Directors Duties: Current Challenges Stavros Pavlou Senior and - PDF document

Nov-17 Directors’ Duties: Current Challenges Stavros Pavlou Senior and Managing Partner Patrikios Pavlou & Associates LLC Advanced Directors’ Workshop 30 th November & 1 st December 2017 Who is a Director?  The term “Director” includes any person occupying the position of director by whatever name called (S. 2, Cyprus Companies Law, Cap.113).  The term “director” may be applied to any person who has been validly appointed as a director (de jure director) and to a person who acts as a director without having been appointed validly or at all (de facto director). 1

Nov-17 Who is a Director?  ‘ The directors are not servants to obey directions given by the shareholders as individuals; they are not agents appointed by and bound to serve the shareholders as their principals. They are persons who may by the regulations be entrusted with the control of the business, and if so entrusted they can be dispossessed from that control only by the statutory majority which can alter the articles.’ Gramophone & Typewriter Ltd v Stanley, Court of Appeal, 27 March 1908. Who is a Director?  ‘ To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director’. Hydrodan (Corby) Ltd (In Liquidation) , Re Chancery Division, 17 December 1993. 2

Nov-17 What about ‘Nominee’ Directors?  Cyprus Companies Law does not provide for Nominee Directors.  The are treated by all exactly like all other directors. What about ‘Nominee’ Directors?  “…the fact that a director of a company has been nominated to that office by a shareholder does not, of itself, impose any duty on the director owed to his nominator… an appointed director, without being in breach of his duties to the company, may take the interests of his nominator into account, provided that his decisions as a director are in what he genuinely considers to be the best interests of the company; but that is a very different thing from his being under a duty to his nominator by reason of his appointment by it.’ Frederick Geraint Hawkes v Simone Francesca Cuddy , et al [2009]. 3

Nov-17 DIRECTORS’ DUTIES: AN OVERVIEW  FIDUCIARY DUTIES Owed towards the company and not towards the individual  shareholders. Good faith: To act in the company’s best interests (subjective  test). Duty to use powers for proper purpose.  Duty to make independent judgments.  Duty to avoid conflicts of interest.  DUTY OF SKILL AND CARE  Directors owe a duty of care to the company in common law not to act negligently in managing the affairs of the company.  “A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.” ( Re City Equitable Fire Insurance Co. [1925 ]) 4

Nov-17 STATUTORY DUTIES  A number of laws impose specific duties on the directors. Such laws include but are not limited to Companies Law, Cap. 113.  Social Insurance Law.  Anti-Money Laundering Laws, Directives and Regulations.  Value Added Tax Law of 2000.  Assessment and Collection of Taxes Law.   Therefore directors, in an over-regulated environment, should know and understand their obligations and liabilities under all relevant laws. LIABILITY OF DIRECTORS  The Law does not specify the exact level of skill and care directors owe to the company. If directors act in good faith and in the best interests of the company they cannot be held responsible, unless they are found guilty of gross negligence (recklessness).  Section 197: Any provisions in any contract with the company exempting any officer or indemnifying him against any liability which would otherwise attach to him in respect of any negligent act or default, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void.  If in any proceeding ( between the director and the company ) for negligence, default, breach of duty or breach of trust, it appears to the court that the director may be liable, but that he has acted honestly and reasonably, the court may relieve his of any liability (section 383). 5

Nov-17 TORTIOUS LIABILITY OF DIRECTORS Can a director be liable for torts of the Company?  The “Direct or Procure” Test  A director is personally liable for the tortious acts of his company where he has authorized, directed and procured the tortious act and such director need not have known that the act was tortious. Necessary to show that the director’s involvement in the acts  complained of would have rendered him a joint torfeasor if he was not a director. TORTIOUS LIABILITY OF DIRECTORS  The “make the tort his own” Test A director must not only commit or direct the tortious act or  conduct but he must do so deliberately or recklessly and so as to make it his own, as distinct from the act or conduct of the company. It is unnecessary for the director to know that the act is tortious.  The “assumption of responsibility” Test A director would only be liable if he assumed personal liability  for a representation and the other party could reasonably rely on that assumption or responsibility. Where fraud is involved a director who has made a fraudulent  misrepresentation will not be able to raise the limited liability and separate legal personality of the company as a defence. 6

Nov-17 CURRENT CHALLENGES CURRENT CHALLENGES  SUBSTANCE – EFFECTIVE MANAGEMENT CONSIDERATIONS  Section 2 of the Income Tax Law No. 188(I)/2002: A company is considered a Cyprus tax resident when its control and management is exercised within Cyprus.  “A company resides, for the purposes of income tax, where its real business is carried on… and the real business is carried on where the central management and control actually abides”. De Beers Consolidated Miles Ltd v Howe, Surveyor of Taxes (1906) 5 TC 198. 7

Nov-17 CURRENT CHALLENGES  SUBSTANCE – EFFECTIVE MANAGEMENT CONSIDERATIONS (CONT)  “the company may be properly found to reside in a country where it ‘really does business’, that is to say, where the controlling power and authority which, according to the ordinary constitution of a limited liability company, is vested in its board of directors, and the exercise of that power and authority, is to some substantial degree to be found.” Bullock (H M Inspector of Taxes) v The Unit Construction Co, Ltd Ch.d. [1959] Ch. 147  Substance is currently a buzzword for the purposes of mitigating tax and other risks.  What can directors do to ensure that their companies are Cyprus tax residents? CURRENT CHALLENGES  VAT LEGISLATION Section 48(1) of VAT Law of 2000→ ‘whenever a criminal offence  under VAT Law is committed by a legal person, the legal person as well as its directors and managing officers bear the liability’. Managing officer: any director, secretary or equivalent office, or  any person who appears to be acting under such capacity. Proof of intention to commit VAT wrongdoing is not necessary to  substantiate the criminal offence. Directors bear personal criminal liability for their companies’ failure to comply with the VAT law (Criminal Appeal 276/2015, 277/2015, 12/04/2017).  The Supreme Court on 18/09/2017 imposed a 4-month imprisonment to two directors whose entity failed to settle VAT and submit VAT returns, emphasising that the VAT law is of public concern and thus the court sentences should aim primarily to deter future offenders. 8

Nov-17 CURRENT CHALLENGES  TAX LEGISLATION CURRENT CHALLENGES  TAX LEGISLATION Directors are responsible for submitting tax returns and take all  necessary steps and actions for the assessment and submission of taxes imposed on the company. Directors may have criminal liability as accomplices where the  company is guilty of the offence of fraudulently or deliberately submitting inaccurate statements, returns, accounts etc. Administrative fines if directors fail to submit tax returns or omit,  neglect or refuse to provide information. Directors may also be criminally liable. Where the company is guilty of the offence of fraudulently  omitting or delaying to pay taxes then automatic strict liability falls on the director. 9

Nov-17 CURRENT CHALLENGES  TAX LEGISLATION (CONT) A recent circular from the Tax Commissioner clarified that:  The appointment of a nominee director or a legal person  providing nominee services does not refute any criminal liability of such directors for tax offences. The directors must know the business transactions of the  company and to comply with the company’s tax obligations. Criminal prosecutions will not be suspended due to the fact  that the director of the company involved is a nominee director. Directors should take preventive measures to avoid potential  problems arising out of the undertaking of directorships. In case that the directors have lost communication with the  UBOs, they should resign and notify the ROC and the Tax Department accordingly. CURRENT CHALLENGES  SANCTIONS AND RESTRICTIVE MEASURES 10