Company Directors: Duties And Liability In Cayman Islands Law

Duties and liabilities of directors of companies in the Cayman Islands are determined by legislation in the Companies Law (Revised) and by the Common Law from which precedents are established. Some of the Common Law principles are incorporated in statute and legal precedents evolve over time as new cases are tried before the Grand Court, Court of Appeal and the Privy Council.

Statutory Duties of Company Directors

The Companies Law (2011 Revision) lists the duties and requirements of company directors:

To maintain a register of company members with their names and addresses and in the case of a company having its capital divided into shares, a statement of the shares held by each member, at the registered office of the company in the Cayman Islands. (This provision does not apply to the register of exempted companies which can be kept at any location). To maintain a register of directors. The Registrar of Companies shall be notified of any change in directors or officers within 30 days. Failure to comply with the notification gives rise to a penalty of CI$10 for every day during which the default continues. The penalty applies to every director and manager who knowingly and willfully authorises or permits such default. A register of mortgages and charges over company assets must be kept at the registered office of the company. A director or manager who knowingly and willfully authorises or permits a mortgage or charge on company property without entry on the company register is liable to a penalty of CI$100. Special resolutions adopted by the company must be notified to the Registrar of Companies within 15 days and annexed to or incorporated into every copy of the Articles of Association. The directors of a company are responsible for filing annual returns and the appropriate fee with the Registrar of Companies annually. The shareholders of a company, other than exempted companies, must hold at least one AGM annually. The directors are responsible for ensuring that the company keeps proper books of account and that it complies with accounting requirements. Changes of directors and any change of registered office must be notified to the Registrar within 30 days. Section 34 (2). No distribution or dividend may be paid to members out of the share premium account unless immediately following the date on which it is paid the company shall be able to pay its debts as they fall due. A company and any director or manager who knowingly and willfully authorises or permits any distribution or dividend which contravenes this provision is liable on summary conviction to a fine of CI$15,000 and to imprisonment for 5 years. Section 37 (6). A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which payment out of capital is proposed to be made the company shall be able to pay its debts as they fall due in the ordinary course of business. The company and any director or manager thereof who willfully and knowingly authorises or permits any payment out of capital to effect any redemption or purchase of any share in contravention of this provision commits an offence and is liable on summary conviction to a fine ofCI$15,000 and to imprisonment for 5 years. Fraudulent Trading

Section 147 of the Law provides that a liquidator may apply to the Court for a declaration where it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. The Court may declare that any persons who were knowingly parties to the carrying on of the business in the manner mentioned are liable to make contributions to the company's assets.

Fraud in Anticipation of Winding Up

Section 134 of the Law provides that where any person, being an officer (including a shadow director), professional service provider, voluntary liquidator or controller of the company, within 12 months preceding the commencement of winding up has, with the intent to defraud creditors or contributories:

(a) concealed any part of the company's property to the value of CI$10,000 dollars or more or concealed any debt due to or from the company;

(b) removed any part of the company's property to the value of ten thousand dollars or more;

(c) concealed, destroyed, mutilated or falsified any documents affecting or relating to the company's property or affairs;

(d) made any false entry in any documents affecting or relating to the company's property or affairs;

(e) parted with, altered or made any omission in any document affecting or relating to the company's property or affairs; or

(f) pawned, pledged or disposed of any property of the company which has been obtained on credit and has not been paid for unless it was done in the ordinary course of the company's business, then such person is guilty of an offence and is liable on conviction to a fine and to imprisonment for five years.

Transactions in fraud of creditors

Section 135 of the Law introduced a criminal offence, similarly punishable by fine or imprisonment, where in the case of a company being wound up by the Court or voluntarily, an officer of the company, a professional service provider to the company has either (a) made a gift or transfer of, or has charged the company's property, or has caused or connived in levying execution against it or (b) has concealed or removed the company's property, in each case with the intent to defraud the company's creditors or contributories.

Misconduct in winding up

Section 136 of the Law states inter alia that where a company is being wound up by the court or voluntarily, any person who is or was a director, officer or professional service provider of the company who does not make full disclosure to the liquidator of all company documents or property within his control (except where disposed of in the ordinary course of business) or who permits a false debt to be proved in the liquidation is punishable by a fine and to imprisonment for five years.

Material omission in statement of affairs

Section 137 provides that where a company is being wound up, a director, officer or manager or a professional service provider of the company commits an offence if he makes any material omission in any statement relating to the company's affairs with intent to defraud the company's creditors or contributories. A person who commits an offence under the section is liable to a fine and/or imprisonment for up to five years.

Penal Code of the Cayman Islands

The Penal Code of the Cayman Islands provides for offences of theft and fraud and includes offences such as publishing false or misleading statements with intent to deceive members or creditors and false accounting. The penalty for wrongdoing is up to seven years imprisonment.

Shadow Directors

Shadow directors are potentially criminally liable...