The duties and liabilities of the directors of a company under Cayman Islands law arise from:
- the common law – the duties have developed over many years by way of analogy with other legal relationships, particularly the relationship between principal and agent and between trustee and beneficiary;
- statute – principally the Companies Law (as amended) (the Companies Law), but also the Penal Code (as amended) (the Penal Code), the Proceeds of Crime Law, (as amended) (the Proceeds of Crime Law) and, where appropriate, the Mutual Funds Law (as amended) (the Mutual Funds Law); and
- the memorandum and articles of association of the company – its constitution, within the limits of which the directors are obliged to operate.
It is important that directors understand their duties and liabilities – an importance brought into focus in light of the much publicised Weavering case.1
Common law duties and liabilities of directors
Under the common law directors owe fiduciary duties and certain duties of skill and care.
An individual director must act in good faith in his dealings with or on behalf of the company and exercise the powers and fulfil the duties of his office honestly. His fiduciary duty has five aspects:
- a duty to act in good faith in what the director considers are the best interests of the company;
- a duty to exercise powers in the company's interests and only for the purpose or purposes for which they are given;
- a duty not to put himself in a position where there is an actual or potential conflict between his duty to the company and his personal interests;
- a duty not to misuse company property; and
- a duty not to improperly fetter the exercise of the director's future discretion.
Duties of skill and care
A director's fiduciary duty imposes on him a largely negative obligation to do nothing which conflicts with the company's interest. However, when a director is acting in the company's interest he is expected to exercise whatever skill he possesses with reasonable care. This duty has two aspects:
- a duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable the director to properly discharge his duties; and
- a duty to attend diligently to the affairs of the company.
However, a director is entitled to rely upon his fellow directors and the other officers of the company and can delegate power to others where it is reasonable to do so.
If a director breaches his fiduciary duties or duties of skill and care, he may be personally liable to the company for damages.
Offences for which a director may be liable under the common law include negligent misstatement and deceit.
Where a director has been negligent in making a statement he may be liable under a claim for damages brought by a plaintiff who has suffered loss through acting in reliance on that statement. In connection with mutual funds, each director should read the offering document as it progresses to final proof. Each director should consider every material statement of fact or of opinion contained therein and satisfy himself prior to publication of the document that:
- he is not aware of anything which would cause him to doubt the accuracy of any statement in the document; and
- each statement has been the subject of sufficient verification by appropriate and competent people to afford him reasonable grounds to believe that it is true and not misleading.
If the directors have been fraudulent in misrepresenting facts by making a statement either with knowledge of its falsity or being reckless as to whether it is true or false they could be liable for damages to a shareholder or purchaser thereby deceived. The measure of damages in an action for deceit is the actual damage suffered by the plaintiff, including consequential loss and it is not limited to damages which were reasonably foreseeable as a result of the misstatement.
Statutory duties and liabilities of directors
The general principles governing a director's conduct set out above are augmented by a range of specific duties imposed by statute.
The Companies Law
The Companies Law places certain duties upon the directors of Cayman Islands companies, some of which are sanctioned by criminal penalties. Many of these duties are specifically imposed upon the directors. In addition, in a number of instances the Companies Law provides that where a company is in breach of a particular statutory obligation, any "officer" of the company (which includes a director) who is "in default" shall be liable to a penalty as well as the company. The Companies Law states that for this purpose the expression "officer who is in default" means any officer of the company who knowingly and wilfully authorises or permits the default, refusal or contravention mentioned in the enactment. Among the most important statutory provisions that are sanctioned in this way are the following:
- No distribution or dividend may be paid to members out of the share premium account unless immediately following the date on which the distribution or dividend is proposed to be paid the company shall be able to pay its debts as they fall due in the ordinary course of business. A company and any director thereof who knowingly and wilfully authorises or permits any distribution or dividend to be paid in contravention of this provision is guilty of an offence and liable on summary conviction to a fine of approximately US$18,000 and to imprisonment for five years.
- A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment out of capital is proposed to be made the company shall be able to pay its debts as they fall due in the ordinary course of business. A company and any director thereof who knowingly and wilfully authorises or permits any payment out of capital to effect any redemption or purchase of any share is guilty of an offence and liable on summary conviction to a fine of approximately US$18,000 and to imprisonment for five years.
- Every company shall cause to be kept in writing on one or more sheets, whether bound or unbound, a register of its members. Any company making default in complying with this section shall incur a penalty of approximately US$6,000 for every day during which the default continues; and every director of the company who knowingly and wilfully authorises such contravention shall incur the like penalty.
