There have been a number of reported decisions in the Cayman Islands that underscore the basic principle that a director must act in good faith and in the interests of the company on whose board they serve. The courts of the Cayman Islands will regard appropriate English court decisions as highly persuasive and will take into account Commonwealth court decisions where general principles of company law are involved, unless there are specific statutory differences. The Cayman Islands cases referred to below are specifically identified and all other cases are of the English courts.

Common law duties

It has long been established in common law that a director owes two types of duty to the company, a fiduciary duty and a duty of skill and care.

In essence, this means that directors, operating and making decisions as a board, are required to:

• act in good faith in the best interests of the company;
• use powers conferred on them for the proper purpose; and
• exercise whatever skill they possess and reasonable care when acting in the company's interests.

Furthermore, an individual director should not allow their personal interests to conflict with those of the company nor derive any personal profit from their position beyond what the company pays them.

If a director breaches any of their common law duties, the company can take action to recover its property or to obtain payment of damages from the director as compensation for any loss incurred. The company is also entitled to recover any personal profit a director may have made by exploiting their position.

To whom duty is owed

Generally directors' duties are owed to the company as a whole and not to individual members. However, directors must be aware that in certain circumstances their duties are owed to a wider audience, including, for example, the interests of the company's creditors.

In that regard, it was held in the Cayman Islands case of Prospect Properties v McNeill, [1990-91] CILR 177 at p 201, that the directors had failed to act in compliance with their fiduciary duty to the company in failing to consider the interests of creditors.

There is no particular guidance under Cayman Islands law on how to determine the best interests of the company. However, where there are different groups of shareholders with different interests, the Cayman Islands Courts are likely to follow the established English approach that directors must act fairly between these different groups.

Although the directors duties are owed to the company (as confirmed by the Cayman Islands Court of Appeal in Schultz v Reynolds and Newport Limited, [1992-93] CILR 59) a minority shareholder may bring a derivative action on behalf of the company if, for instance, the directors have used their controlling powers, either fraudulently or negligently, with the intention of benefiting themselves at the expense of the company.

Fiduciary duty

As confirmed in Prospect Properties v McNeill, an individual director must act in good faith in their dealings with or on behalf of the company and exercise the powers conferred on them and fulfil the duties of their office honestly.

Duty to act in good faith

Directors acting as a board have a duty to act in good faith in what they consider to be the best interests of the company (Re Smith and Fawcett Ltd [1942] Ch 304, at 306, CA). They must not use their powers for the benefit of third parties or themselves. It is likely that, provided the director's motives were honest and they genuinely believed the action taken was in the best interests of the company, the director would not normally be subject to claims that they should have acted differently.

The English Court of Appeal in Re Smith & Fawcett Ltd [1942] 1 All ER 542, held that "directors must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interest of the company, and not for any collateral purposes". Accordingly, the Cayman Islands Court is likely to interfere only where it believes no reasonable director would consider the action taken to be in the best interests of the company.

If a director is found to have acted honestly but not in the best interests of the company, they are in breach of duty.

Duty to exercise powers for a proper purpose

A company's memorandum and articles of association, relevant shareholders' resolutions and board minutes will determine the powers conferred upon directors and the context in which they can be reasonably exercised. Any director who exercises these powers over the company's assets other than for the purposes intended or for the benefit of the company as a whole will be liable for a breach of duty.

In certain circumstances where there is no question of insolvency of the company, these breaches of duty can be ratified after the event by the members in general meeting. This was permitted in Bamford v Bamford [1970] Ch 212, where the English Court of Appeal held that the improper issue of 500,000 shares by the directors to defend a takeover bid could be ratified by the shareholders and therefore no challenge could be made to the directors' actions. Shareholders cannot ratify a breach of duty by the directors if the company is insolvent.

Conflict of interest

A director must not put themselves in a position where there is an actual or potential conflict between their personal interest and their duty to the company. This is illustrated in the Cayman Islands decision in Phyllison Ltd v G H Ltd, [1992-93] CILR 160. Further a conflict of interest will arise if the director seeks to exploit the assets or opportunities of the company for their own benefit. The effect of this at common law is that a director may not enter into a valid contract (other than a service contract) with the company, directly or indirectly, unless the company gives its approval in general meeting, or the articles permit such a transaction.

Strict application of this principle in all circumstances would often work to the detriment of companies and it is established that disclosure by the director of their interest may validate the contract. In practice, in most companies, provisions in the articles render contracts in which a director is interested enforceable subject to disclosure by the director of their interest to the board.

