Background
Over 80% of start-up businesses fail in the first five years. One of the tasks accountants in public practice deal with is assisting clients when this occurs. Liquidation is the insolvency process related to companies and formally deals with those going through this stressful process. Liquidators are appointed and take control of the company and, if appropriate, they hold directors accountable for their actions.
During the last week, GRA has been approached by a reporter regarding the practice of appointing what he calls “dummy directors” (we call them “nominee directors”) to companies being liquidated. GRA has explained this option to insolvent clients over the years, and some clients have acted on it. The reporter’s questions have prompted us to publish this blog.
In short, the law allows shareholders of failed companies to appoint different directors at any time, including at the eleventh hour just before they go into liquidation. This does not in any way reduce the outgoing directors’ liability; they can (and do) get sued for their actions while holding office. Simply, nominees merely reduce the public’s visibility of the former directors during the liquidation process.
Aussie Director Scam v Nominee Directors in Context
Changing a director and immediately liquidating should be contrasted to a situation where a nominee director takes office and continues to trade / dispose of assets etc. In such circumstances, that director would be answerable for their actions while holding office, because they were trading or making decisions. A few years ago, this area received some publicity in Australia where shady businesspeople put the homeless into companies, then continued to trade and committed tax scams while hiding behind the dummy directors. You can read about that disgraceful situation HERE.
This is completely different to appointing a nominee director at the 11th hour, and immediately liquidating. The nominee directors don’t continue to trade; they do nothing. Such action is purely about reducing the visibility of the outgoing directors after the liquidation is complete.
Q & A
Some key questions:
Professional Duties
We have a professional duty to advise our clients of all the options available to them. Insolvency has always been an uncomfortable process, and many feel ashamed because they have failed. Reduced visibility is in a client’s favour; that’s why we bring the option to their attention. They can still get sued, prosecuted or, if appropriate, be banned from being a director. Simply, they still face the consequences of their actions.
While we don’t really do much in relation to insolvency work (we are not insolvency practitioners), we do refer clients to liquidators and make sure our clients do everything they can to minimise the damage that may result from the process. It’s in our clients’ interests to do that, and it’s our professional duty to assist them with all the information they need to make the best decision for their circumstances.
We think the practice of appointing nominee directors is one that is lawful, at no risk to the nominees, and not uncommon in New Zealand. It is probably new to the reporter who has been questioning us, but we say – complicated as it is – it is actually a storm in a teacup.
Matthew Gilligan | John Rowe | Salesh Chand
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Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
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