Bridging the regulatory gap: Nominee directors in Bangladesh

A practical inconsistency exists between the procedure followed by the Registrar of Joint Stock Companies and Firms (RJSC) and the banking sector regarding the cessation of nominee directorship in companies classified as loan defaulters.

Under the Companies Act, 1994, when a corporate shareholder replaces its nominee director through a duly approved board resolution and the prescribed statutory documents are filed with RJSC, the Registrar records the cessation of that nominee directorship and updates the company's official records.

Consequently, from the perspective of corporate law, the individual ceases to hold any office as a director of the defaulting company.

However, in practice, many banks continue to associate that individual with the defaulting borrower until the lending bank formally approves or recognizes the release of the nominee director through its internal approval process. As a result, despite the cessation of directorship having been duly recorded by RJSC, the banking system continues to identify the individual as being connected with the defaulting borrower.

Distinction between a nominee
director and a shareholder director

This issue arises primarily because insufficient distinction is made between a nominee director and a shareholder or promoter director.

A shareholder or promoter director ordinarily derives his or her position from ownership of shares and exercises effective control over the company's affairs, strategic direction, and management. Such directors generally remain associated with the company by virtue of their ownership interests and play a continuing role in corporate governance and decision-making.

A nominee director, on the other hand, is appointed solely to represent the interests of a corporate shareholder. The office is representative rather than proprietary in nature. A nominee director neither acquires the position by virtue of personal share ownership nor ordinarily exercises independent control over the company.

The appointment continues only so long as the nominating shareholder wishes the individual to represent its interests.

Accordingly, a corporate shareholder may, whenever considered necessary, replace or withdraw its nominee director through a duly approved board resolution and by completing the statutory filings with RJSC. Once these legal formalities are completed, the nominee director immediately ceases to hold any authority to participate in the management, governance, or decision-making of the company.

Unlike shareholder or promoter directors, whose association with the company generally continues through ownership and control, nominee directors serve in a representative capacity and may change from time to time depending upon the corporate decisions of the nominating shareholder. Such changes are common in corporate practice and are an integral feature of nominee directorship.

While every director is subject to the same fiduciary and statutory obligations during the period he or she remains in office, the distinguishing characteristic of a nominee director lies in the absence of continuing ownership, control, or governance authority once the nomination has been lawfully withdrawn.

Therefore, after RJSC has recorded the cessation of the nominee directorship, continuing to associate that individual with the defaulting borrower for banking purposes does not accurately reflect the prevailing legal and corporate position.

Practical consequences

This inconsistency creates significant unintended consequences where the same individual serves as a nominee director of another financially sound company seeking fresh credit facilities. Although the second company has no loan default, maintains a sound financial position, and fully complies with all regulatory requirements, its financing proposals are often delayed or declined because the banking system continues to associate the nominee director with the defaulting borrower.

Consequently, a financially solvent company becomes adversely affected due to a historical association that has already been legally terminated under the Companies Act, 1994. This not only delays access to finance but also discourages investment, hampers business expansion, and creates unnecessary regulatory uncertainty.

Policy recommendation

To address this issue, Bangladesh Bank may consider introducing a harmonized regulatory mechanism under which banks shall recognize the cessation of a nominee director upon verification of:
• the duly approved resolution of the nominating corporate shareholder;
• the relevant corporate filings; and
• the updated records maintained by RJSC

Upon such verification, the nominee director should no longer be regarded as being associated with the defaulting borrower for the purpose of assessing credit eligibility of any other company in which he or she serves as a nominee director.

Such a policy would not dilute credit discipline or weaken recovery measures against defaulting borrowers. Rather, it would align banking practice with the legal position reflected in the official corporate records maintained by RJSC. It would also ensure that financially sound companies are not deprived of legitimate financing opportunities solely because of a nominee directorship that has already lawfully ceased.

This harmonized approach would improve regulatory certainty, facilitate investment, promote efficient corporate governance, and remove an unintended obstacle to financing while preserving the integrity of Bangladesh Bank's prudential framework.

Writer: Kazi Salauddin; Company Secretary, fiber@home