Isle of Man: BVI Companies: Directors Duties, Indemnification And Protection

Last Updated: 14 February 2013
Article by Chris Arrowsmith and Rob Lindley

Directors' duties

The directors of a BVI company run the day-to-day activities of the company and make any commercial decisions required. There is no statutory requirement for directors to get shareholder approval for entering transactions, but the company's memorandum and articles of association could be amended to stipulate this.

Directors must always bear in mind their duties to the company. These duties are codified in the BVI Business Companies Act 2004 (the "Act") and include:

  • Acting honestly, in good faith and in what the director believes to be in the best interests of the company;
  • Exercising their powers for a proper purpose, including not acting in a manner that contravenes the Act and the memorandum/ articles of the company;
  • Exercising their powers and performing their duties with a level of care, diligence and skill that a reasonable director would exercise in the circumstances, taking into account the nature of the company, the nature of the decision and the position of the director and the responsibilities undertaken by the director.

Transactions entered into in breach of these duties may result in personal liability for the directors.

If a director has other interests, these should be disclosed to the board of directors immediately after becoming aware of it. Provided he has disclosed his interest, the director is able to attend the board meeting and vote on the approval of that transaction. A director is not, however, required to disclose an interest if the transaction is between the company and the director, and the transaction is entered into in the ordinary course of the company's business and on usual terms and conditions.

Shareholder claims

A key principle of BVI company law is that a company should be managed for the main purpose of increasing its share price, also called "returning shareholder value". The interest of the shareholders is therefore paramount and the Act accordingly provides a wide spectrum of remedies for disgruntled shareholders where a company has breached its duty to a member qua member. Actions that shareholders can take include:

  • Compliance Order - the shareholder makes an application to court for an injunction against a company or its directors if the Act or the company's memorandum or articles are contravened;
  • Personal action - the shareholder can bring the company for breach of a duty owed by the company to him as a member;
  • Derivative action - the shareholder applies to court for permission to bring proceedings against a director on behalf of the company. The applicant must establish a statutory basis for the derivative action and the matters that the court must consider on making a decision are listed in the Act.

If a derivative action is permitted, the court has a wide range of reliefs that it can grant on the application of a shareholder who considers himself unfairly prejudiced, including an order for a company or any other person to acquire the member's shares; compensation to the member; or even appointing a liquidator/receiver.

Director indemnities

With the ability of shareholders to bring claims against directors, it is vital that directors strike a balance between taking certain risks to enable them to maximise company profit, whilst taking measures to protect themselves from claims when things do not go to plan.

Indemnities under the Act

The Act provides that directors or former directors of a BVI company, and directors or former directors of another company or enterprise who are serving as such at the request of the BVI company may be indemnified against all expenses, including legal fees, and against all judgements, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings.

The persons above may only be indemnified by the company where they have acted honestly and in good faith and in what they believed to be in the best interests of the company. If these core duties are breached, any indemnity is void.

There is one mandatory situation for indemnification under the Act: that a person must be indemnified by the company if he has been successful in the defence of any proceedings against him.

Memorandum and Articles of Association

A company's memorandum and articles will often contain provisions relating to directors' indemnities. These provisions override the provisions of the Act - whether they go above and beyond the Act, or nullify the statutory indemnity altogether. As the memorandum and articles of a BVI company can only be amended by the shareholders and not by the directors, it is a risk for directors and former directors that indemnity provisions could subsequently be removed without recourse.

Separate Contractual Arrangements In light of the shareholders' ability to remove indemnification from the memorandum and articles, it is advisable for the director to require a separate agreement with the company. Any such agreement could not be amended without the consent of both parties, therefore the director has more comfort and control over an indemnity of this kind.

Alternatively, directors might consider taking out D&O insurance, which is also permitted by the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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