Group structures – risk of personal liability for directors and parent company liability for group companies
A recent decision of the Privy Council, the final court of appeal for Crown Dependencies and British Overseas Territories made up of UK Supreme Court judges and senior Commonwealth judges, highlights the risks for groups of companies where the business of the whole group is managed centrally rather than being devolved to the individual group companies. In this situation, the benefit of limited liability for each company in the group can be lost and both nominee directors of subsidiaries and parent company directors can face personal liability.
The case concerned Conticorp SA, a company based in Ecuador, and Interamerican Asset Management Fund Limited (IAMF), based in the Bahamas and indirectly owned by Conticorp. Mr Taylor was the sole director of IAMF, but acted purely on instructions from Conticorp.
During 1995 and 1996, IAMF transferred substantially all of its assets to Conticorp in return for Conticorp transferring securities in another of its subsidiaries to IAMF. However, the securities transferred to IAMF turned out to be worth much less than the assets it had transferred to Conticorp. At the time of these transactions, the Conticorp group was in financial difficulty, and it seems that this was an attempt to keep assets from the creditors of its subsidiaries.
Liability of the director
Like directors of UK companies, a director of a company in the Bahamas must exercise independent judgment as to what is in the interests of the company. There is nothing wrong with a director being nominated by a shareholder to represent that shareholder's interests, as long as he does not simply act under the shareholder's direction.
Mr Taylor was found to have breached his duties to IAMF by giving effect, blindly and ignorantly, to Conticorp's instructions. He would have breached his duties by doing so even if he was lucky enough to receive only instructions that were in fact in IAMF's best interests. Further, the fact that he was paid only $2,500 per annum for his services as a director did not in any way lessen the duties he owed to the company.
In relation to the transfer of IAMF's assets, it did not matter whether Mr Taylor was aware that the assets were worth more than the securities IAMF received in return: as he had simply followed Conticorp's instructions, he was taken to have the same knowledge about the transaction as those instructing him.
Mr Taylor was therefore personally liable to IAMF for his breach of duty in relation to the transfer of assets.
Liability of Conticorp and its officers
An action against Mr Taylor, whilst potentially ruinous for him, would not have enabled IAMF to recover its loss on the transfer of its assets in return for worthless securities. It therefore brought a claim against Conticorp and against three of its principal shareholding owners and officers who had given directions to Mr Taylor about IAMF's affairs.
This claim was based on the allegation that Conticorp and its officers had dishonestly assisted Mr Taylor in his breach of duty to IAMF. Although the claim in this case was brought under the law of the Bahamas, a similar claim could be made under English law.
In order to establish liability, IAMF had to show:
- that Conticorp and its officers had procured or assisted Mr Taylor's breaches of duty;
- what knowledge they had when giving that assistance; and
- whether any honest person in their position giving that assistance, with that knowledge, could have believed that the transfer of its assets was in IAMF's interest.
In this case, it was clear that Conticorp and its officers had procured Mr Taylor's breach of duty in transferring IAMF's assets, and that they were aware of the financial position of the group which rendered the securities given in return worthless. The Privy Council could see nothing in their actions which would lead it to conclude that anyone directing their minds to the IAMF's interests could seriously or honestly have thought any of the transactions to be appropriate in such interests.
As a result, Conticorp and its officers were jointly and severally responsible for dishonestly procuring and assisting Mr Taylor's breaches of duty in entering into the transactions, and accordingly jointly and severally liable to AIMF for its loss of some $192m.
This case does not seek to "pierce the corporate veil" between separate group companies under which a shareholder's liability in respect of a subsidiary company is limited to the amount at which the shares in the subsidiary were originally subscribed. However, it shows that a claim of dishonest assistance can render a parent company and its directors jointly liable with a director of the subsidiary if they procure that director to breach his duties to the subsidiary company.
This case was concerned with a clear breach of duty, in the transfer of company assets for worthless consideration. But a director's general duty to promote the success of his company for the benefit of its members as a whole shifts, when the company faces financial difficulties, so that the director is obliged to safeguard the interests of the company's creditors. Where parent company directors are effectively managing the subsidiary's business and instructing its director, both the parent company directors and the parent company are at risk of joint liability with the subsidiary director for any breach of duty in failing to safeguard the interests of the subsidiary's creditors.