Where offshore intermediate holding companies are used as part of a corporate group, it is not uncommon to find that the local directors are appointed by, and follow the orders of, its parent company. The recent Privy Council case of Central Bank of Ecuador and ors v Conticorp SA and ors provides a striking illustration of how, in the use of offshore companies managed by nominee directors, care must be taken to ensure those companies are run properly as separate and independent legal entities.
Background
Conticorp SA, a company based in Ecuador, owned Groupo Financiero Conticorp SA (GFC) and in turn, two banks (the Banks). Through the Banks, Conticorp had invested heavily in Interamerican Asset Management Fund Limited (IAMF), a company based in the Bahamas.
IAMF held itself out as an independent investment management fund, with an individual – Mr Taylor – as its sole director and nominated investment advisor. However, through its various holdings, Conticorp in reality owned and controlled IAMF and Mr Taylor acted in accordance with the instructions of Conticorp.
Following financial uncertainties in late 1995, the Central Bank of Ecuador (Central Bank) provided emergency subordinated loans to the Banks in order to keep them from collapse. The Central Bank thereby became a major creditor of the Banks.
Over the course of three transactions executed during 1995/1996 (the GDR Transactions), IAMF transferred to Conticorp substantially all of its assets, comprising a valuable loan portfolio and interests in various companies with an aggregate face value of more than US$190 million (the Portfolio). In return, Conticorp procured that certain Global Depository Receipts and other securities in its subsidiary, GFC, were issued to IAMF.
The central point was that the Global Depository Receipts and other securities received by IAMF turned out to be worth substantially less than the value of the Portfolio. At the time the Portfolio was transferred, GFC and its subsidiary entities – the Banks – were in significant financial difficulties, and accordingly the Global Depository Receipts and other securities “could not honestly have been thought to have value, or at least value in any way commensurate with that of the [Portfolio]”. Further, it was determined that there was no realistic prospects of IAMF selling the Global Depository Receipts on the open market – so in essence, IAMF paid $190 million for securities which were worthless.
On those facts, it seems a clear case of a transaction orchestrated by shareholders – Conticorp – in order to illegally extract value from its failing subsidiaries before the Central Bank exercised its rights as a creditor to seize the remaining valuable assets. This is of course precisely the kind of mischief that most insolvency legislation seeks to guard against.
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