Guide To Directors' Duties In The Cayman Islands

PREFACE

This Guide provides a summary of duties and liabilities of directors of a company incorporated under Cayman Islands laws. It is not intended to be an exhaustive statement of the law but to be of assistance to persons who act as directors of one of the (approximately) 90,000 companies incorporated in the Cayman Islands.

The duties and liabilities of directors of a Cayman Islands company are governed by a mix of the Companies Law (2010 Revision) (the "Law") and the common law (insofar as it has not been amended by or incorporated into statute).

Whilst the Cayman Islands' courts regard decisions of the English Courts in relation to such matters as highly persuasive and largely adopt English common law principles, there are still significant differences of which directors of Cayman Islands companies need to be aware and which this Guide sets out.

Additionally, under Cayman law, there are statutory provisions which impose personal liability upon directors for their acts or omissions. This Guide discusses and gives an overview of areas such as fraudulent trading and fraud in anticipation of winding up. There are also provisions relating to misconduct and defrauding creditors.

Directors are not only agents but they are in some sense and to some extent trustees or in the position of trustees. However, their position differs considerably from that of ordinary trustees and this Guide summarises how and which of the strict rules do not apply in all respects to directors.

For most purposes it is sufficient to say that directors occupy a fiduciary position and all the powers entrusted to them are only exercisable in this fiduciary capacity.

In summary, directors are agents of the company to which they stand in a fiduciary relationship. The fiduciary relationship imposes upon directors duties of loyalty and good faith, which are similar to those imposed upon trustees so called. As agents, directors are also under duties of care, diligence and skill. As agents their duties are very different from the trustees' duties to be cautious and not to take risks.

It is recognised that this Guide will not completely answer detailed questions which clients and their advisers may have. It is intended to provide a sketch of the subject matter covered and is not a substitute for taking legal advice in the context of specific factual circumstances. This Guide is, therefore, designed as a starting-point for a more detailed and comprehensive discussion of the issues.

1. NATURE OF DIRECTORS' DUTIES TO THE COMPANY

   Each company registered in the Cayman Islands has a set of constitutional documents which describe and delimit the duties and responsibilities of its directors. The company's constitutional documents are supplemented by common law and statute. In general, the duties described in this Guide are owed by the directors to the underlying company as a whole – that is, to the general body of shareholders, rather than to individual shareholders or to particular classes of shareholders. Where the company is on the brink of insolvency (i.e. where its solvency is in doubt), directors' duties also extend to the company's creditors, whose interests will become paramount if the company actually becomes insolvent.

   Directors as Agents

   As stated directors are, in the eyes of the Companies Law (2010 Revision) (the "Law"), agents of the company for which they act and the general principles of the law of principal and agent regulate in many respects the relationship between the company and its directors. This position has long been established and in Ferguson v. Wilson (1866) L.R. 2. Ch.77, Cairns LJ stated:

   "What is the position of directors of a public company? They are merely agents of a company. The company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent. Wherever an agent is liable those directors would be liable; and where the liability would attach to the principal, and the principal only, the liability is the liability of the company."

   Therefore the general rule is that directors are considered to be acting as agents for the company and, as long as they make this fact clear to third parties, they should not incur any personal liability for breach of contract or any tortious act committed by the company. It follows that if a director fails to make it clear to a third party that he acts as a director of a company or, for instance, the director gives personal guarantees, then personal liability will result.

   A director's duties of care, diligence and skill can be summarized as follows:-

   1. Directors are not expected to be experts unless appointed as such

      A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. The test is partly objective (the standard of the reasonable man) and partly subjective (the reasonable man is deemed to have the knowledge and experience of the particular director). A director is therefore not expected to exercise skill which he does not possess.

      It is clear from these remarks that directors of a specific company are not required to be experts of the type of business which the company promotes unless they are appointed because of their specialist qualifications. Many boards consist only partly of such experts and, for the rest, of persons who are specialists in business administration or in certain general aspects of business management such as legal, financial, accounting, banking or expert trade practice. Upon these principles a director would be entitled to rely upon the advice of his fellow directors and in matters in which they are, or should be, experts.

      A number of English cases have accepted the distinction between the duty to be skilful, on the one hand and to take care on the other; the first being defined by reference to the particular director's skill and experience, and the latter by reference to the standard to be expected of the ordinary man.

   2. A director must exercise reasonable care and diligence but is not liable for errors of judgement

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