Directors duties and liabilities under Cayman Islands law

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                               Directors' duties and liabilities under
                               Cayman Islands law

For more briefings visit       Introduction                                              conflict between his duty to the company
                               The duties and liabilities of the directors of a          and his personal interests;
                               company under Cayman Islands law arise from:        •	 a duty not to misuse company property;
This briefing is only
intended to give a             •	 the common law – the duties have                       and
summary and general                 developed over many years by way of            •	 a duty not to improperly fetter the
overview of the subject
                                    analogy with other legal relationships,              exercise of the director's future discretion.
matter. It is not intended
to be comprehensive and             particularly the relationship between          Duties of skill and care
does not constitute, and            principal and agent and between trustee
should not be taken to be,
                                                                                   A director's fiduciary duty imposes on him
                                    and beneficiary;
legal advice. If you would                                                         a largely negative obligation to do nothing
like legal advice or further   •	 statute – principally the Companies Law          which conflicts with the company's interest.
information on any issue            (as amended) (the "Companies Law"), but        However, when a director is acting in the
raised by this briefing,            also the Penal Code (as amended) (the
please contact one of your
                                                                                   company's interest he is expected to exercise
normal Mourant Ozannes
                                    "Penal Code"), the Proceeds of Crime Law,      whatever skill he possesses with reasonable
contacts.                           2008 (the "Proceeds of Crime Law") and,        care. This duty has two aspects:
                                    where appropriate, the Mutual Funds Law
                                                                                   •	 a duty to acquire and maintain a sufficient
Contacts:                           (as amended) (the "Mutual Funds Law");
                                                                                         knowledge and understanding of the
Neal Lomax                                                                               company’s business to enable the
Managing Partner, Cayman       •	 the memorandum and articles of                         director to properly discharge his duties;
Islands                             association of the company – its                     and
James Wauchope                      constitution, within the limits of which the
Partner, Cayman Islands
                                                                                   •	 a duty to attend diligently to the affairs of
                                    directors are obliged to operate.
                                                                                         the company.
For contact details,           Common law duties and liabilities of
please see the end of this                                                         However, a director is entitled to rely upon his
briefing.                                                                          fellow directors and the other officers of the
                               Under the common law directors owe                  company and can delegate power to others
                               fiduciary duties and certain duties of skill and    where it is reasonable to do so.
                                                                                   If a director breaches his fiduciary duties or
                               Fiduciary duties                                    duties of skill and care, he may be personally
                               An individual director must act in good faith in    liable to the company for damages.
                               his dealings with or on behalf of the company       Offences for which a director may be liable
                               and exercise the powers and fulfil the duties of    under the common law include negligent
                               his office honestly. His fiduciary duty has five    misstatement and deceit.
                                                                                   Negligent misstatement
                               •	 a duty to act in good faith in what the
                                                                                   Where a director has been negligent in
                                    director considers are the best interests
                                                                                   making a statement he may be liable under a
                                    of the company;
                                                                                   claim for damages brought by a plaintiff who
                               •	 a duty to exercise powers in the                 has suffered loss through acting in reliance
                                    company's interests and only for the           on that statement. In connection with mutual
                                    purpose or purposes for which they are         funds, each director should read the offering
                                    given;                                         document as it progresses to final proof.
                               •	 a duty not to put himself in a position          Each director should consider every material
                                    where there is an actual or potential          statement of fact or of opinion contained             CAYMAN GUERNSEY JERSEY LONDON
BRIEFING             therein and satisfy himself prior to publication        shall be able to pay its debts as they fall
                     of the document that:                                   due in the ordinary course of business.
                     •	 he is not aware of anything which would              A company and any director thereof
                           cause him to doubt the accuracy of any            who knowingly and wilfully authorises or
                           statement in the document; and                    permits any distribution or dividend to
                                                                             be paid in contravention of this provision
                     •	 each statement has been the subject
                                                                             is guilty of an offence and liable on
                           of sufficient verification by appropriate
                                                                             summary conviction to a fine of CI$15,000
                           and competent people to afford him
                                                                             and to imprisonment for five years.
