Many foreign business owners want to establish a company in Singapore to take advantage of the legal and tax system, without necessarily being based in Singapore. To comply with the Singapore law, each company will need to appoint a local nominee director. In this article, we explain the role of director and the nominee director risks involved and the solutions to cover such risks.
What is a nominee director
Setting up a company in Singapore will require at least one director, and this person must be Singaporean, permanent resident or an employment pass residing in Singapore. If your company does not have any person residing in Singapore, they can “hire” a person that will act as director for a fee. This person will be called a nominee director. It is very common that consulting or accounting companies offer to find a nominee director for you for a fee.
Why is the services of a Nominee Director is required?
The Nominee Director is only tasked with adhering to Singapore’s regulatory obligations and does not participate in the management of the company.
Choosing a director might be risky, then why the need for a nominee director?
If the business violates the law, the Singaporean government needs to be able to contact someone who can be held responsible. For instance, the business may fail to pay taxes, disobey laws, take advantage of customers, etc. The foreign owners of the company could potentially flee and abandon it if there was no Nominee Director.
As a result, the Singapore government has established the necessity of a Local Director in order to avoid this problem, presuming that the person serving as the firm’s Local / Nominee Director is more likely to ensure that the company continues to abide by the nation’s business-related regulations.
The Nominee Director is therefore entitled to the same obligations and liabilities as a regular director under the Singapore Companies Act and common law. As a result, both the foreign-owned Singapore company and the host Government benefit from this arrangement.
What risks a nominee director might face
There are risks with this practice on both sides: from the company point of view, the nominee director has access to many company information and can disrupt the daily company activity. This risk can be easily secured by contracting a reputable company to select the right person for you. For the nominee director himself, he faces many liabilities if the company does fraudulent activities or goes bankrupt. Accepting such a position shouldn’t be taken lightly.
Two main liabilities faced by nominee directors
- Financial liability: if the company goes bankrupt, or does an illegal financial transaction, the nominee director will be liable on his personal assets. Directors are liable on personal funds, not limited to company assets.
- Administrative liability: liability risks may come from health and safety issues, environmental issues, tax and accounting, food safety, cyber security law or data protection issues. Any wrongdoing in the company operation can lead to personal fines for the directors of the company.
Is it risky for a company to appoint a nominee director?
many organizations in Singapore are reportedly employing the Nominee director’s services successfully and without any problems. The sheer quantity alone proves that choosing a nominee director is safe and actually helps corporate operations in Singapore.
In view of the Singaporean corporations act, it is important to keep in mind that there is no distinction between a nominee director and a regular director. According to the Companies Act, “The operations of a company shall be managed by, or under the supervision of, the directors and the directors may exercise all the corporate powers, except those that the company shall exercise in a general meeting pursuant to the Company Act or the company’s bylaws.”
In general, this makes sure that the Singapore company’s directors have the authority to make all decisions. As a result, Nominee Director has the same authority as other directors, which may lead to misconduct.
Directors and Officers liability insurance can lower the liability risks
The mentioned risks makes it extremely necessary for a company to choose a reliable corporate service provider to manage the activities of the Singapore firm in order to prevent such any disasters.
In this manner, you can receive expert services with total assurance that your nominee director is dependable and won’t get involved in any business matters you don’t want.
Most of the director’s liabilities can be covered by Directors and Officers liability insurance. In the event of such a claim, the legal fees will be at least SGD 50,000.00, which will be covered by D&O policy. Maximum coverage will depend on the sum insured selected for the D&O policy.. Such policy has to be put in place by the company for the whole management, and you can also find individual D&O coverage but such policy remain unusual and very selective underwriting.
Covering the risk for the nominee director as well as company management is important if you set up an entity in Singapore. Contact us if you want to know more about D&O coverage.