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Duties of a Director under Cayman Islands Law

8 April 2011

Introduction

This legal guide summarises the duties imposed by the law of the Cayman Islands upon a director of a Cayman Islands company and includes a description of the standard a director is obliged to meet in the proper discharge of those duties. Cayman Islands law essentially imports the appropriate principles of English common law (prior to the enactment of the Companies Act 2006 of the United Kingdom), which have been substantially confirmed by decisions of the courts of the Cayman Islands. Although the case law has developed the nature and content of these duties by reference to directors, the principles should, in practice, be regarded as being of equal application to any officer of the company authorised to act on its behalf and in particular to those acting in a managerial capacity.

2 Fiduciary Duties

A director is in a fiduciary relationship to the company. Fiduciary duties may be described as being those of loyalty, honesty and good faith owed to the company. Every director owes these duties individually and they are owed to the company as a whole. Specifically, they are not owed to other companies with which the company is associated, to the directors or to individual shareholders. In practical terms, these duties translate into the following:

2.1 Bona Fides

The directors must act bona fide in what they consider to be in the best interests of the company as a whole. This is a subjective test and a court could only interfere if it determines that no reasonable director could have concluded that a particular course of action was in the best interests of the company. The court is not, however, concerned with the merits of the decision from a commercial point of view.

2.2 Proper Purpose

The directors must exercise the powers that are vested in them for the purpose for which they were conferred and not for a collateral purpose. For example, a company’s articles of association may confer on the directors the power to issue additional shares, but it would be an improper exercise of that power if additional shares were issued solely with a view to enabling the directors to maintain personal control of the company in their capacity as shareholders.

2.3 Unfettered Discretion

Directors should not improperly fetter the exercise of future discretion. For example, the directors cannot validly contract as to how they shall vote at future board meetings or otherwise conduct themselves in the future.

2.4 Conflict of Duty and Interest
Directors must not place themselves in a position in which there is a conflict between their duty to the company and their personal interests. This obligation, however, is often varied by the articles of association, for example, by permitting the director to vote on a matter in which he has an interest provided that he has disclosed the nature of this interest to the board at the earliest opportunity.
 

3 Duties of Care, Diligence and Skill

3.1 In addition to the fiduciary duties, each director owes a duty of care, diligence and skill to the company. The duties of care, diligence and skill have been traditionally regarded as subjective (i.e. a director of a Cayman Islands company has only been obliged to exhibit such skill as he actually possesses).

3.2 However, more recently it appears that the duties of care and skill of a director of a Cayman Islands company are also to be determined by reference to the skill, care and diligence that would be displayed by a reasonable director in those circumstances. The precise content of these duties will depend on the facts and vary from case to case, but the following broad guidance can be given:

(a) An executive director will be required to keep himself informed as to the financial affairs of the company and to play an appropriate role in its management.
(b) A non-executive director will be expected to attend to the affairs of the company with the level of diligence that, in all the circumstances, is reasonably necessary to enable him properly to ensure that the judgment he exercises is not only independent but also properly informed, and to ensure that his supervision of the executive management is effective.
(c) Additional duties may also apply by virtue of the employment relationship between a company and its executive directors (for example, pursuant to the contract of employment) and by virtue of the higher standards likely to be expected of employed professionals.
 

4 To whom are the duties owed?

The duties of a director are generally owed to the company but can, very occasionally, be owed directly to creditors or shareholders if there are special factual circumstances. In the ordinary course, the "interests of the company" may be equated to the interests of the company's shareholders. Once, however, a company is insolvent or is "doubtfully solvent" the directors must consider the creditors' interests when discharging their duties.
 
5 Delegation

Provided that the articles of association so provide, directors can delegate any or all of their powers to one or more directors, officers, committees (whether or not such committees comprise persons other then directors or officers) or service providers. In the context of a company which is a mutual fund, for example, it is quite common to delegate day-to-day management authority to an investment manager. However, delegation by the directors of their powers does not relieve directors of their duties to the company and the directors still retain ultimate responsibility for exercising supervision and control over the acts of any such delegates. The nature of any such delegation and the appropriate level of ongoing supervision will depend heavily on the precise factual circumstances and directors would be well advised to discuss any proposed delegations of their authority with their legal counsel at the earliest opportunity.

6 Documentation

As a matter of good corporate governance and best business practice it is important that any decisions of the board of directors are appropriately documented in either board minutes or written resolutions. In general, the more important the decision, the more comprehensive any such documentation should be. The resolutions or minutes will play an important role in providing evidence that the directors complied with their duties to the company should the actions of the directors be subject to challenge at a later date.

January 2011
This legal guide is intended to provide only general information for the clients and professional contacts of Maples and Calder. It does not purport to be comprehensive or to render legal advice.


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