We are living in challenging times, arguably far more challenging than in 2008 given the supply and the demand side issues all businesses are facing, and the concerns as to our personal well-being and that of those around us. Against such a backdrop, informed decision-making by directors is all the more complicated, and so too any assessment of the risks that directors face in trying to steer a company through what are often unchartered waters. Identifying the right options for companies, and mitigating risks for companies and directors alike, will be key for the directors and their advisors in the weeks and months to come. The 2007-09 global financial crisis has taught us that decisions which directors make now will likely be judged with the benefit of hindsight in years to come, and will have a considerable impact on the future of many companies, as well as the shape of shareholder and board litigation. Successfully navigating through this period will be far from straightforward, even for the most experienced director.

It is perhaps an obvious point to make, but before embarking on a strategy directors must have regard to the laws which apply to the companies over which they are appointed, and act and take advice accordingly. With so many corporate and trust structures in the Channel Islands involving a combination of Jersey, Guernsey and BVI incorporated entities, and with the laws of those jurisdictions being different, sometimes markedly so, this is a critical point that must not be overlooked. A Jersey or Guernsey based director seeking advice from Jersey or Guernsey legal counsel on governance, corporate, finance or litigation issues that relate to their conduct of a BVI incorporated company, or vice versa, is laying a foundation that will undermine all of the decisions that follow, and which will leave that director open to challenge and potential liability.

With a clear understanding of the laws that must govern their conduct, directors are then in a position to properly deal with the more complex questions as to how their conduct should influence the company in question, and how they must act so as to discharge their duties. Whilst the use of independent benchmarking services to monitor investment values has become more sophisticated since 2008, benchmarking will not protect a board in respect of the many difficult decisions which directors are required to make, against often very complex and subjective backdrops, in order to react to the current crisis.

In the current circumstances, directors of Jersey, Guernsey and BVI companies should be assessing the commercial and financial position of the companies they are managing in detail, with the best interests of those companies at the forefront of their minds, and documenting their review and decision-making process on an ongoing basis. More than ever, the collective nature of a board needs to come to the fore. If it previously existed, the question of "shall we meet as a board to discuss" has gone out of the window, replaced by "how frequently shall we meet", "how we can improve our governance processes", "what short term and medium term steps can we take to protect the company", and "what interests must we have regard to when making decisions".

As much as possible, directors must recognise that their actions and inactions may become the subject of analysis with the benefit of hindsight, and they need to be able to stand behind their decisions. That may mean reversing prior decisions, or doubling down on them; whatever they are, action points need to be based on proactive investigation and informed decision making in the light of changing economic circumstances. Rather than slavishly following plans settled against a different backdrop, directors should borrow from the US Marine Corps slogan to "Improvise, Adapt, and Overcome".

Critically, directors must consider the position of the company they are a director of rather than the group in which the company sits. There might be a common goal of the group as a whole, but directors are not acting as a director of a group – they act as a fiduciary of one or more corporates within it. Where those corporates are governed by different laws, and have different capital structures, cash flow positions and liquidity needs, the assessment that directors must go through in making decisions on their behalf also must differ, and demonstrably so.

However, even before one starts to consider such issues as whether a company is a going concern or is in a state of stress or distress, in the context of Jersey, Guernsey and BVI companies there are a host of differences at law that directors must have regard to. This includes the threshold tests and protections that apply from a director's duty perspective.

  • When considering whether there has been a breach of a Jersey director's fiduciary duties to act honestly, in good faith and with a view to the best interests of the company, the Jersey Court will apply a subjective test, focussing on what was in a director's mind at the relevant time. Having independent, expert advice from specialists from different professions will be of substantial benefit should a claim be made for breach of fiduciary duty, not least to demonstrate that a director properly discharged his or her duties and took independent advice before taking a particular course of action.
  • In Guernsey, the test for a breach of duty is a high one and the court will need to be satisfied that no reasonably diligent director with the material degree of knowledge, skill and expertise could have acted in the way the director did. That said the requisite knowledge and skill is determined by reference not only to the actual skill and knowledge of the individual but also the skill and knowledge he ought reasonably be considered to have. Thus now, more than ever more, outside evidence as to why decisions were made and that they were rational ones, should be available and that will be in the form of external professional advice, in order that directors do not become vulnerable to future claims of breach of duty.
  • The protections afforded to a director of a BVI company go further. When exercising their powers or otherwise performing their duties, directors of BVI companies are statutorily entitled to rely on the advice they receive from professional advisers (including legal advisers) provided the director reasonably believes that the matters in question are within that adviser's professional or expert competence. However that benefit is contingent upon the director acting in good faith; making proper and detailed inquiries; and where it subsequently transpires that the director's reliance on the advice was not warranted, the director not being aware of that error at the relevant time.

Hindsight is a wonderful tool for learning lessons for the future, but less so when it is being used to judge decisions that you made in the past as a fiduciary of a company. Before looking at complex scenario assessment and brainstorming different permutations and outcomes, boards of directors and their professional advisors must answer the basic questions of "what hat am I wearing", and "how do I properly discharge my duties".

Originally published by Walkers, April 2020

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.