Bermuda: Duties And Liabilities Of Directors - 2018

Last Updated: 14 August 2018
Article by Jonathan Betts

Introduction

This Memorandum provides a summary of duties and liabilities of directors of companies incorporated under the laws of Bermuda. It is not intended to be an exhaustive statement of the law in this area but merely to be of some guidance to persons who act as directors of such companies. Particular circumstances or transactions should be the subject of specific legal advice given on the relevant facts at the relevant time.

Companies formed in Bermuda and the duties and liabilities of their directors are governed by the company's Memorandum of Association and Bye-Laws (together its constitution) and the Companies Act 1981 (the "Companies Act") and the common law so far as it has not been amended by statutory provisions. The Bermuda courts would regard as highly persuasive the decisions of the English courts in relation to such matters.

Statutory Duties of Directors

The Companies Act requires directors of companies, in exercising their powers and discharging their duties, to act honestly, in good faith and with reasonable care, diligence and skill. As a result directors will need to be diligent in ensuring that the various obligations of the company, set out below, are carried out. Directors' obligations are owed to the company, not the shareholders.

Maintaining registers

The Companies Act requires each company incorporated under it to maintain certain registers. The Directors, as part of their general duty of care, should ensure that such registers are kept in the appropriate location and maintained in good order. The registers are:

  1. The Register of Members: To be kept at the registered office of the company in Bermuda. The register contains the names and addresses and details of shares issued to the company's members.
  2. The Register of Directors and Officers: To be kept at the registered office of the company in Bermuda. The register contains the names and addresses of each of the company's directors and officers.

Maintaining records of account

The directors are also responsible for ensuring that the company complies with the requirements of the Companies Act to maintain proper accounting records. Unless waived by the members, the company's accounts must be audited and inclusive of the auditors' report and be available to the members.

Registered office

The directors are also responsible for ensuring that the company complies with the requirements of the Companies Act to maintain a registered office in Bermuda, and to ensure that its name is properly displayed at its registered office as well as on its stationery etc.

Annual general meetings

Directors of a Bermuda company must call a general meeting of the company's shareholders at least once a year, although this meeting does not need to be held in the Bermuda.

Other Duties of the Directors

Directors of a Bermuda company will also be responsible for ensuring that all of the company's statutory duties and requirements are properly carried out. This will include ensuring that changes to the company's registered office, share capital, memorandum of a vbnmssociation, or other events that will require the notification of the Registrar of Companies, are duly carried out.

Fiduciary Duties

Apart from the specific duties referred to above, the Companies Law does not (unlike the current English statute) specify the general or fiduciary duties of directors. English case law is highly persuasive and Bermuda Courts have adopted the English common law principles relating to directors' duties which can generally be summarised as a duty:

  1. to act in what the directors bona fide consider to be the best interests of the company and not for collateral purpose;
  2. to exercise their powers for the purposes for which they are conferred;
  3. of trusteeship of the company's assets;
  4. to avoid conflicts of interest and of duty;
  5. to disclose personal interest in contracts involving the company;
  6. not to make secret profits from the directors' office; and
  7. to act with skill, care and diligence.

Of these the duties of loyalty, honesty and fidelity are considered to be the core fiduciary duties.

In recent years the English and Commonwealth authorities have moved towards a primarily-objective test for the standard of skill, care and diligence.

Liabilities of Directors

Generally speaking, directors are not personally liable for the debts, liabilities or obligations of a company except for those debts, liabilities or obligations which arise out of the negligence, fraud or breach of fiduciary duty on the part of an individual director, or an action not within his authority and not ratified by the company.

The analysis of directors' liability is assessed under three separate heads:

  1. liability to the company and its shareholders;
  2. liability to third parties outside the company; and
  3. liability of other directors.

