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

Nov-17 1

Directors’ Duties: Current Challenges

Advanced Directors’ Workshop 30th November & 1st December 2017

Stavros Pavlou Senior and Managing Partner Patrikios Pavlou & Associates LLC

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).

Nov-17 2

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.

Nov-17 3

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

• f

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

• f 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].

Nov-17 4

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])

Nov-17 5

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

• we 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

• r 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).

Nov-17 6

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

• n 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.

Nov-17 7

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.

Nov-17 8

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

• f 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

• n

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.

Nov-17 9

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
• mitting or delaying to pay taxes then automatic strict liability falls
• n the director.

Nov-17 10

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

• f 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

Nov-17 11

CURRENT CHALLENGES

 SANCTIONS AND RESTRICTIVE MEASURES

• Sanctions: Actions taken by the Security Council of the United

Nations (UN) to maintain or restore international peace and security. Can take a number

• f

different forms from comprehensive economic and trade sanctions to more targeted measures, such as embargoes.

• Restrictive Measures: Adopted by the EU to target sectorial

cooperation and exchanges with the Russian Federation.

• The Law of 2016 on the Implementation of the Provisions of

Resolutions or Decisions of the UN Security Council (Sanctions) and the Decisions and Regulations of the Council of the EU (Restrictive Measures) has introduced specific measures and penalties for the breach and/or non compliance therewith.

CURRENT CHALLENGES

 SANCTIONS AND RESTRICTIVE MEASURES (CONT)

• Violation of the Sanctions and of the Restrictive Measures

constitutes a criminal offence and any person is subject, on conviction: a) in the event

• f

a natural person to a sentence of imprisonment not exceeding 2 years or to a fine not exceeding EURO 100,000 or both, and b) In the event of a legal person, to a criminal fine not exceeding EURO 300,000

• Directors, managers or officers are also subject to administrative

fines for infringing directives issued by the competent authorities for ensuring the implementation of Sanctions and Restrictive Measures.

Nov-17 12

CURRENT CHALLENGES

 EXCHANGE OF INFORMATION

CURRENT CHALLENGES

 EXCHANGE OF INFORMATION

• Article 26 of the OECD Model Tax Convention creates an
• bligation

to exchange information that it is foreseeably relevant to the correct application of the relevant double tax treaty and for facilitating the administration and enforcement of domestic tax laws of the contracting states.

• Mechanism

for exchange

• f

information incorporated into section 6 of the Assessment and Collection of Taxes Law 72(I)/2008.

• Tax

authorities are not at liberty to engage in ‘fishing expeditions’ or to request information that it is unlikely to be relevant to the tax affairs of a given taxpayer.

Nov-17 13

CURRENT CHALLENGES

 EXCHANGE OF INFORMATION (CONT)

• In general terms a ‘fishing expedition’ is an investigation

undertaken with the hope of discovering information.

• Tax authorities should provide detailed information of the

necessity of the request, while the taxpayer concerned must be sufficiently identified.

• Directors should be ready to respond to requests of exchange
• f information, however they should be able to identify any

possible ‘fishing expeditions’.

CURRENT CHALLENGES

Nov-17 14

CURRENT CHALLENGES

 ANTI-MONEY LAUNDERING CONCERNS

CURRENT CHALLENGES

 ANTI-MONEY LAUNDERING CONCERNS

• Directors may be held criminally liable under the provisions of

the AML Law 188(I)/2007 (‘AML Law’). Administrative sanctions are also applicable.

• Directors should apply adequate and appropriate systems in

relation to client identification and due diligence, record keeping and all other matters arising out of the AML Law.

• A director who knows or suspects that a person is engaged in

laundering

• r

financing

• f

terrorism

• ffences

and the information on which that knowledge or suspicion is based on comes to his attention in the course of his trade, profession, business or employment must disclose such information to MOKAS.

• CySec Directive DI144-2007-2008 (the ‘Directive’) provides that

directors must ensure that all obligations under the Law and Directive are complied with.

Nov-17 15

CURRENT CHALLENGES

 ANTI-MONEY LAUNDERING CONCERNS (CONT)

• The Directive in its sixth appendix provides examples of suspicious

transactions/activities related to money laundering and terrorist financing.

• Directors should be able to recognize if a transaction the company

is proposed to enter into might raise money-laundering suspicions.

• Examples of such suspicious transactions include, amongst others:

– Unnecessarily complex transactions. – The transactions or the size of the transactions do not comply with the usual practice and business activity of the client. – The settlement of any transaction in cash. – Any transaction the nature, size or frequency appear to be unusual. – The business relationship involves only one transaction or it has a short duration.

CURRENT CHALLENGES

 CRS AND FATCA CONSIDERATIONS

• OECD Common Reporting Standard (CRS): Automatic exchange
• f financial

account and taxpayer information between the participating jurisdictions.

• Foreign Account Tax Compliance Act (FATCA): A US tax legislation

to prevent and detect possible tax evasion and improve tax compliance.

• Directors should provide information with duly completed self-

certification forms.

• Completion of self-certification forms requires a comprehensive

analysis of a company’s activities, operations and circumstances, against the relevant complex regulatory requirements.

• Incorrect completion or incorrect classification may lead to

unnecessary reporting for the company and the controlling persons, prevention

• f
• pening
• f

new accounts

• r

even reputational risks.

Nov-17 16

DIRECTORS SHOULD:

 Get acquainted with the provisions of the Memorandum and Articles of Association of the company, as well as any Shareholders’ Agreement to which the company is a party.  Know and understand their obligations and liabilities under all applicable laws and regulations and stay updated with all legislative developments both in the national and on the European/international level.  Ensure that the company is compliant with all obligations.  Always monitor the activities of the company for potential infringement

• f the AML legislation.

 Have sufficient knowledge of the operations and business activities of the company.  Understand their duties and that such duties are owed towards the company and not to the individual shareholders and possibly to the creditors or third parties dealing with the company.  Obtain proper legal, tax or other professional advice as appropriate, if are unsure how to act in a particular occasion.

Patrician Chambers, 332 Agiou Andreou Str., 3035 Limassol, Cyprus P .O. Box 54543, 3725 Limassol, Cyprus Tel: +357 25 871 599 Fax: +357 25 344 548 info@pavlaw.com www.pavlaw.com