- Every company shall keep at its registered office in writing on one or more sheets, whether bound or unbound, a register of all mortgages and charges specifically affecting property of the company, and shall enter in such register in respect of each mortgage or charge a short description of the property mortgaged or charged, the amount of the charge created and the names of the mortgagees or persons entitled to such charge. If any property of the company is mortgaged or charged without such entry as aforesaid being made, every director or other officer of the company who knowingly and wilfully authorises or permits the omission of such entry, shall incur a penalty of approximately US$120.
- Every company shall keep at its registered office a register containing the names and addresses of its directors and officers, and shall send to the Registrar of Companies in the Cayman Islands (the Registrar) a copy of such register, and shall within 60 days notify the Registrar of any change that takes place in such directors or officers. Any company which fails to comply with such provisions shall incur a penalty of approximately US$1,200 and a further penalty of approximately US$120 for every day which the default continues, and every director and manager of the company who shall knowingly and wilfully authorise or permit such default shall incur the like penalty.
- Every year each exempted company shall furnish to the Registrar a declaration (the Declaration) that since the previous return or since registration, as the case may be, there has been no alteration in the memorandum of association, other than an alteration in the name of the company or an alteration already reported; and that the operations of the exempted company since the last return or since registration of the exempted company, as the case may be, have been mainly outside the Islands. Every director and officer of a company who knowingly makes or permits the making of the Declaration referred to above knowing it to be false is guilty of an offence and liable on summary conviction to a fine of approximately US$6,100 and to imprisonment for one year.
- An exempted company shall not trade in the Islands with any person, firm or corporation except in furtherance of the business of the exempted company carried on outside the Islands. If an exempted company carries on any business in the Islands in contravention of the provision of the Companies Law relating to exempted companies, then, without prejudice to any other proceedings that may be taken in respect of the contravention, the exempted company and every director, provisional director and officer of the exempted company who is responsible for the contravention is guilty of an offence and liable on summary conviction to a fine of approximately US$120 for every day during which the contravention occurs or continues, and the exempted company shall be liable to be immediately dissolved and removed from the register.
- There are additional duties and liabilities imposed by the Companies Law in relation to directors of segregated portfolio companies. Please refer to our briefing 'Segregated Portfolio Companies' for further detail.
The Penal Code
The Penal Code provides that whoever, being an officer of a body corporate or unincorporated association (or person purporting to act as such), with intent to deceive members or creditors of the body corporate or association about its affairs, publishes or concurs in publishing a written statement or account which to his knowledge is or may be misleading, false or deceptive in a material particular, is guilty of an offence and liable to imprisonment for seven years.
The Proceeds of Crime Law
The Proceeds of Crime Law contains a number of money laundering offences of which the directors should be aware. The offences, the penalty for which is a fine and/ or imprisonment, include assisting another to retain the benefit of criminal conduct, the acquisition, possession or use of property representing the proceeds of criminal conduct and concealing or transferring proceeds of criminal conduct.
- It is an offence to be concerned in an arrangement whereby (a) the retention or control by or on behalf of another (X) of property which is the proceeds of X's criminal conduct is facilitated (whether by concealment, removal from the jurisdiction, transfer to nominees or otherwise); or (b) property which is the proceeds of X's criminal conduct (i) are used to secure that funds are placed at X's disposal; or (ii) is used for X's benefit to acquire property by way of investment, knowing or suspecting that X is a person who is or has been engaged in criminal conduct.
- A person is guilty of an offence if, knowing that any property is, or in whole or in part directly or indirectly represents, another person's proceeds or criminal conduct, he acquires or uses that property or has possession of it.
- A person is also guilty of an offence if, knowing or having reasonable grounds to suspect that any property is, or in whole or in part directly or indirectly represents, another person's proceeds of criminal conduct, he (a) conceals or disguises that property; or (b) converts or transfers that property or removes it from the jurisdiction, with intent to assist any person to avoid prosecution for an offence or to avoid the making or enforcement of a confiscation order.
In connection with mutual funds, it is important that directors put in place appropriate procedures to allow the administrators on behalf of the company to ensure the identity of the subscribers to the shares and the source of funds. Satisfactory references should be obtained regarding the intended beneficial owners of the shares from a recognised professional firm or financial institution such as a bank, a legal firm or an accounting firm. If a subscription application is received from a professional intermediary the company should obtain a written agreement from the intermediary that he has verified the identity and carried out a due diligence check in respect of the intended beneficial owner.
The Mutual Funds Law
- An offering document in respect of equity interests in a mutual fund must describe the equity interests in all material respects and contain such other information as is necessary to enable a prospective investor in the mutual fund to make an informed decision as to whether or not to subscribe for or purchase the equity interests. Such information must be updated within 21 days of any material change. This supplements any duty of disclosure under common law or any other law.
