There's been increased focus from the courts and regulators on the duties owed by directors of a Cayman Islands or BVI fund since the financial crisis of 2007-8 and various high profile fund meltdowns. So what duties does a director of a fund actually owe?
In both the Cayman Islands and the BVI, directors' duties are based on a mix of English common law, statute and regulatory guidance. A director of a corporate fund owes the same duties to the fund as a director of any other Cayman Islands or BVI company owes to its company. Under common law a director owes fiduciary duties and duties of skill, care and diligence.
Directors' fiduciary duties are:
- to act in good faith in what the director considers is the best interests of the fund;
- to exercise powers for the purposes for which they were conferred and in the fund's interests;
- to act with unfettered discretion; and
- to avoid conflicts of interest and to disclose personal interests in transactions.
A director's duty to act with skill, care and diligence involves a mix of objective and subjective standards for any particular director. There is a minimum objective standard based on the functions given to the director, which can then be raised if the particular director has more knowledge, skill and experience than normally expected. Directors also have a continuing duty to acquire and maintain a sufficient knowledge of the fund's business so that they are able to properly discharge their duties as directors. Although directors can delegate to others, they still have a duty to supervise their delegate and be satisfied that they have the right skills to do the tasks asked of them.
Although the Cayman Islands Companies Law does not specifically set out the duties of directors, it does include various obligations which are offences if they are breached. These include authorising payments out of capital for redemptions or repurchases of a fund's own shares when the company is insolvent and failure to maintain proper books of account. The BVI Business Companies Act, 2004 (BCA) codifies the duties of a director under BVI law and applies equally to executive and non-executive directors and applies even where a director has not been properly appointed to the board. The duties of directors under the BCA overlap with their common law duties and include (a) a duty to act honestly and in good faith, (b) a duty to act for a proper purpose, (c) a duty to exercise care diligence and skill of a reasonable director and (c) a duty to disclose an interest in a transaction. The BCA also allows directors to rely upon the register of members, books, records and financial statements and other information prepared or supplied by employees, professional advisers or experts and other directors subject to a reasonable belief of competence and the director acting in good faith, making proper inquiry and not having knowledge that his or her reliance is unwarranted.
Directors of Cayman funds which are regulated by the Cayman Islands Monetary Authority (CIMA) are also expected to follow the statement of guidance for regulated mutual funds issued by CIMA in 2014 which sets out various principles and guidance on the minimum expectations for sound governance of regulated funds. We will be looking in more detail in another blog at the principles which apply under the statement of guidance, many of which are common practice for well run funds. The Financial Services Commission (FSC) in the BVI has not issued similar guidelines although directors of BVI funds are likely to be held to the same or very similar standards. In Cayman, directors of regulated funds must also be registered or licensed with CIMA under the Directors Registration and Licensing Law (DRLL) before they are appointed as a director. In the BVI, only a director of a public fund must be approved in advance of being appointed. A director of any other fund can be appointed without prior approval, although notice must be provided to the FSC following the appointment.
Directors are usually entitled under a fund's articles of association to be indemnified by the fund for breach of duty. This is usually limited though where the director has been fraudulent or dishonest or there's been wilful neglect or default in the fulfilment of their duties. In the BVI, the director must have acted honestly and in good faith and in what he or she believed to be the best interest of the company in order to benefit from any indemnity. In one of the most well known recent Cayman cases, Weavering Macro Fixed Income Fund Limited (in liquidation), the Court of Appeal in Cayman confirmed that the test for wilful neglect is whether the person knows that he is committing and intends to commit a breach of duty, or is recklessly careless whether or not the act is a breach of duty. Whether there has been wilful neglect and, in the BVI, whether the director has acted honestly and in good faith, will depend on the facts and evidence of each particular case.
Recent court cases and regulatory guidance have effectively reinforced existing Cayman and BVI law on directors' duties, rather than radically changing them. In this way, directors need to continue to bear in mind their duties and responsibilities when considering a course of action for their fund.