The liabilities of Secretaries, UBOs and Directors

Corporate scandals urge regulatory authorities, lawyers, and service providers to rethink the role of directors and secretaries- the key persons in corporate governance, their relationship with the company[1] as well as with the Ultimate Beneficial Owner (UBO).

Directors & Secretaries

Starting from the officers, their role has changed over the years with both director and secretary to play a significant role in the corporate governance and the ‘good standing’ position of the company.

Directors bear lot of responsibilities in regard to the overall success of the business. It is the key controlling person on company performance and managing company finances. Directors have several statutory duties imposed by the Companies Law and other legislation, i.e. the Income Tax, VAT, Customs& Excise Legislation, Health and Safety, and Environmental legislation. They also have fiduciary duties, and they must meet the appropriate standard of care, skill, and diligence.

For the purposes of the present, directors’ duties will not be examined in essence of stipulating the exact duties imposed, but rather to establish that every director has certain liabilities and responsibilities to perform and in case they are not, may give rise to liability for negligence or possible criminal charges.

‘Nominee’ directors cannot detract from those duties due to the mere fact they were appointed just to represent the client or shareholder on the board. In Criminal Appeals No. 323/2015, 324/2015, 325/2015, Attorney General of the Republic v. Solomonides, the Supreme Court issued a decision on the 18th December 2018, based on which 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 Law (Cap 113), any other relevant legislation and case law on the matter. The Court went further and stated that there are no nominee (‘τυπικοί’) directors. This is an important case as the Supreme Court in its interpretation of article 48(1) of the Tax Law, stated that the judgment of the Court of First Instance that the Director of the Company was not guilty for the reason that she was a “typical” director and she never received the tax return since she never signed the Tax Return, and neither was the tax disclosed formally at the registered office of the company, was wrong. The Supreme Court explained that the right to object the Tax Return is the company’s right and not a personal right for each one of the Directors of a company separately. The Directors held criminally liable for unpaid VAT amounts reported in VAT returns, unsettled VAT assessment and associated penalties. Concisely, the status of ‘nominee’ directors is not recognized by the Law neither the Court. Every director is appointed as officer of the company to manage business affairs promoting the success of the company.

Whilst a secretary does not have the same obligations and does not share the same responsibilities with directors, the importance of secretary’s role was first demonstrated in Panorama Development (Guilford) Ltd v. Fidelis Furnishing Fabrics Ltd [1971] 2 Q.B. 711, CA. In that case, the secretary of the company entered into contract on behalf of the company and hired cars from Panorama Development's business. Fidelis claimed that it was not bound to the hire contracts, because Bayne never had the authority to enter them. Once could argue in favor of Fidelis and say that the secretary does not have any authority to bind the company with contracts. The Court however stated that the secretary bound the company with the said transactions with Lord Denning to state that the secretary had implied actual authority by virtue of his position as Company Secretary to enter into such agreements. In addition, Judge Salmon LJ characterized the secretary as ‘the chief administrative officer’ who has ostensible authority with administrative matters. Without a doubt Panorama case paved the way for a modern approach towards company’s secretary role in day-to-day business operations.

Secretary’s conduct is therefore of a major importance. Especially those actions concluded within the ordinary operations and the sphere of performance of duties, even if those actions are considered ultra vires of company’s internal regulations. This was decided in the Co-operative Credit Company of Pallouriotissa v. Nicosia Palace Hotel Co. Ltd and other (2003) 1 CLR 722 (in Greek: Συνεργατική Πιστωτική Εταιρεία Παλλουριώτισσας ν. Nicosia Palace Hotel Co. Ltd και Άλλου (2003) 1 ΑΑΔ 722). The company’s secretary action to sign a letter of guarantee bound the appellant company.

As mentioned above, a company secretary may not be a director, but they will often be liable for breach of duty in the same way as board members. For consideration, the Nicosia District Court issued on the 27/06/2019 decision in Tax Office v. Alexis Fourouklas Metallic Constructions Limited, Case 6142/2015 where the Company and its secretary held to be guilty of failure to pay tax due on time under the provisions of Article 48 of Tax Law 95 (I) /2000. Τhe Court referred to Panorama case in order to reach such ratio. Same approach was followed in Tax Office v. G.J. Metaxas Jewelry Gallery Ltd, Case 30187/2014, issued on the 05/07/2019 by the District Court of Nicosia. The Cour found the Company and its secretary guilty of the following criminal offences: failure to submit a tax return on time, failure to pay tax due on time and failure /refusal to pay additional tax, charges and interest.

Based on the above, you could argue with us that there is no room to underestimate secretary's role. The company secretary can be transformed from being a ‘mere servant’ to statutory officer responsible for ensuring the proper corporate governance.

Ultimate Beneficial Owner(s)

Beneficial ownership verification and ongoing monitoring is considered the most essential tool component of the KYC onboarding and anti-financial crime procedures. Criminals often uses corporate vehicles to cover their illegal transactions, possible financial fraud or even terror financing activities. Complex ownership structures shelter organized crime, with firms to be in the need to address risks posed by entities under their administration and other money laundering methodologies. This is why you need to determine control which is unrelated with ownership.

Beneficial ownership is not about having a level of ownership that is substantive or big enough to be considered as controlling ownership, but merely about having ownership in the first place or control or benefit. While “control” may be relevant to finding the responsible individuals, who controlled a corporate vehicle involved in a financial crime, ownership is relevant for other purposes.

You need to go one step further, until every individual with control through other means is disclosed and not to leave your assumption that the client is the ultimate beneficial owner once a certain threshold was identified that holds to (either one share or more than 25%). As per the 5th AML Directive, you need to identify those individuals who exercise influence” or effective control” over the legal vehicle.

As you need to ensure protection and mitigate risk exposure not only towards your firm but to yourself and your employees in case a client uses his company for unlawful purposes, you should be able to perform evaluation over the structure used by determining control and perform due diligence at all times; meaning, before and during the establishment of business relationship, and of course in cases where the transaction of the entity seems suspicious. Continuous education on the field of AML and UBOs is required for all, directors, secretaries, corporate administrators, lawyers, compliance officers, accountants and auditors.

Our seminar and why you should attend

The demand for transparency- has led to the development of laws, regulations, case law and practices requiring for continuous education, on the definition and management of responsibilities arising from ultimate beneficial owners, directors and secretaries of Cypriot companies as well as their obligations.

Our seminar aims to help lawyers, compliance officers and corporate administrators to develop skills in choosing the right secretary or manager in a company, understanding the risks that may arise from such an appointment, understanding and drafting necessary documents during the appointment process. We are not referring to nominee directors and secretaries, but rather to directors and secretaries acting as the lawful officers in the company, to their role - that is of a major importance, and under the law they both have certain duties to fulfill.

The seminar focuses on the practical implementation of the modern role of company’s officers and responsibilities of ultimate beneficial owners prior and during the establishment of the relationship.

After the end of this seminar, participants will also be able to choose the right agreement they should have with a client as well as the development of good practices to protect them in cases of mishandling or a 'bad' appointment on their part.

[1] Joseph Lee, 'The Corporate Governance Officer as a Transformed Role of the Company Secretary: An International Comparison' (2018) 14 SC J Int'l L & Bus 107

Chrystalla Socratous

Advocate, Legal Consultant

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