British Virgin Islands: Directors Duties – A BVI Perspective

Directors of British Virgin Islands ("BVI") companies have certain fiduciary duties which arise both at common law and under statute. These fiduciary duties ultimately seek to protect companies and their shareholders whose destiny lie primarily in the hands of the directors in charge.

1. Common law duties

At common law directors have the following fiduciary duties:

(a) bona fide in what the director considers to be in the best interests of the company as a whole and not for a collateral purpose;

(b) to act for a proper purpose and to exercise their powers for the purposes for which they are conferred;

(c) to avoid conflicts of interest;

(d) to disclose personal interests in contracts involving the company;

(e) not to make secret profits from the director's office; and

(f) to act with skill and care.

2. Statutory duties and standard of care and skill

The BVI Business Companies Act, 2004 (the "Act") has codified and further modified the common law duties. Section 120(1) of the Act provides that a director is required to act honestly and in good faith with a view to the best interests of the company. In exercising the powers of a director, section 121 of the Act provides that the director shall exercise his powers for a proper purpose and shall not act or agree to the company acting in a manner that contravenes the Act or the company's memorandum and articles of association. Section 122 of the Act further provides that when exercising powers or performing duties as a director, the director shall exercise the care, diligence and skill that a responsible director would exercise in the circumstances taking into account, without limitation:

• the nature of the company;
• the nature of the decision; and
• the position of the director and the nature of the responsibilities undertaken by him.

Directors also have a statutory duty in relation to conflict of interest situations. In relation to conflicts, section 124 of the Act provides that, a director of a company shall, immediately after becoming aware of the fact that he is interested in a transaction entered into, or to be entered into, by the company, disclose the interest to the board of the company. A director who fails to disclose a conflict of interest in a transaction to the board of the company a commits an offence and may be liable to a fine of US$10,000.

Section 125(1) of Act provides that a transaction entered into by a company in respect of which a director is interested is voidable by the company unless the director's interest:

• was disclosed to the board of directors prior to the company entering in to the transaction; or
• is not required to be disclosed because the transaction or proposed transaction is between the director and the company and the transaction or proposed transaction is or is to be entered into in the ordinary course of the company's business and on usual terms and conditions.

Section 125(2) of the Act provides that notwithstanding section 125(1), a transaction entered into by a company in respect of which a director is interested is not voidable by the company if:

• the material facts of the interest of the director in the transaction are known by the shareholders entitled to vote at a meeting of shareholders and the transaction is approved or ratified by a resolution of shareholders; or
• the company received fair value for the transaction (fair value shall be determined on the basis of the information known to the company and the interested director at the time that the transaction was entered into).

The result of the above duties is that directors must therefore exercise reasonable care in the management of the company's affairs, otherwise, they could be liable in damages to the company if they fail to do so. If they act within their powers and with such care as is reasonably to be expected of them having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, then they have discharged both their common law as well as their statutory duties to the company. A director is also liable to the company for negligence, if he/she fails to exercise such degree of care as a reasonable person might be expected to take in the circumstances on his own behalf and the company consequently suffers loss. Significantly, if a director complies with his fiduciary duties, exercise such degree of care as a reasonable person might be expected to take in the circumstances on his own behalf, and acts within his authority, the fact that a decision that he has adopted causes a loss to the company, will not result in any personal liability to the director.

3. Special cases – duties not owed to company

Bearing in mind that fiduciary duties are generally owed to the company as a whole, section 120(2) to (4) of the Act modifies the traditional principles of directors fiduciary duties and provides that:

• a director of a company that is a wholly owned subsidiary may when exercising powers or performing duties as a director, if expressly permitted to do so by the memorandum or articles of the company, act in a manner which he believes is in the best interests of that company's holding company even though it may not be in the best interest of the company;

• a director of a company that is a subsidiary, but not a wholly owned subsidiary, may, when exercising powers or performing duties as a director, if expressly permitted to do so by the memorandum and articles of the company and with the prior agreement of the shareholders, other than its holding company, act in a manner which he believes is in the best interests of that company's holding company even though it may not be in the best interest of the company; and

• a director of a company that is carrying out a joint venture between the shareholders may, when exercising powers or performing, duties as a director in connection with the carrying out of the joint venture, if expressly permitted to do so by the memorandum or articles of the company, act in a manner which he believes is in the best interests of a shareholder or shareholders (i.e., the shareholders appointing him), even though it may not be in the best interest of the company.

It is important to note that the above modifications to the traditional principles of directors fiduciary duties will only apply where they are expressly provided for in the memorandum or articles of the company.

4. Liabilities for debts

A director is not liable for any debt, obligation or default of the company except in so far as he may be liable for his own conduct or acts (section 30 of the Act) with the following exceptions:

• when a company has no members, any person doing business in its name or on its behalf is personally liable for the payment of all debts of the company contracted during that time (Section 108 of the Act); or
• where a fraud has been committed by the director.

5. Potential insolvency

In a financial distress scenario directors must also have regard to the interests of the general body of creditors where there is a possibility that the company could become insolvent. If directors operate without regard to the interests of the general body of creditors and cause loss, then they may be held liable for insolvent trading which is addressed in the Insolvency Act, 2003. This offence only applies to directors or former directors and in such a case the court may order a director or former director to contribute to the company's assets where, at a time when he was a director of the company but before the commencement of liquidation, he knew or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation and he failed to take every step reasonably open to him to minimise the loss to the company's creditors. In a potential insolvency scenario, directors must also be careful of voidable transactions which include unfair preference and undervalue transactions.

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.