23 January 2006
There must exist in excess of a million offshore companies scattered among the various offshore centres. Despite this, however, there is very little literature relating to the problems of offshore companies. This is perhaps unsurprising, as the apparent safety of these entities tends to engender a certain inattention to fundamental issues. But a brief look at some company law basics applied in the offshore context shows just how easily trouble can arise.
Few offshore countries have the equivalent of Table A, but economics and time pressure demand the use of standard memoranda and articles. But are these ever checked? Of course, there is no such thing as 'standard'; and the document that began life as elegant perfection soon becomes a repository of ad hoc amendment and typographical error. A glance at any number of standard articles discloses wide variations in almost every essential aspect of corporate life - for example, who can amend the articles, appoint directors, declare dividends, agree directors' remuneration and merge or consolidate with another company.
To strike an English company from the register is a fairly long process and includes several written warnings from the registrar. If it has all been a ghastly mistake, you can be struck back on and, for the most part, it is as if you never left. It is not necessarily so in sunnier climes where the collection of offshore company fees is a serious business. Non-payment is a capital offence. In several places there is no prior notice, so you will never know the difference until it is too late. And do not assume that the court has the same remedial powers as in CA 1995 s653(3); things may never be the same.
The classic hierarchy of beneficial owner (client), nominee shareholders, offshore company and supplied directors offers great scope for wholly ineffectual board activity. The chief culprit, of course, is the nominee director who acts without independent thought at the client's bidding. Directors have a discretion and are in a similar position to trustees: they must make a decision and exercise an active discretion (Selangor v Craddock (No 3)); they must decide on a sensible basis, not capriciously or irrationally (Re Gresham Life, ex parte Penney); for proper purposes (Howard Smith v Ampol) and taking into account the relevant and eschewing the irrelevant (Byng v London Life).
Breach any of these requirements and the director's decision may be ineffective. For those acting at the bidding of a sole shareholder, this may not be the end of the world when creditors are affected. An act instigated or ratified by the members becomes the act of the company and absolves directors of their sins (Multinational Gas Co v Multinational Gas Services). But does this apply if directions come from a beneficial owner rather than a (nominee) shareholder? The converse is also problematic. Many service providers arrange for annual shareholder ratifications of the directors' acts for the preceding period. These are of limited use if done in ignorance of the full facts (Gray v New Augarita Porcupine Mines).
The unthinking director and the 'ostrich' (do nothing) director are both in breach of their duty of care to the company. Common law duties have been tightened significantly in recent years. Objective standards are in and Re City Equitable Fire is gone (Re Barings (No 5); SSTI v Bairstow). Reliance on others may not suffice; directors must have sufficient knowledge and understanding of the company to enable them to supervise it effectively. Cyphers, sleepers and ostriches beware.
The UK has set its face against corporate redomiciliation, but many offshore centres permit inbound and outbound continuation. Some are a touch overkeen and permit inward continuation of companies from any jurisdiction under whose law redomiciliation is not prohibited. Of course, in most jurisdictions the law either permits continuation or says nothing, but the absence of an express negative is enough for some, so we have companies that have arrived in country B without having left country A. Best not to think about it.
Complex common law rules are often matched overseas by little- known statutory provisions with no English equivalent. In a number of jurisdictions, running out of members is unwise; those that act on behalf of the company become liable for debts contracted thereafter.
These and a host of other problems are not limited to offshore companies, but offshore fact patterns can make them acute.