Corporate Law Update

This week we look at directors’ residential addresses (and a proposed new power to remove them from public view), corruption around the world (with the publication of Transparency International’s Corruption Perceptions Index 2017), and whether the knowledge of a company’s shareholder can be attributed to the company.

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New power for directors to remove residential addresses

The UK Government has announced it is planning to introduce new regulations allowing directors to remove their personal (i.e. residential) addresses from the public record at Companies House. The draft regulations can be found here.

Since 2009, when a person is appointed as a director of a UK company, the company must supply the director's residential address to Companies House. However, Companies House does not publish that address. Instead, it publishes a "service address" for the director.

However, if a director was appointed before that date, the director’s residential address will remain on the public record at Companies House and can be removed only in certain circumstances. (This is limited to where the director or someone living with them is at threat of intimidation or violence.) Where the director’s address was registered before 1 January 2003, removal is not possible at all.

As a result, there are still many directors whose residential addresses are a matter of public record. The Government is concerned that this is putting directors at an increased risk of fraud.

The proposed new regulations would change this by allowing existing directors to substitute their residential address with a service address (which would normally be the company's address), essentially bringing them in line with the current regime.

In short:

  • A director would no longer need to show a serious risk of violence or intimidation to himself or herself or a person living with him or her as a result of his or her company’s activities.
  • A director would be able to apply to remove his or her residential address, even if it was registered before 1 January 2003.
  • If the director is still required to provide an address, Companies House would replace his or her residential address with a service address provided in the removal application.
  • If the director is not required to provide an address, Companies House would obscure all parts of the address except the first half of the post code (the “outward post code”). For a non-UK address, Companies House would obscure everything except the country and next geographical sub-division (e.g. Delaware, United States of America).

The changes would also apply to company secretaries, shareholders and former shareholders where their residential address has been disclosed. The draft regulations contemplate similar changes for limited liability partnerships (LLPs) and European companies (SEs).

Transparency International publishes 2017 corruption index

Transparency International has published its Corruption Perceptions Index (CPI) for 2017.

The index consists of a table ranking countries worldwide according to how corrupt their public sectors are perceived to be. The data is compiled from 13 data sources across 12 different institutions that capture perceptions of corruption over the past two years.

Countries are scored from zero to 100. The higher the score, the less corrupt a country is perceived to be.

The CPI must be treated carefully, as it is by its nature subjective. However, it is nonetheless a valuable tool for organisations when conducting risk assessments for bribery and corruption, money laundering and terrorism financing.

Highlights from the CPI 2017 (including individual country scores) include:

  • New Zealand has retained top spot (89), followed by Denmark (88), Finland (85), Norway (85) and Switzerland (85). Notably, though, all of these countries suffered a drop in score, other than Norway (which achieved the same score this year).
  • Somalia remains bottom (9), propping up South Sudan (12), Syria (14) and Afghanistan (15).
  • 124 out of the 180 countries covered (69%) scored below 50. Notably, 53% of G20 countries scored below 50. The average score globally was 43.
  • Regionally, Western Europe showed high scores, ranging from 43 (Bulgaria) to 88 (Denmark). Eastern Europe, Central Asia, Africa and the Middle East generally showed lower scores. The Americas and Asia-Pacific showed wide discrepancies in scores, ranging from 18 (Venezuela) and 15 (Afghanistan) to 82 (Canada) and 89 (New Zealand) respectively.
  • The UK has managed to climb one point (82) and two places to joint 8th since 2016. Likewise, the United States climbed one point (75) and two places to joint 16th.
  • Australia, meanwhile, remains joint 13th but has dropped two points (77).
  • The highest climbers (those rising by more than 4 points) this year were the United Arab Emirates (+5 to 71), Barbados (+7 to 68), Jamaica (+5 to 44), Trinidad and Tobago (+6 to 41) and North Korea (+5 to 17). Brunei, Greece, Belarus, Guyana, Tanzania and Gambia all climbed by 4 points.
  • The steepest fallers (by more than 4 points) were Saint Lucia (-5 to 55), Bahrain (-7 to 36) and Liberia (-6 to 31). Cape Verde, Grenada, Mauritius, Suriname and Tajikistan all fell by 4 points.
  • For the first time, the CPI covers Equatorial Guinea, the Seychelles, Swaziland and Vanuatu.

