Guernsey Company Law - Directors' Duties - Shareholders

Introduction

This briefing summarises the duties and liabilities of directors of companies incorporated in Guernsey. 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.

Who are directors?

Under the Companies (Guernsey) Law, 2008, as amended (the "Law") a director includes an "alternate director and any person occupying the position of director, by whatever name called". It is important to note that there is no distinction between directors and alternate directors, nor executive and non-executive directors, so that all duties that apply to a director also apply to an executive director, a non-executive director and an alternate director.

The Law treats a "shadow director", being a "person in accordance with whose directions or instructions the directors of the company are accustomed to act", as being a director for certain purposes, including in relation to conflicts of interest. Crucial here is the concept of directions or instructions – giving advice to a director does not make the adviser a shadow director. In our view, the directors' duties set out below generally apply equally to a shadow director.

What do directors do?

Directors are officers and agents of the company and they manage, direct and supervise the affairs of the company in accordance with the company's Memorandum and Articles of Incorporation (the "Memorandum" and "Articles" respectively), statutory and regulatory requirements as well as best practices. Directors manage, direct and supervise by:

receiving up to date and accurate information regarding the conduct of the business of the company;
attending regular board meetings; and
making informed decisions regarding the company's future.

Duties and responsibilities of a director to a Guernsey company

Under the Law, a director's fiduciary duties are not codified into a consolidated list as has been done in some other jurisdictions, such the UK.

However, Guernsey has imported the English common law position of directors' duties as it stood prior to its codification into UK statute, and this has been confirmed and developed by the Guernsey Courts.

These duties are broken down into two distinct categories:

fiduciary duties, which relate to honesty and loyalty; and
duties of skill, care and diligence, which relate to competence.

Fiduciary duties

Duty to act in the best interests of the company

The core fiduciary duty of a director is one of loyalty – a director must act in what they honestly consider to be the best interests of the company.

This duty is discharged if the director honestly believes that they are acting in the company's best interests even if the relevant act was not in the company's best interests as considered objectively. Guernsey law considers this by applying a subjective test that relates to the director's state of mind and whether they believed they were acting in the best interests of the company.

However, to the extent that the director's belief is so unreasonable that doubt can be cast on whether the director actually believed it, Guernsey law also applies an objective test that looks to whether an intelligent and honest person in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.

Essentially, the central reason for the action taken by a director must be the best interests of the company. A director must take account of the factors affecting the company's relationships and performance and act in the way they considers is in good faith. It should be noted that a director's action is not wrong just because it happens to benefit someone else, but the interests of the company cannot simply be incidental reasons for the action being taken.

Duty to act within their powers and for the proper purposes of the company

Directors must act in accordance with the company's constitution and must exercise their powers for the proper purposes for which they are conferred.

A director may be in breach of the duty for any failure to exercise powers in accordance with the constitution irrespective of whether the director honestly believes that they are exercising their powers properly.

Duty to exercise independent judgement

A director must exercise independent judgement and at a minimum, oversee the company and keep themself sufficiently informed to make their own decisions.

What this means is that the director must not be unduly influenced or coerced when making a decision in respect of the company. A director should put the interests of the company first, without outside control or influence and based on their individual reasonable skill and care. Of course, a board of directors may work together for the common benefit of the company, but ultimately a director is autonomous in their own right and should discharge their duties based on their informed opinions.

Duty to avoid any conflicts of interest and a duty to declare an interest

A director must avoid actual or possible conflicts of interests between the company's interests and the director's personal interests, as well as avoiding conflicts between the duties owed to different principals of the company.

The traditional description of the no conflicts duty is that no-one having fiduciary duties to discharge shall be allowed to enter into engagements in which they have, or can have, a personal interest conflicting or which may conflict, with the interests of those to whom they are bound to protect. If a director exploits for themself a "corporate opportunity" of the company for the director's gain a conflict would arise. In addition, if a director elected to exploit a corporate opportunity and doing so was not in the best interests of the company that would not be in compliance with their fiduciary duties. There is no similar duty on a shareholder.

Although the duty to avoid any conflicts of interest and a duty to declare an interest are duties in their own right, these duties are best seen as two sides of the same coin. Firstly, a director must consider whether there is conflict of interest and secondly, if so, that director must declare that interest in accordance with the Law.

These disclosure duties set out in the Law may be summarised as follows:

Duty to disclose: a director of a Guernsey company must immediately after becoming aware of the fact that they are interested in a transaction or proposed transaction with the company, disclose to the board the nature and extent of their interest. The duty to disclose does not apply if: (a) the transaction or proposed transaction is between the director and the company, and (b) 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.
Meaning of interested: a director of a Guernsey company is interested in a transaction to which the company is a party if the director: (a) is a party to, or may derive a material benefit from, the transaction; (b) has a material financial interest in another party to the transaction; (c) is a director, officer, employee or member of another party (other than a party which is an associated company) who may derive a material financial benefit from the transaction; (d) is the parent, child or spouse of another party who may derive a material financial benefit from the transaction; or (e) is otherwise indirectly or directly materially interested in the transaction.
Interested director may vote: Subject to the company's Memorandum and Articles, a director who is interested in a transaction entered into, or to be entered into, by the company, may: (a) vote on a matter relating to the transaction; (b) attend a meeting of directors at which a matter relating to the transaction arises and be counted in the quorum of the meeting; (c) sign a document relating to the transaction on behalf of the company, and (d) do any other thing in their capacity as a director in relation to the transaction as if the director were not interested in the transaction.
Disclosure: A general disclosure to the board to the effect that a director has an interest (as director, officer, employee, member or otherwise) in a party and is to be regarded as interested in any transaction (which may after the date of the disclosure be entered into with that party) is sufficient disclosure of interest in relation to that transaction.
Effect on director: A director who fails to comply with these disclosure requirements is guilty of an offence.
Effect on transaction: A transaction entered into by a company in which a director is interested is voidable by the company at any time within 3 months after the date the transaction is disclosed to the board of directors unless: (a) the director's interest was disclosed to the board prior to the company entering into the transaction or the transaction wasn't required to be disclosed; (b) the transaction is ratified by the shareholders (see further below); or (c) the company received fair value for the transaction. The fact that a transaction is not voidable is without prejudice to any remedy the company may have against the director.

