Cayman Islands: Indemnification of Trustees Acting As Directors – Cayman Islands

Last Updated: 22 July 2011

By Kay Carter, Senior Associate, and Sophia Harris, Managing Partner

In the Cayman Islands, STAR trusts may hold shares of a company which carries on a business. Trustees of such STAR trusts may arrange to become, or have an employee become, a director of the company because the trustees have a duty to be more informed about the company's business than a 'mere' shareholder .

In the Cayman Islands, STAR trusts may hold shares of a company which carries on a business. Trustees of such STAR trusts may arrange to become, or have an employee become, a director of the company because the trustees have a duty to be more informed about the company's business than a 'mere' shareholder1. Being a director has a potential downside, however, as directors have a positive obligation to become and remain informed about the business of the company in order to ensure that the business is carried on in accordance with the laws and regulations of the jurisdiction in which the business is conducted.

Although the fiduciary duties owed by a director of a company are fundamentally similar to the fiduciary duties owed by trustees to the trust, the duties are not owed to the same persons. Directors owe a duty of care to the company as a whole, which consists of the interests of all the shareholders. The best interests of the company may not necessarily be the same as the best interests of the trust even in the situation where the trustees are the sole shareholder of the company, the shares of which are held as trust assets. Directors are charged with managing the business; trustees are charged with protecting trust property and maximising the return for application to the objects of the trust. Trustees who act as directors must create a satisfactory balance between the competing duties.

The standard applicable to the duty of care owed by both trustees and directors has objective and subjective elements. In addition to the core obligations of honesty and good faith that trustees owe to the trust, trustees must exhibit the degree of skill, care, prudence and diligence that would be expected of trustees managing the types of assets held by the trust. Similarly, directors have a positive duty to act with the degree of skill, care, prudence and diligence that would be expected of directors managing the type of business carried on by the company.

Notwithstanding the similarities between the duties of care owed by trustees and by directors and the standards applicable to such duties, the fact that the duties are owed to different persons means that trustees acting as directors are probably not fully protected by an indemnity under the trust deed. This is so even where the trustees are indemnified for everything except fraud2, and even if the trust deed contains a clause modifying or nullifying the trustee's duty to become and remain informed about the business of the company the shares of which are trust assets. It should also be noted that trustees can only rely on an indemnity under the terms of a trust deed where the trustees have expressly complied with any and all requirements under such indemnity3. Therefore trustees should ensure that they are also indemnified under the company's directors' and officers' liability insurance policy in respect of their actions as a director.

In addition to indemnification under the terms of the trust and under the D&O liability insurance, trustees should develop policies and procedures to minimise the risk of an inadvertent breach of the duties of care owed to the trust and the company. For example, the trustees could create a policy that transactions of a certain nature or value must have the consent of two trustees who must review all of the information known to the trustees in respect of such transactions. Where the trust assets consist of shares of a company that carries on a family business, the trustees should consider whether or not it would assist them in performing their duties as trustees or directors to have family members provide advice.

Footnotes

1 Bartlett v Barclays Bank Trust Co Ltd. (Nos. 1 and 2), [1980] Ch. 515, [1980] W.L.R. 430, [1980] 1 All E.R. 139, [1980] 2 All E.R. 92 (Ch.D.)

2 Armitage v. Nurse, [1997] E.W.C.A. Civ 1279, [1998] Ch. 241, [1997] 3 W.L.R. 1946, [1997] 2 All E.R. 705 (C.A.)

3 Coutts (Cayman) Limited v Lemos, [2004-2005] C.I.L.R. 77 (Cayman C.A.)

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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