European Commission consults on AIFMD

The European Commission is consulting on how the Alternative Investment Fund Managers Directive (“AIFMD”) is working in practice and the extent to which it is meeting its objectives.

AIFMD is an EU directive that regulates the operation and management of certain collective investment schemes that do not require authorisation (known as “alternative investment funds”).

The consultation is being conducted through an online questionnaire administered by KPMG on behalf of the Directorate-General for Financial Stability, Financial Services and Capital Markets Union.

Company was not attributed sole shareholder's knowledge

The Privy Council has held that, for the purpose of deciding when the limitation period began for a claim by a company against its former directors for breach of duty, the company did not automatically possess the same knowledge of events as its sole shareholder.

What happened?

Julien and others v Evolving Tecknologies and Enterprise Development Company Limited involved an investment by Eteck, a company formed by the Minister of Finance of Trinidad and Tobago for the purpose of investing in the IT sector in Trinidad and Tobago.

In 2005, Eteck invested US$5 million in Bamboo Networks Limited, a Cayman Islands company with offices in Hong Kong and China. In due course, Bamboo’s business in Trinidad and Tobago failed, and Eteck lost its entire investment.

Following the general election in Trinidad and Tobago in May 2010, Eteck’s board was replaced. The new board initiated a claim against Eteck’s previous directors, claiming they had breached their duties to Eteck by entering into what turned out to be an inappropriate investment.

Eteck’s previous directors argued that the claim was time-barred under the Trinidad and Tobago Limitation of Certain Actions Act 1997 (the “Act”).

Section 14 of the Act states that, if the facts of a claim are deliberately concealed by the defendant, the time limit for the claim does not begin until the claimant discovers those facts. It also says that a deliberate breach of duty will be considered “deliberately concealed” if it is unlikely to be discovered for some time. Section 14 is more or less identical to section 32 of the UK Limitation Act 1980.

The Ministry of Finance argued that Eteck’s former directors had “deliberately concealed” their breach in this sense, and so the time limit had not yet expired.

Eteck’s former directors ran a novel argument in response. They said that Eteck’s sole shareholder, the Ministry of Finance, had known of the investment and had authorised it. The Ministry was well aware of the associated risks and so had already discovered the facts leading to any claim for breach of duty.

Because the Ministry of Finance was Eteck’s sole shareholder with total control over it, the former directors said that Eteck itself should be regarded as having been aware of the relevant facts.

They based this argument on “a fundamental principle of company law, and a primary rule of attribution, that the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company”.

The extent of this principle at common law is unclear, but several cases have referred to it.

What did the Privy Council say?

The Council thought there was some force behind the former directors’ argument. However, it ultimately rejected the argument.

It said that the fact that there was a sole shareholder in this instance was merely incidental. Where a company has more than one shareholder, it would be impossible or impractical to attribute their collective knowledge to the company. The concept does not easily apply to a body of shareholders.

The Council also highlighted the cardinal distinction between directors, who owe a duty of care to their company, and shareholders, who are entitled to act in their own interests and owe no such duty.

Whilst the Council agreed that there is a general rule that the knowledge of a company’s directors can be attributed to the company, it said there was no such rule about a company’s shareholders.

Practical implications

Limitation periods play two important roles. They prevent someone from “sitting” on a stale claim, then starting proceedings years later, when that person could and should have brought the claim earlier.

They also ensure that a person does not need constantly to “look over his shoulder” in relation to events that may have occurred some time in the past.

However, it is important to be aware of the limits of limitation periods. The case also underlines the fundamental distinction between a company and its shareholders. It is critical to understand who is entitled to bring a given claim and, in particular, not to confuse the knowledge of a company’s shareholders with that of the company itself.