Duties Of A Director Under The Law Of The Cayman Islands

Stuarts Humphries


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Set out below is a summary of the duties imposed by the law of the Cayman Islands upon a director of a Cayman Islands company and a description of the standard a director is obliged to meet in the proper discharge of those duties.
Cayman Islands Corporate/Commercial Law
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Set out below is a summary of the duties imposed by the law of the Cayman Islands upon a director of a Cayman Islands company and a description of the standard a director is obliged to meet in the proper discharge of those duties.

It should be noted that, in setting out the following summary, reference is only made to the law of the Cayman Islands (which essentially imports the appropriate principles of English common law) which have been substantially confirmed by a number of decisions of the Courts of the Cayman Islands. In the case of the directors of many Cayman Islands companies, the law of other jurisdictions, e.g. the United States, may, in the courts of those other jurisdictions, have a significant impact on the standard expected from them. The question (a) whether a foreign court would apply the law of the Cayman Islands; and (b) if not, what law or laws would it apply, are matters on which the advice of legal counsel qualified in the relevant jurisdictions should be sought. The following discussion assumes therefore that the issues would fall to be dealt with on an application of the law of the Cayman Islands, either before a Cayman Islands court or before a foreign court applying purely Cayman Islands law.

There have been a number of reported decisions in the Cayman Islands which underscore the basic principle that a director must act in good faith and in the interests of the company on whose board he serves. The courts of the Cayman Islands will normally follow English and Commonwealth decisions where general principles of company law is involved unless there are specific statutory differences. In addition, a director is under a number of statutory duties as prescribed by the Companies Act (as Revised) and these are addressed in a later section of this Note.

A Director's Duties

It has long been established that a director owes both common law and fiduciary duties to the company for whom he acts. In essence, this means that directors, operating and making decisions as a board, are required to:

  • act in good faith in the best interests of the company;
  • use powers conferred on them for their proper purpose; and
  • exercise whatever skill they possess and reasonable care when acting in the company's interests.

Where a director breaches any of his common law or fiduciary duties, the company can take action to recover its property or to obtain payment of damages from the director as compensation for any loss incurred. The company is also entitled to recover any personal profit a director may have made by exploiting his position.

In addition, it should be noted that a minority shareholder may bring a derivative action on behalf of a company against the directors if they use their powers either fraudulently or negligently with the intention of benefitting themselves at the expense of the company for whom they act (Schultz v. Reynolds and Newport Limited [1992-93] CILR 59, Cayman Islands Court of Appeal).

To Whom Duty is Owed

Generally, directors' duties are owed to the company as a whole and not to individual members. It follows that the general rule is that the enforcement of a director's duties is for the company alone and this rule is subject to only limited exceptions, for instance, where derivative claims can be bought by a minority shareholder.

In this context, the company is defined usually by reference to the shareholders as a whole, as opposed to any particular shareholder. As a general principle, the directors need to balance the short-term interests of the present members against the long-term interests of future members.

It should be noted that where there are different groups of shareholders with different interests, the directors must act fairly as between these different groups. There is an element of objectivity in this test (Mutual Life & Insurance Co. of New York v. Rank Organisation Ltd [1985] BCLC 11 followed by Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155, both English 1st Instance decisions).

Importantly, whilst the interests of the shareholders as a whole are paramount in circumstances where a company is a going concern, it is now well settled that where a company becomes insolvent or is nearly so, then the interests of the company include the interests of the creditors and in such cases, the interests of the creditors may be paramount. This is addressed in more detail at Section III of this Note.

It should also be noted that where the directors have specifically undertaken to act as the agent of an individual shareholder (or group of shareholders) then a duty will be owed to that individual shareholder or group of shareholders.

In addition, fiduciary obligations may, in principle, arise from a special relationship between the directors and shareholders (Coleman v. Myers [1977] 2 NZLR 225 (New Zealand Court of Appeal) and as illustrated by the English decision in Re Chez Nico (Restaurants) Ltd [1992] BCLC 192. For such a fiduciary relationship to arise, there will need to be a special factual relationship between the parties and this was emphasised in the Cayman Islands Court of Appeal decision in Brandner v. Peintner [2000] CILR Note 6a.

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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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