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Playing with fire: The hidden hazards of being a Nominee Director


Nominee directorships. This is often seen as a tick-the-box exercise by foreign companies wanting to set up a new entity in Singapore. Have you been asked to be a Nominee Director, either as a one-off for a company, or do you provide this as a professional service to multiple entities? Make sure you understand the risks involved and what you should have in place to protect yourself.

 

The main role of Nominee Directors is to fulfil the regulatory requirement set by the Companies Act that requires all Singapore incorporated companies to have at least one director who is a permanent resident in Singapore. To meet this requirement, the Nominee Director needs to be either a Singapore citizen or a Singapore permanent resident.

 

 

The Nominee Director is not actively involved in company management and does not have executive authority like company directors. However, this individual is appointed by the board of the company to represent the company with the Singapore authorities, and therefore has the following two key responsibilities:

 

 

1.     Fiduciary duties: The individuals must act in the best interests of the company, including duty of care, uphold confidentiality of sensitive information and company data.

2.     Compliance: Ensure that the company adheres to legal and regulatory requirements, especially those relevant to the appointing party's interests.

 

Both sets of responsibilities are related to upholding the legal framework in Singapore. This means any breaches of this could have detrimental legal consequences to the Nominee Director and the appointing company. Here are a couple of examples of the potential risks involved.

 

-       The Nominee Director is appointed to a med-tech startup in the process of performing some clinical trials. The company founders as part of an onboarding meeting provides the Nominee Director with a highly confidential document which includes the company strategy, key figures and some of the clinical trial data which includes sensitive personal data. On the way home from the meeting, that document is lost en route by the Nominee Director. Because that document was never found again and contained some medical history data and other personal identifiable information, the company had to report the loss to the Personal Data Protection Commission (PDPC) as required under the Personal Data Protection Act (PDPA). As a result, the company was fined for improper handling of sensitive data. The company’s reputation was also damaged as the news about the data breach got out into the media.

 

-       Jack is the Nominee Director on XYZ Tech Solutions Pte Ltd which is a software development company. XYZ Tech Solutions entered into a contract with SecureNet Pte Ltd, a cybersecurity firm, to provide advanced security solutions for XYS Tech Solutions’ software products. SecureNet promised to deliver a custom-built security software suite within six months. However, due to delays and alleged subpar performance by SecureNet, XYZ Tech Solutions decided to terminate the contract and refused to pay the remaining fees.

 

Feeling aggrieved by the termination and non-payment, SecureNet took legal action. They filed a lawsuit not only against XYZ Tech Solutions but also named all the directors listed on the company register in ACRA as defendants. This included Jack, the Nominee Director. SecureNet claimed that the directors had personally made misrepresentations during the contract negotiations and accused them of wrongful termination and breach of contract.

 

Both examples show the potential large legal and reputational consequences that could happen. To mitigate these risks, these are the things that you should consider putting in place.

 

1.     Due Diligence:

Conduct a due diligence of the appointing company before accepting the role as Nominee Director. Be sure to check for any past or ongoing legal issues, regulatory compliance records and reputation in the market.

 

2.     Service Agreement:

Put in place a service agreement between yourself and the company. Be sure to define roles and responsibilities and define the dispute resolution process.

 

3.     Insurance:

Directors & Officers (D&O) Insurance. This insurance is taken out on the company level to protect the company and its directors from ‘wrongful acts’ in managing the company that results in lawsuits in investigations. These ‘wrongful acts’ could be a result from breach of fiduciary duties and compliance as the role of the Nominee Director. When directors are named in lawsuits, they are personally liable for these costs which makes having a D&O policy in place all the more important. It is in the interest therefore of the Nominee Director that a D&O insurance policy is in place for every company that they serve on. Have a read of our previous article where we break down the basics of a D&O policy.

 

Professional Indemnity (PI) Insurance: This is an important insurance policy for Nominee Directors who do this as a professional service for multiple companies. This is especially the case because D&O policies usually have an exclusion whereby they do not cover claims related to professional services, i.e. it will not cover the claims for providing Nominee Directorship services.

 

PI insurance provides protection from lawsuits of negligence, errors and omissions as a result of delivering professional services, i.e. Nominee Directorship services. PI insurance however is taken out on a company level, so this is important for professional Nominee Directors to check that the company they represent (usually a corporate secretary company) has a PI policy in place. The professional Nominee Director may be hired as an employee or a subcontractor of the corporate secretary company. Either way, PI policies usually cover both employees and subcontractors of the company insured. Whilst a valid PI policy may be in place, it is also important that a D&O policy is in place for every company the Nominee Director sits on. The D&O insurer may force the PI insurer to pay the claim and vice versa. It is therefore better to cover all bases.

 

Make sure you’ve assessed the risks involved of becoming a Nominee Director before signing up to it. Whilst it may seem as a straight forward easy role, there are some hidden risks involved. Get in touch with us at corporate@anapi.co for a chat about the right insurance options for your setup.



Image credit: Freepik

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