Duties and Liabilities of "Nominee Directors" in Cyprus
Private and public companies in Cyprus are required to appoint directors, with the number depending on the type of company. Smaller companies may have a sole director who fulfils multiple tasks, while larger companies typically have more individuals in the management body. Private limited companies in Cyprus must have at least one director who can also act as the company secretary but only in cases when the company has one and only member. Public companies must appoint at least two directors.
There are no nationality restrictions for directors in Cyprus, however, individuals are prohibited from becoming company directors if:
- they have a bankruptcy order against them;
- or they have been convicted for an offence connected to his or her activities as a company director; in this case an individual can be prohibited from occupying the same position for the next 5 years.
Further a company is a resident in the country in which management and control is located and implemented, therefore if the intention is to have a Cyprus tax resident company, the directors or at least the majority of them must be permanent residents of Cyprus.
Regular company directors and nominee directors
In Cyprus, there is a distinction between regular company directors and nominee directors. While both types can represent the company, nominee directors in Cyprus are appointed by the Ultimate Beneficiary Owner (UBO) for specific tasks, often to provide an additional layer of privacy. Only the name of the nominee director is made public, and they act solely based on the instructions of the client. Nominee services in Cyprus are regulated, under Article 4 of the ASP Law (ASP - Administrative Services Provider, and only certain local professionals can provide this service.
| ASPs are licensed to provide the following services in relation to management and administration of trusts and companies. Nominee companies wholly owned by licensed ASPs are automatically authorised under the same license to offer administrative services. |
Directors in Cyprus have certain duties, including fiduciary duty, the duty to exercise skill and care, and statutory duties. They must act in good faith and in the best interest of the company, avoiding conflicts of interest. Statutory duties derive from the Companies Law and other relevant legislation, covering areas such as disclosure of interest in contracts, fraudulent trading, director's report, annual return, and financial statements.
| Duty of care refers to a fiduciary responsibility held by company directors which requires them to live up to a certain standard of care. This duty — which is both ethical and legal — requires to make decisions in good faith and in a reasonably prudent manner. |
Directors in Cyprus can be held liable for actions against the best interest of the company or for contractual breaches and other offenses. The liability of directors can be categorized into criminal, administrative, or civil liability. Common types of liabilities include breach of common law duties (fiduciary duties and duties of skill and care), breach of statutory duties and prosecution for tax offenses.
It's important to note that directors cannot avoid liability through provisions in contracts or articles of association that attempt to exempt or indemnify a director who has breached their duty of care and skill. However, a company may obtain directors' liability insurance under Section 197 of the Companies Act, Cap. 113.
Liability for prospectuses is another aspect where directors can be held accountable. False statements in a prospectus can lead to personal liability, and subscribers or third parties who suffered harm due.
The Law Commission in its Consultation Paper on Directors’ Duties 1998 (CP 153), explained the term ‘’nominee director’’ as referring to persons who, independently of the method of their appointment, but in relation to their office, are expected to act in accordance with some understanding or arrangement which creates an obligation or mutual expectation of loyalty to some person or persons other than the company as a whole.
In the English case of Hawkes v Cuddy (2009) EWCA Civ 291 it was held that even though a director may owe duties to his nominator, such duties do not arise out of his nomination, but out of a separate agreement or office and they cannot detract from his duty to the company of which he is a director when he is acting as such.
Additionally, in the English case of Central Bank of Ecuador v Conticorp SA [2015] UKPC 11, it was held that:
‘’…A nominee director is not entitled to forego, or surrender to another, any exercise of his discretion, however paltry the amount he may be paid. Under the International Business Companies Act, section 55, a director must “act honestly and in good faith with a view to the best interests of the company”, and must also “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”.
This case went on to state that it was the duty of the ’nominee’ director to understand the affairs of the company and to apply his own mind to those interests.
Additionally, in the recent decision of the Supreme Court of Cyprus in the case of Criminal Appeal No. 323/2015 Attorney General of the Republic v Solomonidi, the Cypriot Court adopted a similar approach with that expounded in English case law, and stated that:
‘’There are no formalistic (τυπικοί) directors of a legal person. From the moment a person is appointed as a company director he has all the responsibilities and obligations of a director, as those are determined by the Companies Act (Cap 113), any relevant applicable legislation and case law on the matter.’’
What these decisions further show, is that a nominee director will not avoid liability by claiming that his role was only that of a so-called ‘’rainmaker’’ and that he had no real knowledge of the affairs of the company and/or any contracts entered into by the company.
Furthermore, due to the fact that it has been established that a nominee director does not differ in terms of duties and liabilities from any other company director. It means that like any director he can be found liable to compensate an outsider for harm suffered by the company. This is particularly easy if a claim in deceit has succeeded against the person controlling the company (‘’the director’’), in which case there is no need for the court to consider whether it is appropriate to pierce the corporate veil. (Dadourian Group International Inc v Simms [2006] EWHC 2973 (Ch)) In the case of a nominee director, they are considered the lawful director of the company for all legal purposes, with all the responsibilities and powers that come with it.
Despite, the use of nominee director services is always governed by specific terms and conditions outlined in a nominee/management agreement between the beneficial owner(s) and the service provider. These terms typically state that the nominee director will act only as a nominee, without any involvement in the management, financial, or operational matters of the company. They are expected to follow the instructions of the beneficial owner in decision-making, subject to the provisions of the law.
An appointment of a nominee director is accompanied by a letter of indemnity, where the beneficial owner(s) undertake(s) to indemnify the nominee director for any damage, expense, or liability incurred in connection with the provision of nominee services. Directors are legally liable for the actions or omissions of the company. Therefore, the nominee director should follow the instructions of the beneficial owner as long as they do not conflict with or contradict the law. To allow ending the services of the nominee at any given time, an open-dated resignation letter of the nominee director should be signed by the beneficial owner(s) so the nominee director ensures that they can appoint a director of their choice to the post of director of the company.
However, indemnification does not cover a fiduciary service provider against recklessness or not acting in the best interests of the company with the required due care and skill, especially towards the creditors of the company, including local tax authorities.
Our company formation representatives in Cyprus can give you more information about the director’s powers and restrictions. You can contact us if you have further questions or if you are interested in company registration in this country.
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