- A regulated mutual fund must have its accounts audited annually by an auditor approved by the Cayman Islands Monetary Authority (CIMA) and send its audited accounts in respect of the financial year of the fund to CIMA within six months of the end of that financial year or within such extension of that period as CIMA may allow. The directors are responsible for ensuring that the company complies with this provision and whoever contravenes the provision shall be guilty of an offence and liable on conviction to a fine of approximately $24,000.
- CIMA may, at any time, instruct a regulated mutual fund to have its accounts audited and to submit them to CIMA within such time as CIMA specifies. The directors of a regulated mutual fund shall ensure that an instruction given to the company by CIMA is complied with within the specified time, and whoever contravenes this provision is guilty of an offence and liable on conviction to a fine of approximately US$12,000 plus approximately US$600 in respect of each day after time during which the regulated mutual fund failed to comply with the instruction.
- If requested to do so by CIMA, a director of a regulated mutual fund shall give CIMA such information or such explanation in respect of the fund as CIMA may reasonably require to enable it to carry out its duty under the law, and whoever contravenes this provision is guilty of an offence and liable on conviction to a fine of approximately US$122,000. A person giving such information or explanation shall not give CIMA information or an explanation that he knows or should reasonably know is false or misleading, and whoever contravenes this provision is guilty of an offence and liable on conviction to a fine of approximately US$122,000.
- If requested to do so by CIMA, a director of a regulated mutual fund shall give CIMA access to, or provide at any reasonable time all records relating to the mutual fund, and whoever contravenes this provision is guilty of an offence and liable on conviction to a fine of approximately US$122,000.
- If CIMA has reasonable grounds for believing a person is carrying on or attempting to carry on business as a mutual fund in or from the Cayman Islands without a licence or without having registered the fund with CIMA, CIMA may instruct that person to give CIMA such information or explanation as CIMA may reasonably require to enable CIMA to carry out its duty under the law. Whoever fails to comply with such an instruction is guilty of an offence and liable on conviction to a fine of approximately US$122,000. Furthermore, a person giving such information or explanation that he knows or should reasonably know is false or misleading is guilty of an offence and liable on conviction to a fine of approximately US$122,000.
- CIMA has broad powers to ensure the protection of investors and creditors and to ensure that the direction and management of the fund is being conducted in a fit and proper manner, including requiring the substitution of a director.
CIMA Statement of Guidance
In January 2014, CIMA published a statement of guidance (the SOG) for regulated mutual fund governing bodies (bodies responsible for overseeing the activities of funds) and operators (members who together comprise the governing bodies of funds) to ensure that the management and direction of funds is conducted in the fit and proper manner expected by CIMA - the SOG sets out the minimum requirements against which corporate governance should be measured.2
The SOG sets out key principles which should be interpreted and applied in the context of each regulated fund, taking into account factors such as the fund's structure, complexity and size. The SOG sets out that:
- a fund's governing body is required to effectively supervise and oversee a fund's activities (as highlighted in the much publicised Weavering judgment3 as being absent in the case of the Weavering fund). This requirement underpins the other principles which the SOG establishes and includes a requirement that the governing body of a fund should meet at least twice per year;
- a fund's operators must ensure internal documents are maintained which fully record the proceedings of meetings of the fund's governing body;
- communication between the operators of a fund and its governing bodies should include appropriate reporting on compliance and transparency with investors where disclosure is appropriate; and
- a fund's risks should be appropriately managed and mitigated (and discussed at meetings of the funds governing body).
CIMA has released a Statement of Guidance which establishes key principles of good governance which must be observed by each Cayman Islands regulated mutual fund. Such principles require, inter alia, the board of directors to properly oversee the activities of the fund's service-providers, suitably identify, disclose and manage all conflicts of interest and meet at least twice a year or otherwise more frequently as determined by the size, nature and complexity of the fund.
Protections against directors' liability
A company may include a provision in its articles of association or may enter into a separate contractual arrangement with a director indemnifying a director in certain circumstances, provided however that such constitutional or contractual indemnification cannot override a director's common law or statutory duties and liabilities.
The company may also purchase and maintain insurance for directors and certain other persons against liability incurred as a result of any negligence, default, breach of duty or breach of trust in relation to the company.
1 Weavering Macro Fixed Income Fund Limited (in liquidation) v Stefan Peterson and Hans Ekstrom; click here to see our briefing note on the judgment.
2 Click here to see our briefing note entitled "CIMA's statement of guidance on fund governance: a baseline of adequacy".
3 Weavering Macro Fixed Income Fund Limited (in liquidation) v Stefan Peterson and Hans Ekstrom; click here to see our briefing note on the judgment.
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.