                           reasonable grounds to believe that it is
                           true and not misleading.                     •	   A payment out of capital by a company
                                                                             for the redemption or purchase of its own
                                                                             shares is not lawful unless immediately
                     If the directors have been fraudulent in                following the date on which the payment
                     misrepresenting facts by making a statement             out of capital is proposed to be made
                     either with knowledge of its falsity or being           the company shall be able to pay its
                     reckless as to whether it is true or false they         debts as they fall due in the ordinary
                     could be liable for damages to a shareholder            course of business. A company and any
                     or purchaser thereby deceived. The measure              director thereof who knowingly and
                     of damages in an action for deceit is the actual        wilfully authorises or permits any payment
                     damage suffered by the plaintiff, including             out of capital to effect any redemption
                     consequential loss and it is not limited to             or purchase of any share is guilty of
                     damages which were reasonably foreseeable               an offence and liable on summary
                     as a result of the misstatement.                        conviction to a fine of CI$15,000 and to
                     Statutory duties and liabilities of directors           imprisonment for five years.
                     The general principles governing a director's      •	   Every company shall cause to be kept in
                     conduct set out above are augmented by a                writing on one or more sheets, whether
                     range of specific duties imposed by statute.            bound or unbound, a register of its
                     The Companies Law                                       members. Any company making default
                     The Companies Law places certain duties                 in complying with this section shall incur
                     upon the directors of Cayman Islands                    a penalty of CI$10 for every day during
                     companies, some of which are sanctioned                 which the default continues; and every
                     by criminal penalties. Many of these duties             director of the company who knowingly
                     are specifically imposed upon the directors.            and wilfully authorises such contravention
                     In addition, in a number of instances the               shall incur the like penalty.
                     Companies Law provides that where a                •	   Every company shall keep at its registered
                     company is in breach of a particular statutory          office in writing on one or more sheets,
                     obligation, any "officer" of the company                whether bound or unbound, a register
                     (which includes a director) who is "in default"         of all mortgages and charges specifically
                     shall be liable to a penalty as well as the             affecting property of the company, and
                     company. The Companies Law states that for              shall enter in such register in respect
                     this purpose the expression "officer who is in          of each mortgage or charge a short
                     default" means any officer of the company               description of the property mortgaged
                     who knowingly and wilfully authorises or                or charged, the amount of the charge
                     permits the default, refusal or contravention           created and the names of the mortgagees
                     mentioned in the enactment. Among the                   or persons entitled to such charge. If any
                     most important statutory provisions that are            property of the company is mortgaged or
                     sanctioned in this way are the following:               charged without such entry as aforesaid
                     •	 No distribution or dividend may be paid              being made, every director or other
                           to members out of the share premium               officer of the company who knowingly
                           account unless immediately following the          and wilfully authorises or permits the
                           date on which the distribution or dividend        omission of such entry, shall incur a
                           is proposed to be paid the company                penalty of CI$100.   CAYMAN GUERNSEY JERSEY LONDON
BRIEFING             •	   Every company shall keep at its registered           liable on summary conviction to a fine
                          office a register containing the names and           of CI$100 for every day during which the
                          addresses of its directors and officers, and         contravention occurs or continues, and
                          shall send to the Registrar of Companies             the exempted company shall be liable to
                          in the Cayman Islands (the "Registrar")              be immediately dissolved and removed
                          a copy of such register, and shall within            from the register.
                          thirty days notify the Registrar of any        •	 There are additional duties and liabilities
                          change that takes place in such directors            imposed by the Companies Law in
                          or officers. Any company which fails to              relation to directors of segregated
                          comply with such provisions shall incur              portfolio companies. Please refer to our
                          a penalty of CI$10 for every day during              briefing 'Segregated Portfolio Companies'
                          which the default continues, and every               for further detail.