Liability to Company and Shareholders

Under the first heading the question would arise where the director provides negligent advice or acts negligently with the result that the company's assets are diminished and as an indirect consequence the market value of the shares falls. The general principle laid down by the English case of Foss v Harbottle (1843) 2 Hare 461 would apply in that the directors' duties are taken to be to the company and not to its individual shareholders. This can give rise to difficulties where, for example, the directors have voting control of a company and use that control to block any action by the company against them. There are, however, several exceptions where the shareholders can bring action against the directors but this action (called a "derivative action") is raised by the shareholders (or one or more of them) acting on behalf of the company. The shareholders are merely seeking to obtain a remedy for the company itself for the wrong done to the company. Generally speaking, it is possible for minority shareholders to sue on behalf of the company where some reason can be shown that, unless they are permitted to do so, the interests of justice will be defeated. The law relating to derivative actions is extremely complex and the foregoing remarks are intended only to highlight the manner in which shareholders could take action against the company's directors.

Liability to Third Parties

The directors can also in certain circumstances incur personal liability to third parties (eg a director is potentially liable in tort for his acts as a director). By way of example, if a director makes a negligent statement to a third party relating to the company's clients or its business generally and the third party suffers a loss as a result of reliance upon such statement, the director could incur personal liability. Again, the circumstances in which the third party could take such action vary and depend also on the degree of professional skill exercised by the director in providing advice to the third party.

Liability of Other Directors

The mere fact that one director is liable to the company for a breach of duty does not of itself render the remaining directors also liable. Thus, for example, in the absence of negligence the director is not liable for a breach of duty by other directors of which he was ignorant. Decided English cases have held that failure to attend board meetings does not of itself make a director liable for the act done at those meetings by his co-directors, and agreement to a course of practice resulting in loss does not create a liability where a director has taken no part in the specific action giving rise to the loss.

However, a director will be liable if he has failed to supervise the activities of a guilty director in circumstances where his duty of care obliges him to do so, or where he has knowingly participated in or has sanctioned conduct which constitutes a breach of duty - and in these circumstances a comparatively slight degree of participation is sufficient to create liability.

Powers of Liquidator

Mention should also be made of the provisions of sections 245 and 246 of the Companies Act by virtue of which the liquidator of a company is empowered to take action against any past or present director, manager or officer of the company if it appears in the course of the winding up that such person has been guilty of a criminal offence in relation to the company.

Indemnification of Directors

Bermuda laws do not prohibit or restrict a company from indemnifying its directors and officers against personal liability for any loss they may incur arising out of the company's business. The indemnity extends only to liability for their own negligence and breach of duty other than breaches of fiduciary duty and not where there is evidence of dishonesty, wilful default or fraud. Accordingly, and subject to the above exception, many companies registered in Bermuda include an indemnity for the benefit of all their directors and officers in their Bye-Laws. The company will then usually insure against its own liability under the indemnity

Any provision in the Bye-Laws of the company or in a director's contract of employment that purports to indemnify a director for any wilful neglect or default in carrying out their duties shall be deemed void.

Authority of Directors to Act

The constitutional documents of a Bermuda company consist of its memorandum of association and Bye-Laws. The memorandum of association generally sets out the objects and powers of the company and the Bye-Laws deal with matters related to its internal workings.

The Bye-Laws generally authorise the directors to transact the business of the company and to exercise all its powers, usually without the participation of the shareholders. It is open to the directors to delegate (if they are permitted by the Bye-Laws to do so) any specific function to any one of their number or to committees or to the company's officers. Without such delegation and in the absence of any provision in the Bye-Laws to the contrary, no director or officer or other person is empowered to individually act to bind the company. There is the exception of "ostensible authority" where in certain circumstances it may appear to a bona fide third party that a director or officer is empowered to act for the company and the company may be bound thereby, but any director attempting to proceed in reliance of this should exercise caution. It is advisable that the delegation of any power to any particular director, officer or other individual to act on behalf of the company be fully considered and expressly approved by the board of directors.

Conclusion

The information contained in this memorandum is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter. Walkers works in exclusive association with Taylors in Bermuda, a full service commercial law firm providing advice on all aspects of Bermuda law.

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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