Can a director be held liable under Cyprus Law?

There are plenty of possible consequences when a director is found to have acted in breach of duty. He may even be criminally liable. However, the potential liability and the extent of it, depend on the kind of duty the director has breached.

Breach of fiduciary duties and the duty of skill and care

Breach of the duty to act in good faith in the best interests of the company which is actually a fiduciary duty as well as a breach of the duty of skill and care can result in the director being personally liable to the company for damages or injunctive relief.

In both cases, it is for the company or its liquidator and not for individual shareholders to sue the director in breach under section 311 of the Companies Act, Cap. 113.

If a director in breach of his fiduciary duties made a personal profit out of a business transaction, then he will be liable to pay that profit to the company. As illustrated in Bairstow v Queens Moat Houses plc [2001] 2 BCLC 531, CA, directors are obliged when they act in breach of duty to make good any misapplication by them of the company’s assets. In specific, this case considered a team of former directors who had declared unlawful dividends. The Court of Appeal held that the former directors were liable to repay the entire amount of unlawful dividends regardless of whether the company might through other mechanisms have lawfully declared such dividends with the result that there was no loss to the company.

This lead us to the fundamental principle that where the breach of duty by a director involves a misappropriation of company assets, the company is entitled to pursue a proprietary claim where it can trace the asset or an identifiable substitute (so if the director still has the asset, the court can order the director to transfer it to the company) or, if that is not possible, a personal claim can arise so that the director compensate (ie pay a sum of money to) the company for the loss.

In practice, a personal claim will often produce the same result in value as a proprietary claim, but the disadvantage of a personal claim is that it ranks equally with the claims of the other unsecured creditors of the defaulting fiduciary and thus, the bankruptcy of the fiduciary may affect the ability of the claimant company to recover.

Where an asset of the company has been misapplied and there has been a subsequent loss in value of the asset, then that loss must be made good by the director, as part of reinstating that trust asset.

The fiduciary has the duty to account for a profit made as the courts are inclined to order breach of duty to account and restoration of the profit from the director in breach. If a director had an indirect gain, through for example an increase in value of his shareholdings in a company which exploited the opportunity, he must still account for that gain. The burden of proof is on the defaulting fiduciary to show that the profit is not one for which he should account.

Regarding a director’s breach of duty of care and skill, this gives rise to the standard common law liability in damages for negligence. Claims against directors for negligence are rare, though.

Breach of statutory duties

Breach of statutory duty gives rise to criminal, civil or administrative liability or all together.

After the intrusion of the following section in many statutes such as the Consumer Credit Law 39(1)/2001, the Consumer Protection Laws, the Health and Safety of Work Law 89(1)/96 and the Environmental Protection Legislation, directors are unable to hide behind the limited liability corporate veil.

“where an offence…committed by a body corporate is proved to have committed with the consent or connivance of, or to be attributable to any neglect on the part of any director, manager, secretary or other similar officer of the body corporate or any person who was purporting to act in such capacity, he as well as the body corporate shall be guilty of that offence and shall be liable to be proceeded against and punished accordingly.”

If the improper profit is made through a company used by the director as a means to cover his breach of fiduciary duty, the courts lift the corporate veil and treat the company’s gain as the director’s gain.

The fact that the director has a substantial or even a controlling interest in a company which knowingly received trust property does not make the fiduciary personally accountable for that receipt; rather the director remains liable for his own breach of duty and must account for the profits made by him.

Strict liability is imposed on directors in circumstances where it is proved that the directors have violated the provisions of VAT legislation.  Even if the particular director did not have the purpose to act illegal, he will still be criminally liable.

Furthermore, a director can also be accused for committing an offence under section 20 (c) of the Cyprus Criminal Code.

Liability under Tax Law

In case of tax evasion, directors are subject to criminal proceedings brought against them, either personally or through their companies, by the Inland Revenue and Customs & Excise.

Prosecution for tax evasion arises in cases of cheating the public revenue, false accounting and conspiracy to fraud.

According to sections 53(1) and 54 of the Cyprus VAT legislation, all the members of the board of directors as well as the general manager or the director or the chief executive director of the company are responsible when tax evasion takes place. Directors also face civil liability for any tax due to the state.

It is worth noting that criminal prosecution for tax evasion (fine and/or imprisonment of at least 2 years) is rare, since the Inland Revenue and Customs & Excise usually gives the director the opportunity to make complete financial disclosures according to legal requirements and if not, then they proceed with civil penalties (administrative fines). This is not the case though when it comes to professional advisers where the Inland Revenue and Customs & Excise prefer to bring criminal proceedings against them.

Can directors avoid liability?

Under section 197 Cap 113, a company can extract directors’ liability insurance, but can not introduce any provision in a contract or in the articles of association of the company which attempts to exempt a director or indemnify a director who has been in breach of his duty of care and skill.

Liability for prospectuses

Under section 43 of the Companies Law, Cap. 113, directors are liable for untrue statements in a prospectus.

If a subscriber was induced to purchase shares by false statements in the prospectus, then he is entitled to sue every director for compensation.

Any third party who has taken shares based on mistaken statements in any information report is also entitled to sue the directors under section 69 of the Stock Exchange Law.

Law 9(1)/2001 further imposes a personal liability for refund on directors when they have collected funds for listing securities with the Stock Exchange without final consent.

Sections 68 and 69 of the Stock Exchange Law provide that directors who have consented or collaborated in making false and misleading fraudulent statements are jointly or severally criminally liable.

Section 44 of the Companies Law further prescribes that any person, director or not, who authorize the issue of a prospectus with false statements is committing an offence with serious consequences such as imprisonment and/or a fine of CYP1.500.
Under the Criminal Code, directors may be accused for the offence of obtaining money by false pretences in case of false statements or for the offence of making false statements with the intention to defraud or induce any persons to become a member or advance money to the company. If the second offence occurs, then the director may be subject to seven years of imprisonment.

Future Legislation

After the reforms proposed by the “Troika”, Cyprus government proposed some statutory reforms regarding directors’ personal liability for “Offences under Assessment and Collection of Taxes Law” which bestow that directors shall be guilty of an offence and may face a penalty and/or imprisonment if they deliberately deny or delay to perform their duties.

The above information is provided for guidance purposes only and cannot be considered as substitute for legal advice.