Directors' Duties Under Cayman Islands Law

There is no statutory codification in the Cayman Islands of the general duties, obligations and liabilities owed by directors to Cayman companies and the general duties are based on a combination of English common law, statute and regulatory guidance. In most cases directors are responsible to the company and not, in the absence of special circumstances, to the shareholders as individuals. For these purposes as a general rule, the company is defined by reference to the interest of both present and future shareholders of the company as a whole and the consent of individual disadvantaged shareholders is not required where directors choose a particular course of action.

If a company is in financial difficulty the interests of the company will also include the interests of the creditors. In other words, those with the greatest economic interest in the company at any given time (predominantly shareholders if the company is solvent and a continuing business, but predominantly creditors if it is insolvent or winding down) are the parties with reference to whom the directors' duties to the company are assessed.

In special circumstances, the directors may owe duties to individual shareholders. For instance, the articles of association (Articles) or a shareholders' agreement may impose specific duties towards shareholders, and representations made by directors to shareholders may impose fiduciary duties to the shareholders (eg the courts may recognise a fiduciary duty owed by directors to individual shareholders in the context of advice given by the directors to the shareholders as to whether they should sell their shares to a bidder).

The common law duties of directors

At common law a director owes two types of duty to the company, fiduciary duties and duties of skill, care and diligence.

Fiduciary duties An individual director must act in good faith in his dealings with or on behalf of the company and exercise the powers and fulfil the duties of the office honestly. Fiduciary duties covered by the general obligation include:

A duty to act in good faith

A director has a duty to act in good faith in what he considers is the best interests of the company and not for any collateral purpose.

A duty to exercise powers in the company's interests

A director must exercise his powers in the company's interests and in accordance with the relevant provisions of the company's constitutional documents and not for any personal or improper purpose.

Unfettered discretion

A director must not fetter the future exercise of his powers and so should not agree to exercise his powers in accordance with the instructions of some third party irrespective of the best interests of the company. This is of particular relevance to a nominee director or one who represents a particular shareholder, whose duties will always be to the company not to the appointor.

Secret profits

A director's fiduciary position precludes him from taking a personal profit from any opportunities that result from the directorship, even if the director is acting honestly and for the good of the company, unless the Articles provide otherwise. Subject to the Articles, any profit so arising must be paid over to the company. This applies whether the profit arises from a contract with the company or a third party.

To avoid conflicts of interest The general rule is that a director must not put himself in a position where there is an actual or potential conflict between a personal interest or duties owed to third parties and his duty to the company. For instance, if a director directs business to a company in which he is interested, perhaps because the person is also a director of that company, then the director is in danger of breaching his fiduciary duty.

Disclosure

Notwithstanding the general duty to avoid a conflict of interest, a director may enter into a contract where a conflict of interest might arise if the articles allow it or if the company gives its approval in a general meeting of shareholders. The Articles commonly provide that a director will not be disqualified by his office from contracting with the company, or be liable to account to the company for any profit realised from such contract, provided that disclosure is made.

Acting in other capacities

A director is not prohibited from acting as an officer or employee of the company (other than auditor), as a director of another company, or from representing the interests of a shareholder or another third party, provided that the company consents and the director can continue to act in the best interests of the company.

However, a director in such position must preserve independent discretion as to how he exercises his powers and, if a conflict arises, he must not subordinate the interests of...