Guernsey: Corporate Governance In An Offshore Centre

Last Updated: 5 July 2005
Article by Paul Christopher


More is expected from directors now than in the past. Sir Howard Davies, the former head of the United Kingdoms Financial Services Authority, has said that "the Crown Dependencies [of which Guernsey forms part] continually have to go that extra mile just to prove that they are upright, honest and godly. Of course it is not fair, but it is realistic".

Directors of offshore companies should embrace the new reality for three very good reasons:

  1. the profile of offshore companies has increased;
  2. in order to fulfil their duties, directors need to understand the liabilities attaching to their position; and
  3. potential tax consequences.

To mix metaphors: these three corners, which are all addressed below, form a virtuous circle:


Offshore companies are used as vehicles for a wide range of activities ranging from operating businesses (commercial businesses such as banking, insurance, investment management and other financial services) to specific purpose companies established to engage in specific activities - for example to form part of a securitisation process or to issue bonds on shares and raise finance. Companies (along with unit trusts and limited partnerships) are also popular as vehicles for investment funds (closed or open ended funds) and Guernsey has always been a popular jurisdiction in which to establish investment funds for non-retail investors: particularly investment vehicles for venture capital, alternative investment strategy funds and property funds. At the end of December 2004 there were £56.6 billion of assets under management and administration in Guernsey domiciled funds. Guernsey companies are often listed on the United Kingdom’s Stock Exchange, our own Channel Islands Stock Exchange (the "CISX") or other exchanges around the world.


Guernsey imports the principles of English company law and the associated common law attaching to it. However, offshore companies have distinct differences from their traditional onshore counterparts. Most offshore companies will not normally have employees of their own. The company will operate by appointing service providers - for example to administer the company or provide investment advice to it. The company will have a board of directors to oversee its operations and those directors will typically be non-executive but professional directors who will have the same legal duties, responsibilities and potential liabilities as their executive (and non executive) counterparts in the onshore world. The directors’ duties broadly fall into fiduciary duties (the duties of loyalty, honesty and good faith) and the common law duties of care, skill and diligence. Where a company is listed, the directors will also have duties and responsibilities under the appropriate listing rules.

In the case of investment funds, there will be a requirement for the majority of directors to be domiciled offshore. There will also be "independent directors" - those who are not related to the managers of the company and who do not hold any business or other relationships related to the company and are therefore completely independent. The United Kingdom’s Financial Services Authority (the "FSA") in issuing statement 164 amended the listing rules on the independence of directors for investment companies listed in the UK. A UK listed company may now only have a maximum of one director who is associated with the investment manager. In Guernsey, whilst it is necessary to demonstrate that the majority of directors are independent, there is a less rigid approach to the definition of what may constitute independence from a regulatory and CISX perspective. However, a Guernsey company listed on the London Stock Exchange must still adhere to the UK Listing Rules.


Corporate governance and the duties and obligations of directors in offshore companies are not only a legal requirement: a failure of corporate governance may have significant fiscal consequences if there has been a failure to ensure that the mind management and control of the company has remained offshore. Cases where the United Kingdom’s Inland Revenue have failed to establish company’s onshore residence e have requested the directors to demonstrate that they have not only attended board meetings offshore, but have genuinely:

  1. considered decisions even if they have been asked to make the decisions by a third party (for example, in the case of the board of a subsidiary company where it is asked to consider implementing "instructions" of a controlling shareholder),
  2. obtained information they felt was necessary, and
  3. made decisions in the best interests of the company and the group. Records of board meetings demonstrated that there was discussion to consider that the directors’ policy was appropriate for the company to implement.

The cases underline the point that the directors of offshore companies need to meet and discuss important decisions affecting the company, and for such meetings to be conducted offshore. It will be necessary for boards to give themselves sufficient time for the decision to be taken - for example if a board is divesting itself of substantial assets, it would be inappropriate for the board to approve the transaction only at the last minute. A well-governed board would have been appraised and taken all of the relevant decisions throughout the life of the transaction from the decision initially to market the assets for sale, through negotiations and to the final resolution to approve the contractual documents.


It is critical that good corporate governance in an offshore context is not just carried out but it is visible and demonstrable (i.e. board meetings should be clearly and fully minuted). This visibility is vital to the protection of the individual directors who may be called upon to prove that they abided by the appropriate stricture of corporate governance, and may also be necessary to counter allegations by any investigating tax authorities.

The primary method by which a director demonstrates that he performs his duty is by board meeting participation. By locating in an offshore centre accessible to Europe (such as Guernsey) directors will have a simpler task in attending board meeting and have the ability to attend board meetings more frequently. Not only will a director be able to attend more board meetings in person, but he will also be able to visit the locally-based service providers and obtain for himself the information he feels necessary and raise matters directly with those service providers, further demonstrating good corporate governance.

It is the case that in certain circumstances the offshore world is more closely regulated than onshore.

Prospective directors of investment funds need to be approved by the Guernsey Financial Services Commission (GFSC) as being fit and proper. The GFSC has also issued guidance on the expectation of corporate governance for all financial services businesses in Guernsey.

The reputation and ongoing dynamism of offshore centres depend fundamentally on the quality and propriety of the local service providers and particularly the directors. In Guernsey, directors, service providers and their advisers have recognised this issue, have risen to this challenge and see visible and appropriate corporate governance as being fundamental to continuing success.

Paul Christopher is an English solicitor and an advocate of the Royal Court of Guernsey working for Ozannes’ Corporate Department. He has been with the firm for six years and specialises in corporate finance particularly investment funds and mergers and acquisitions.

© Ozannes

May 2005

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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