Directors of Isle of Man companies owe 3 types of duty to their company:
- duties of loyalty and good faith— such duties are categorised as fiduciary duties; and
- duties of care, skill and diligence; and
- statutory duties.
Directors' fiduciary duties and duties of care skill and diligence are derived from common law and at many points overlap with each other. In addition, these duties are constantly evolving and being developed by case law as the acceptable standard of conduct expected from directors changes over time.
Directors' Fiduciary Duties
The general rule is that fiduciary duties are owed by a director to the company and not to the company's shareholders, creditors or beneficial owners and it is the company which can enforce them. Set out below is a summary of the main fiduciary duties which directors owe to their company.
Duty to Act Bona Fide
Directors must act bona fide in what they consider—and not what the court may consider—is in the interests of the company. This duty of honesty and good faith is arguably the primary fiduciary duty of a director.
The duty imposed upon directors to act bona fide in the interests of the company is a subjective one. The question is not whether, viewed objectively by the court, a particular act or omission was in the interests of the company—rather the question is whether the director honestly believed that the act or omission was in the interests of the company.
Duty to Act for a Proper Purpose
Directors must exercise their powers for a proper purpose. For example, the directors of a company cannot exercise their power to allot shares to entrench themselves in office.
The duty to act for a proper purpose is an objective one. Even if a director has acted bona fide in what he believes to be in the interests of the company, if he has exercised his powers for an improper purpose he will still be in breach of his duties to the company.
No Conflict of Duty and Interest
Directors must not put themselves in a position where there is a conflict (actual or potential) between their personal interests and their duties to the company or between their duty to the company and a duty owed to another person. The rationale behind this rule is that a company is entitled to the collective wisdom of its directors.
No Secret Profits
A director must not make a secret profit for himself from the use of corporate assets, information or opportunities. This duty has its origins in the no conflicts rule but has probably now attained the status of a separate rule. Case law suggests that directors can be relieved from liability in cases where they make a profit from the use of company assets, information or opportunities where full disclosure to the shareholders in general meeting is made and the shareholders give their approval.
Duty to Act Independently
Directors must not agree to restrict their powers to exercise independent judgment and they must not fetter their discretion. This duty overlaps with the no conflict rule and the duty of directors to act bona fide in the interests of the company—if a director is not acting independently he will probably not be acting in the best interests of the company and will be in a position of conflict.
Directors Duties of Care, Diligence and Skill
Directors owe a duty of care when carrying out functions in relation to their company. The standard of care which a director is required to exercise is the care that would be taken by a reasonably diligent person having both:
- the general knowledge, skill and experience that may reasonably be expected from a person carrying out the same functions as are carried out by that director in relation to the company (an objective test); and
- the general knowledge, skill and experience that that director has (a subjective test).
Directors are under a duty to acquire and maintain a sufficient knowledge and understanding of their company's business to enable them properly to discharge their duties as directors.
There is no such concept as a "nominee" director in Isle of Man law. Every director has exactly the same responsibility to the company as a whole and if a director neglects that responsibility in the interests of, or on the orders of, his principal, that director will be guilty of a breach of duty.
Developments in English Company Law
The fiduciary duties and duties of care, skill and diligence owed by directors of Isle of Man companies to their company are derived from common law, as opposed to set out in statute. This provides the courts with the flexibility to develop the scope of the relevant duties as the need arises and as the standards expected from directors changes over time. Up until now the fiduciary and common law duties imposed upon directors of Isle of Man companies have been almost identical to the duties imposed upon directors of English companies. Consequently, English case law has provided much guidance on the duties owed by directors of Isle of Man companies.
However, the new English Companies Act 2006 has now partially codified the general duties of directors by setting out in statute what duties a director of an English company owes to the company. The English Companies Act 2006 sets out 7 general duties with which directors of English companies must comply. Although these statutory general duties are similar to the existing common law and equitable principles, they are not identical. Very briefly these general duties are:
- the duty to act within powers;
- the duty to promote the success of the company;
- the duty to exercise independent judgment;
- the duty to exercise reasonable care, skill and diligence;
- the duty to avoid conflicts of interest;
- the duty not to accept benefits from third parties; and
- the duty to declare an interest in a proposed transaction or arrangement.
The Isle of Man has not gone down this route and the common law and fiduciary duties of Isle of Man directors are not set out in statute. Going forward, it will be interesting to monitor how the duties imposed upon directors of English companies will develop over time and what influence future English case (which will be based upon these new statutory directors duties) will have in the Isle of Man courts and on the duties owed by directors of Isle of Man companies.
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.