The extent to which a director of a company can carry on a competing business or serve on the boards of competing companies is unclear. There is old case law that provides that it is not a breach of duty for a director to serve on the boards of competing companies (London and Mashonaland Exploration Co v New Mashonaland Exploration Co [1891] WN 165). However, the fiduciary duties that bind all directors might in certain circumstances make such an appointment almost untenable in practice.

In certain circumstances a contract that is voidable by reason of a director's interest can be ratified by the company in general meeting (North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589).

Duty not to fetter their own discretion

A director must not fetter their discretion to act in the best interests of the company by, for example, a contract with an outsider. Therefore, under Cayman Islands law, a director who is appointed by a shareholder cannot agree with that shareholder, for example, to vote at board meetings in any particular way (even if voting in that way would not otherwise be a breach of their duties to the company). This situation is distinguishable from one in which the directors enter into an agreement on behalf of the company under which they bind themselves to vote in such a way as to ensure that the company performs its obligations under that agreement (Fulham Football Club Limited and Others v Cabra Estates plc [1994] 1 BCLC 363).

Secret profits

A director's fiduciary position precludes them from taking a personal profit from any opportunities that result from their position as a director even if they are acting honestly and for the good of the company. Any profit arising in such circumstances must be repaid to the company unless it has been previously disclosed and authorized. This applies whether the profit arises from a contract with the company or a third party.

Even if the director's profit would not have accrued to the company, they must still account for it if the opportunity to make it arose through their directorship. This derives from the rule in equity that a person who uses their fiduciary position to make a profit is liable to account for that profit (Cayman Islands News Bureau Limited v Cohen and Cohen Associates Limited [1988-89] CILR 195 at p 208, applying the House of Lords decision in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134).

Equally, it was confirmed in the Cayman Islands News Bureau decision that if a fiduciary duty is established, the question of accountability does not depend on whether the company) would have obtained the benefit. A director cannot escape their duty to account for a personal profit by resigning before they take it.

Common law duty of skill and care

The directors' fiduciary duties impose on them a largely negative obligation to do nothing that conflicts with the company's interests. At the same time, when they are acting in the company's interests they are expected to exercise whatever skill they possess, and reasonable care.

Case law has long established that a director must attend diligently to the affairs of the company and that, in performing their duties, they must display the "reasonable care ... an ordinary man might be expected to take in the same circumstances on his own behalf" (Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425).

The starting point in determining the nature and extent of the duty of skill and care remains the English Court of Appeal decision in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. That case established three well-known principles as follows:

• A director is not an expert, and need only display skills they actually possess. They are not expected to exercise a level of skill they do not have.
• A director need not devote their continuous attention to the business.
• A director is entitled, in the absence of suspicious circumstances, to rely on the experience and expertise of their co-directors and other officers of the company.

Degree of skill

The level of skill required by a director based on the City Equitable case is subjective and implies that they would not be expected, merely by virtue of their office, to possess any particular skills. Their performance is judged by the way they apply any skills they actually have.

Attention to the business

It was held in City Equitable that "a director is not bound to give continuous attention to the affairs of the company. His duties are of an intermittent nature". This dictum is clearly more appropriate to a director who does not have a service contract with the company. A director's service contract may specify the specific duties of the director and often requires that they devote their full attention to the business of the company and so would override the above principle. Equally, the size and nature of a company's operations will be relevant to determining the matters that are attended to by the director personally, as again will the overall factual matrix.

More recent helpful guidance as to what in practice is expected of a director is found in the English decision of Re: Barings Plc (No 5) [2003] 1 BCLC 523, where it was held that directors should: (1) "acquire and maintain a sufficient knowledge and understanding of the company's business to enable them to properly discharge their duties as directors;" (2) that they were under a "duty to supervise the discharge of the delegated functions;" and (3) that "the extent of the duty...depend[s] on the facts of each particular case".

Reliance on others

Generally, a director is entitled to rely on their fellow directors and officers of the company. Thus in Dovey v Cory [1901] AC 477 HL, it was held that a director was entitled to rely on a subordinate "put in a position of trust for the express purpose of attending to the detail of management" and was not liable for any loss resulting from wrongful acts committed by that person.

Similarly, in City Equitable it was held that "in respect of duties...that may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly".

Directors cannot absolve themselves entirely of responsibility by delegation to others. For example, in Selangor United Rubber Estates Ltd v Cradock [1967] 2 All ER 1255 the directors were held liable where they should have been aware of a wrong even though they were in fact ignorant of it. So ignorance is not necessarily a defence, and directors are expected to exercise their judgment and to delegate and supervise activities in such a manner as to uncover any unauthorized or unapproved actions. Furthermore, in Re Barings plc; Secretary of State for Trade and Industry v Baker (1998) BCC 583 at 586, when making a disqualification order, the Judge held that, while directors are entitled to delegate functions, the high level of responsibility associated with their office requires them to supervise the delegated functions, even if they trust the competence and integrity of those below them. This approach is broadly consistent with the supervisory obligations explained in Re: Barings Plc (No. 5) [2003] 1 BCLC 523. As a matter of practice, the delegation of authority should itself be periodically reviewed by the board of directors.