Duty not to accept benefits from third parties

A director must not accept benefits from third parties that are offered to them in their capacity as a director, or in order to induce them to do, or omit to do, something in their capacity as a director, if that could reasonably be regarded as contrary to their duty and/or likely to give rise to a conflict of interest.

The offer and/or acceptance of any benefit by any director should be disclosed to the board and board agreement sought before the benefit is accepted.

Duties of skill, care and diligence – standard of care

In acting as a director, a person must exercise such skill and care as would be expected of someone of their particular skill, knowledge and experience. Generally, skill relates to a director's competency and their ability to take positive action as required in the role of director. Care may be seen as the director's attention to detail and applying oneself to the relevant matter at hand.

A director may be in breach of the duty of care, irrespective of whether the director honestly believes that he has acted with proper skill and diligence – i.e. a director can be unwittingly incompetent.

However, not every commercial misjudgement by a director constitutes a breach of the duty of skill and care - the Court must be satisfied that no reasonably diligent director with the applicable level of knowledge, skill and expertise would have acted as the director did.

The standard of care to which a director will be held is that of a reasonable person having both:

the director's knowledge, skill and experience; and
the knowledge, skill and experience that may be reasonably expected of someone with the director's function.

The following factors are relevant in evaluating the level of diligence and skill reasonably expected of a director:

the role of the director in the governance and management structure of the company;
skill which the director has held themself out as having;
the level of remuneration of the director; and
the size of the company and nature of the business.

Who are directors' duties owed to?

A director owes their duties to the company. A director may be liable to the company for loss to the company and not more widely. A personal claim against a director may only be brought by a shareholder where that shareholder can demonstrate a breach of duty owed to them personally, and that they have suffered loss personally, on a distinct and independent basis to any loss suffered by the company.

Potential liabilities

It is important to be aware of the liabilities associated with being a director of a Guernsey company. Available remedies for breach of duty include (these can vary depending on the nature of the breach):

removal from a particular directorship or disqualification from acting as a director for a particular time (or indefinitely);
fines, damages or compensation where the company has suffered loss;
restoration of the company's property;
an account of profits made by the director;
injunction or declaration; or
rescission of a contract where the director failed to disclose an interest.

If a person is ineligible to be a director but acts as a director or shadow director then they are still liable for their acts. Further, director liability in connection with any negligence, default, breach of duty or breach of trust by the director cannot be excluded and the director cannot be indemnified by the company, but the liability can be insured against (a company's director and officer insurance generally covers the costs of defending legal proceedings brought against them personally in connection with their duties as directors of the company).

Other potential liabilities to consider are liabilities relating to:

making of dividends and distributions in circumstances where the required solvency test is not met;
misfeasance - this is an action that can be brought against a director or certain other persons during the winding up of a Guernsey company if it appears that they have (a) appropriated or otherwise misapplied any of the company's assets, (b) become personally liable for any of the company's debts or liabilities , or (c) otherwise been guilty of any misfeasance or breach of fiduciary duty in relation to the company;
fraudulent trading – this is an action that can be brought against a director or certain other persons during the winding up of a Guernsey company if it appears that such director or person was knowingly a party to the carrying on of the company's business with intent to defraud creditors or for any fraudulent purpose; and
wrongful trading – this is an action that can be brought against a director during the insolvent winding up of a Guernsey company if it appears that such director at some time before the commencement of the insolvent winding up knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation but allowed trading to continue. There is a defence that the director took every step with a view to minimising the potential loss to creditors that they ought reasonably to have taken assuming they knew that there was no reasonable prospect of avoiding insolvent liquidation.

Ratification of acts of directors

The Law allows the ratification by a company of conduct by a director which exceeds their powers or amounts to negligence, default, breach of duty or breach of trust in relation to the company.

The decision of the company to ratify such conduct must be taken by the members and may be taken by ordinary resolution, subject to anything in the company's Memorandum or Articles requiring a higher majority (or unanimity). Unless the resolution is passed unanimously the Law provides that members with a personal interest, direct or indirect, in the ratification are not eligible members to vote on the resolution.

Protection against liabilities

Where proceedings are brought against a director for negligence, default, breach of duty or breach of trust in relation to the company, the director can apply to the Court for relief.

The Court may relieve a director wholly or in part from liability on such terms and conditions as it thinks fit. The Court must be satisfied that director:

acted honestly and reasonably; and
having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused.

Regulated and listed companies

Additional duties and obligations may well apply to directors of companies that are regulated by the Guernsey Financial Services Commission (the "GFSC") and/or which are listed on a stock exchange such as The International Stock Exchange or the London Stock Exchange. The nature and extent of these requirements will depend on the regulatory law under which the company is regulated, any applicable GFSC rules and (where relevant) the rules of the particular stock exchange. These duties and obligations are outside the scope of this briefing.

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.