                          director and manager of the company
                                                                         The Penal Code
                          who shall knowingly and wilfully authorise
                          or permit such default shall incur the like    The Penal Code provides that whoever,
                          penalty.                                       being an officer of a body corporate or
                                                                         unincorporated association (or person
                     •	   Every year each exempted company shall
                                                                         purporting to act as such), with intent to
                          furnish to the Registrar a declaration (the
                                                                         deceive members or creditors of the body
                          "Declaration") that since the previous
                                                                         corporate or association about its affairs,
                          return or since registration, as the case
                                                                         publishes or concurs in publishing a written
                          may be, there has been no alteration
                                                                         statement or account which to his knowledge
                          in the memorandum of association,
                                                                         is or may be misleading, false or deceptive in a
                          other than an alteration in the name of
                                                                         material particular, is guilty of an offence and
                          the company or an alteration already
                                                                         liable to imprisonment for seven years.
                          reported; and that the operations of the
                          exempted company since the last return         The Proceeds of Crime Law
                          or since registration of the exempted          The Proceeds of Crime Law contains a
                          company, as the case may be, have been         number of money laundering offences of
                          mainly outside the Islands. Every director     which the directors should be aware. The
                          and officer of a company who knowingly         offences, the penalty for which is a fine and/
                          makes or permits the making of the             or imprisonment, include assisting another
                          Declaration referred to above knowing          to retain the benefit of criminal conduct, the
                          it to be false is guilty of an offence and     acquisition, possession or use of property
                          liable on summary conviction to a fine of      representing the proceeds of criminal conduct
                          CI$1,000 and to imprisonment for three         and concealing or transferring proceeds of
                          months.                                        criminal conduct.
                     •	   An exempted company shall not trade            •	 It is an offence to be concerned in an
                          in the Islands with any person, firm or              arrangement whereby (a) the retention
                          corporation except in furtherance of                 or control by or on behalf of another
                          the business of the exempted company                 ("X") of property which is the proceeds
                          carried on outside the Islands. If an                of X’s criminal conduct is facilitated
                          exempted company carries on any                      (whether by concealment, removal from
                          business in the Islands in contravention             the jurisdiction, transfer to nominees or
                          of the provision of the Companies                    otherwise); or (b) property which is the
                          Law relating to exempted companies,                  proceeds of X's criminal conduct (i) are
                          then, without prejudice to any other                 used to secure that funds are placed at X's
                          proceedings that may be taken in respect             disposal; or (ii) is used for X's benefit to
                          of the contravention, the exempted                   acquire property by way of investment,
                          company and every director, provisional              knowing or suspecting that X is a person
                          director and officer of the exempted                 who is or has been engaged in criminal
                          company who is responsible for the                   conduct.
                          contravention is guilty of an offence and      •	 A person is guilty of an offence if, knowing   CAYMAN GUERNSEY JERSEY LONDON
BRIEFING                   that any property is, or in whole or in part         financial year of the fund to CIMA within
                           directly or indirectly represents, another           six months of the end of that financial
                           person’s proceeds or criminal conduct,               year or within such extension of that
                           he acquires or uses that property or has             period as CIMA may allow. The directors
                           possession of it.                                    are responsible for ensuring that the
                     •	 A person is also guilty of an offence if,               company complies with this provision
                           knowing or having reasonable grounds                 and whoever contravenes the provision
                           to suspect that any property is, or in               shall be guilty of an offence and liable on
                           whole or in part directly or indirectly              conviction to a fine of CI$20,000.
                           represents, another person’s proceeds           •	   CIMA may, at any time, instruct a
                           of criminal conduct, he (a) conceals or              regulated mutual fund to have its
                           disguises that property; or (b) converts             accounts audited and to submit them to
                           or transfers that property or removes                CIMA within such time as CIMA specifies.
