Recent global economic developments have prompted a tightening of credit in various parts of the world and, amongst corporations in some of those countries, a heightened risk of insolvency. Increasingly, advice is being sought about the legal responsibilities and potential liabilities of boards whose companies may be facing some form of insolvency or credit crunch.
A seemingly simple question concerning what personal duties, or potential consequences, members of a board might face in a situation of possible insolvency can often involve a complex analysis. Today, large corporations and financial institutions comprise many businesses and entities, spread over various legal jurisdictions. The relevant laws of all these jurisdictions need to be understood, summarised and presented to the board in a practical manner having regard to the commercial context.
The following is a summary of the position in those offshore jurisdictions that Appleby currently covers:
Bermuda: Directors are under general duties to act honestly and in good faith with a view to the best interests of the company. They are also required to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In performing these duties where a company is insolvent, or on the verge of insolvency, a director is required to afford paramount regard to the interests of the company's creditors as a whole. Directors should act with a view to minimising the potential loss to creditors, as opposed to acting in the best interests of the collective body of shareholders. A director who fails in these duties is liable to the company for any consequential damages.
Therefore, directors should take decisions, such as whether to continue trading, or to seek a winding up of the company, or a sale of its business as a going concern, based on a careful consideration of the course of action that would be in the best interests of the company's creditors. It is the creditors of the Bermuda company who must be considered of paramount importance, including intra-group creditors, rather than the creditors of the corporate group as a whole.
Bermuda also has a fraudulent trading provision equivalent to Section 213 of the English Insolvency Act 1986 (English Insolvency Act), rendering any person who is knowingly party to the carrying on of the company's business with intent to defraud creditors, or for any fraudulent purpose, liable to contribute to the company's assets in the event of an insolvent liquidation.
Cayman Islands: The law in the Cayman Islands is essentially the same as in Bermuda, except that Cayman only recently enacted a fraudulent trading provision equivalent to Section 213 of the English Insolvency Act, and this has not yet come into force. It is pending the drafting of more detailed insolvency rules.
British Virgin Islands (BVI): The law in the BVI is also virtually the same as in Bermuda but for one important addition. Under Section 256 of the Insolvency Act, 2003 of the BVI, a person who is, or who has been, a director of a company can be ordered to make such contribution to the assets of a company in liquidation as the Court considers proper.
To make such an order, the Court must be satisfied that, while a director, he knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into liquidation, and thereafter failed to take every step reasonably open to him to minimise the loss to the company's creditors. This is very similar to wrongful trading under Section 214 of the English Insolvency Act and seemingly renders directors of BVI companies subject to a higher degree of personal responsibility in circumstances of possible insolvency than directors of Bermuda or Cayman companies.
Jersey: The law in Jersey is essentially the same as in the BVI, though the wording of the provision relating to wrongful trading differs slightly. Under Section 177 of the Companies (Jersey) Law, 1991 and Section 44 of the Bankruptcy (Desastre) (Jersey) Law 1990, the test is whether the director knew or was "reckless" regarding whether the company would avoid a winding up and whether, thereafter, he took "reasonable steps" with a view to minimising the potential loss to creditors.
Mauritius: Under Mauritius law, apart from the general duties of directors to act honestly, in good faith and in the best interests of the company and, in so doing, exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, the Companies Act 1984 and 2001 of Mauritius imposes specific duties and responsibilities on directors of potentially insolvent companies both pre and post insolvency.
Under Section 162 of the Companies Act 2001, a director who is of the view that a company is unable to pay its debts as they fall due is under a statutory duty to forthwith call a meeting of the board to consider whether the board should appoint a liquidator or an administrator. Where any director fails to call such a meeting and, at the time of the failure, the company is unable to pay its debts as they fall due and the company is subsequently placed in liquidation, the Court may make an order that such director shall be liable for all or any part of any consequential loss suffered by the creditors of the company.
Where a meeting is called but the board does not resolve to appoint a liquidator or an administrator, and if, at the time of the meeting, there were no reasonable grounds for believing that the company was able to pay its debts as they fall due and the company is subsequently placed in liquidation, then the Court may make an order that those directors who voted against appointing a liquidator or an administrator be liable for all or any part of any consequential loss suffered by creditors of the company.
A further consideration for directors of Mauritius companies is Section 324 of the Companies Act 1924. This provides that where, during the course of the winding up of a company or in any proceedings against a company, it appears that an Officer (which definition includes a director) is knowingly a party to the contracting of a debt and who, at the time the debt is contracted, had no reasonable or probable ground of expectation of the company being able to pay the debt, after taking into consideration the other liabilities, if any, of the company at the time, that Officer shall be deemed to have committed an offence.
Conclusion: As in most developed countries, all of our offshore jurisdictions have laws requiring that company directors exercise a certain degree of care and have regard to the interests of the company's creditors, in circumstances where the company is insolvent or on the verge of insolvency. In BVI, Jersey and Mauritius, the laws go one step further by trying to ensure that directors do not act unreasonably or recklessly as regards any decision to continue trading or to incur further debts.
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.