

Charles ColemanDirector – Gough Law, Isle of Man

Offshore directors – Are they untouchable?

Offshore Alert London25 November 2015Grange St. Pauls, London

Professional DirectorsNominee Directors Independent Directors

Definitions

Requisite criminal intent?“dishonesty”?

Strict liabilityRegulatory offences?Offences under proceed of crime legislation?

Criminal law?

How active is the regulator?How egregious are the actions of the director?Available sanctions?Unlikely effective remedy for loser.

Regulatory Sanctions?

Statutory duties:E.G. art 74(1) Companies (Jersey) Law

General duty to act honestly in good faith and with due care, diligence and skill

Common law dutiesMust act bona fide in the best interests of the Company

Must positively apply his mind to the question of what the Company’s interests are

Must exercise independent judgement and not fetter discretion

Must act in accordance with the powers given by articles.

No “special rules”

The Basics: What are duties of director?

Nothing legally wrong

“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”

Bouting v. Association of Cinematograph [1963] 2 QB 626

A director who acts without exercising any discretion at the direction of a stranger to the company is “fixed with the stranger’s knowledge of the nature of the transactions”

Selangor v United Rubber Estates [1968] 1 WLR 1555

“Nominee” Directors

Why pursue directors?

“low hanging fruit”? Fraud casesInsolvent fraud

Enforceability issues against “fraudsters” and/or principal characters

Insurance coverageMinimum level of cover?

Why pursue directors?

Establish breach of fiduciary duty by directorsPursue those who may have dishonesty assisted

that breach.

Stepping stone to other parties: Dishonest assistance

Central Bank of Ecuador v. Conticorp SA & others [2015] UKPC

11

Case Study

The structureConticorp SA

Grupo Financiero Conticorp SA

Banco Continental

Banco Curacao

Interamerican Asset Management Fund Limited “IAMF”

2,500 Bahamanian $ per year 5 individuals authorised to give him “full

instructions”Members of the family which controlled Conticorp “never more than an instrument executing the

Respondents’ instructions”

Mr Taylor

On instructions signed away portfolio of assets worth $190m in transaction at undervalue

Orchestrated by Conticorp to extract value from failing subsidiary

Taylor made no enquiries as to commercial benefit to company of transaction.

No independent judgment

Fixed with knowledge of those instructing him.

The transactions

No reason to believe that the instructions he received were dishonest

Impossible on the information that he was provided with for him to conclude where the interests of the Company lay

BUT made no reasonable enquiry.

Taylor’s defence

Mr Taylor gave effect “blindly and ignorantly” to others’ instructions and this was so whether or not he was, in the event fortunate enough to receive only instructions which were in IAMF’s best interest

It was his duty to understand IAMF’s affairs and apply his own mind to its interests

He took the risk, at the very least, that the instructions he received and followed may not be proper

No different standard for offshore nominees

“Dishonesty”Defendant must be conscious of those elements of the

transaction which make his participation transgress ordinary standards of honest behaviour, but there is no requirement that he should have thought about what those standards were

Barlow Clowes v Eurotrust [2006]

Dishonest Assisters

Joint and several liability US$ 191mCompound interest

Available where money obtained and retained by fraud by someone in fiduciary position

Applies equally to those who assist the fiducuiary

Interest US$381m

Judgment

Corporate Services Provider provides services to fraudster

Fraudster obtained funds from victim on trust CSP paid away funds Court found knowledge sufficient for dishonest assistance Judgment against CSP £4.5m and €8.4m

Nolan v Minerva [2014] - Jersey

Causes of action

Breach of fiduciary dutyNegligence

Causes of action

Directors acting in interests of another company within group/shareholders of another company

Angelmist Properties Ltd v. Leonard [2015]Transaction for benefit of another company in group is potentially in the

overall, albeit indirect interest of their company

But must still exercise appropriate care in the interests of the company of which they are director. Cannot forego that Company’s interest

Conflict of interest

Possibility of exclusion clausesArticles of association

Contracts of services

Only liable for “wilful default”

Negligence

Failings of directors, included:Signing minutes of meetings and reports prepared by professionals

appointed to manage fund without reading them

Signed financial statements, management representation letters and side letters without making enquiries

Signed sham investment management and advisory agreements without reading them

Failed to read a report which identified a related entity as investment counterparty.

Weavering v Peterson - Caymans

Need to establish eitherIntentional and conscious breach of duty, or

Reckless disregard by director for duty he owedRe City Equitable Fire insurance [1925] Ch 407

“Wilful default”

Difficulties

Judgments proof Lack of assets Insurance agreementsCollusive agreement between defendant director & insurer?

Practical difficulties

Reflective loss-type argumentsProper Plaintiff in action for loss suffered by a wrong to the Company

will normally be the Company itself and not its shareholders

Impact for offshore trust structures?

Positive indications from some courtsFreeman v Ansbacher [2009] Jersey

Jefcoate v Spread Trustee Co Ltd [2014] Guernsey

Risk remains

Legal difficulties

Difficulty in proving “fraud” or “dishonesty”Causation “Honestly & reasonably” clausesRatification of conduct by shareholdersApportionment of damagesContributory negligence

Legal difficulties

Conclusions

Simon ThomasPartner – Baker & Partners, Jersey

Charles ColemanDirector – Gough Law, Isle of Man

Offshore directors – Are they untouchable?

Offshore Alert London25 November 2015Grange St. Pauls, London