                           it from the jurisdiction, with intent to             The directors of a regulated mutual fund
                           assist any person to avoid prosecution               shall ensure that an instruction given to
                           for an offence or to avoid the making or             the company by CIMA is complied with
                           enforcement of a confiscation order.                 within the specified time, and whoever
                     In connection with mutual funds, it is                     contravenes this provision is guilty of
                     important that directors put in place                      an offence and liable on conviction to a
                     appropriate procedures to allow the                        fine of CI$10,000 plus CI$500 in respect
                     administrators on behalf of the company to                 of each day after time during which the
                     ensure the identity of the subscribers to the              regulated mutual fund failed to comply
                     shares and the source of funds. Satisfactory               with the instruction.
                     references should be obtained regarding the           •	   If requested to do so by CIMA, a director
                     intended beneficial owners of the Shares from              of a regulated mutual fund shall give CIMA
                     a recognised professional firm or financial                such information or such explanation
                     institution such as a bank, a legal firm or an             in respect of the fund as CIMA may
                     accounting firm. If a subscription application is          reasonably require to enable it to carry
                     received from a professional intermediary the              out its duty under the law, and whoever
                     company should obtain a written agreement                  contravenes this provision is guilty of
                     from the intermediary that he has verified the             an offence and liable on conviction to a
                     identity and carried out a due diligence check             fine of CI$100,000. A person giving such
                     in respect of the intended beneficial owner.               information or explanation shall not give
                     The Mutual Funds Law                                       CIMA information or an explanation
                                                                                that he knows or should reasonably
                     •	 An offering document in respect of equity
                                                                                know is false or misleading, and whoever
                           interests in a mutual fund must describe
                                                                                contravenes this provision is guilty of an
                           the equity interests in all material respects
                                                                                offence and liable on conviction to a fine
                           and contain such other information as
                                                                                of CI$100,000.
                           is necessary to enable a prospective
                           investor in the mutual fund to make an          •	   If requested to do so by CIMA, a director
                           informed decision as to whether or not               of a regulated mutual fund shall give
                           to subscribe for or purchase the equity              CIMA access to, or provide at any
                           interests. Such information must be                  reasonable time all records relating to the
                           updated within 21 days of any material               mutual fund, and whoever contravenes
                           change. This supplements any duty of                 this provision is guilty of an offence
                           disclosure under common law or any                   and liable on conviction to a fine of
                           other law.                                           CI$100,000.
                     •	 A regulated mutual fund must have                  •	   If CIMA has reasonable grounds for
                           its accounts audited annually by an                  believing a person is carrying on or
                           auditor approved by the Cayman Islands               attempting to carry on business as a
                           Monetary Authority ("CIMA") and send                 mutual fund in or from the Cayman
                           its audited accounts in respect of the               Islands without a licence or without   CAYMAN GUERNSEY JERSEY LONDON
BRIEFING                  having registered the fund with CIMA,
                          CIMA may instruct that person to give
                          CIMA such information or explanation as
                          CIMA may reasonably require to enable
                          CIMA to carry out its duty under the
                          law. Whoever fails to comply with such
                          an instruction is guilty of an offence
                          and liable on conviction to a fine of
                          CI$100,000. Furthermore, a person giving
                          such information or explanation that
                          he knows or should reasonably know is
                          false or misleading is guilty of an offence
                          and liable on conviction to a fine of
                     •	 CIMA has broad powers to ensure the
                          protection of investors and creditors
                          and to ensure that the direction and
                          management of the fund is being
                          conducted in a fit and proper manner,
                          including requiring the substitution of a
                     Protections against directors' liability
                     A company may include a provision in its
                     articles of association or may enter into a
                     separate contractual arrangement with a
                     director indemnifying a director in certain
                     circumstances, provided however that such
                     constitutional or contractual indemnification
                     cannot override a director's common law or
                     statutory duties and liabilities.
                     The company may also purchase and maintain
                     insurance for directors and certain other
                     persons against liability incurred as a result
                     of any negligence, default, breach of duty or
                     breach of trust in relation to the company.
                     Neal Lomax, Managing Partner, Cayman Islands
                     +1 345 814 6331
                     James Wauchope, Partner, Cayman Islands
                     +1 345 814 6317

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