Developments

In an environment in which the courts are becoming increasingly vigilant in prosecuting and disqualifying directors for failing to fulfil their fiduciary duties, it is important that information on what is expected of directors is easily accessible for, and widely known by, directors. At present, requirements of directors in terms of their duties and the standard of skill and care expected are embodied in common law and the vast number of cases, coupled with a lack of legal expertise, means this information is not easily found and interpreted by directors. Notwithstanding that, it is clear that both English and Commonwealth authority have gradually adopted an objective test resulting in a more stringent approach to the degree of skill expected of a director and it would appear likely that the Cayman Islands Court will generally adopt that stricter approach, now that 80 years has passed since the City Equitable decision. The level of skill required is likely to be effected, in each individual case, by the overall factual matrix.

Statutory duties

The statutory duties imposed on the director of a Cayman Islands company are principally set out in the Companies Law (2004 Revision). The Companies Law imposes a number of obligations upon a director, failure to comply with which can also result in penalties being imposed on the company. The main statutory obligations are:

• to ensure that the company keeps books of account as prescribed by Section 59 of the Companies Law;
• to ensure that filings, such as the annual return, copies of any special resolutions and any change in the registered office or of the directors, are made to the Registrar of Companies;
• to ensure that the Register of Directors and Officers, Register of Members and Register of Mortgages and Charges are properly kept up to date and at the appropriate location for the company in issue; and
• to properly maintain a registered office in the Cayman Islands.

In addition to the above, directors of exempted segregated portfolio companies who enter into a contract or other agreement that is binding on a segregated portfolio must ensure the contract is executed by or on behalf of that segregated portfolio, otherwise the directors will incur personal liability. Directors could potentially incur liability under other statutes, such as the Securities and Investment Business Law (2004 Revision). Further, banks, trust companies, insurance companies, mutual funds and certain other regulated entities in the Cayman Islands could incur liability to the Cayman Island Monetary Authority.

Breach of duty by directors

Under Cayman Islands law, a director who fails in their duties to the company could have unlimited liability for any loss suffered by the company, even if they themselves have not made any personal gain. Similarly, directors can be liable for actions outside their authority (that are not ratified by the company) and can be directly accountable to third parties for any loss or damage suffered by them, for instance, if found liable for any misrepresentations.

Breach of common law and fiduciary duties

In addition to potentially being dismissed as a director, if a director breaches their fiduciary duty or their duty of skill and care to the company, they will be liable to civil action instigated by the party, most often the company, to whom the duty is owed for any loss suffered or undisclosed profit made or advantage taken. The company may obtain:

• an injunction to restrain the director and prevent them from carrying out or continuing with the action constituting the breach of duty;
• damages by way of compensation;
• restoration of the company's property, provided it does not prejudice an innocent third party;
• an account of profits; or
• rescission of a contract in which the director has an undisclosed interest.

A director who has misapplied a company's funds and is in breach of their fiduciary duties to the company will be liable to replace the funds, together with interest (normally on a compounded basis) (Cayman Islands Grand Court, Pedro Devs Ltd v Zuiderent and Spotts Dev Ltd, [1990-91] CILR N-7).

Liquidator's powers

In practice, the question of whether directors have acted in accordance with their duties is one of the matters a liquidator appointed over a company will consider and they may, in appropriate circumstances, commence proceedings against the director(s).

Greater obligations

Although the specific statutory duties of a director of a Cayman Islands unregulated company may appear limited, the thrust of both English and Commonwealth decisions has for some time been to impose greater obligations upon directors. Directors need to both be aware of the developing approach of the courts and to be conscious of the serious potential consequences of any breach of their common law, fiduciary and statutory obligations.

Author biography

Christopher Anthony Humphries Stuarts Walker Hersant Chris Humphries has a broad experience on a wide range of corporate and commercial transactions for private and listed clients, including mergers, acquisitions, disposals, joint ventures, corporate finance, commercial agreements and insurance securitizations. His primary focus is on private equity, capital markets and asset finance transactions. He also has significant experience in the regulation of insurance businesses and mutual funds. Humphries is a solicitor admitted to practise in England and Wales, is a member of the Law Society of England and Wales, and is admitted as an attorney-at-law and entitled to practise in the Cayman Islands.