Knowledge

Under Guernsey law, directors of a Guernsey company owe certain duties towards that company. These duties (in addition to certain duties owed in instances where the company is insolvent) include the duty to:

• act bona fide in the best interests of the company;
• act for proper purposes;
• exercise independent judgment;
• avoid conflicts of interest; and
• exercise reasonable skill and care.

A breach of these duties by a director may, subject to certain limitations, result in that director being held personally liable.

While directors of a Guernsey company are subject to a variety of other obligations, for example, to counter money laundering and terrorist financing, this briefing will not consider those obligations.

The customary law of Guernsey essentially imports the English common law relating to directors’ duties as it stood prior to the incorporation of the common law duties into the UK Companies Act 2006. In SPL Guernsey ICC Limited and its Incorporated Cells v Addison 19/2018, the Royal Court (the "Court") provided that “…in the absence of any express provision or settled jurisprudence in Guernsey law, regard can properly be had to English law for guidance”. 

"Directors" according to the Companies (Guernsey) Law, 2008, as amended (the "Companies Law")

The Companies Law provides that "director" includes an alternate director and any person occupying the position of director, by whatever name called. The directors of a company are responsible for managing the business and affairs of the company and, subject to the Companies Law or the articles of incorporation of the company, have all the powers necessary to do so. A company must have at least one director. Additional requirements exist for companies regulated by the Guernsey Financial Services Commission ("GFSC"). 

Duties are owed towards the company itself

As a starting point, it was held in the English case of Percival v Wright [1902] 2 Ch 421 that directors’ duties are owed to the company and not to its shareholders. Consequently, a breach of duty is a wrong act/omission done to the company. The proper claimant in proceedings in respect of the breach is the company itself. This was subsequently confirmed by the Court in the Guernsey case of Carlyle Capital Corporation Limited (in Liquidation) and Others v Conway and Others (Guernsey Judgment 38/2017), where the principle was affirmed that the directors of a Guernsey company owe duties to the company, as opposed to its shareholders. While shareholders may bring a claim for breach of duty on behalf of a company (a "derivative action"), any remedy would be awarded in favour of the company, not the shareholder bringing the action.

Fiduciary duties

Historically, the Court has recognised that directors’ duties can be classified under two distinct heads: fiduciary duties and duties of skill and care. The core fiduciary duty is one of loyalty. As such, a director must always act in what they consider to be in the best interests of the company. This requires the director to exercise a degree of independent judgment. Furthermore, a director must also avoid actual or possible conflicts of interest which may arise between the company's interests and the director's personal interests. A director must also act for a proper purpose of the company (i.e. in accordance with the company's constitution) and may be in breach of that duty for any failure to exercise powers in accordance with the constitution of the company, regardless of whether the director honestly believes that they are exercising their powers properly.

The Companies Law provides that a director must, immediately after becoming aware of the fact that they are interested in a transaction or proposed transaction with the company, disclose the nature and extent of this interest to the board of directors. However, this duty does not apply if (1) the transaction is between the director and the company and (2) 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. Following such a disclosure, the director may form part of the quorum and vote on matters in which he or she is interested.

Duty of care

It is a common law principle that directors owe a duty of care towards a company. This requires a director to act with care, skill and diligence in the performance of their duties. It is worth mentioning that a director may be held to be in breach of their duty of care regardless of whether they honestly believe that they have acted with proper skill and diligence. The standard of care to which a director is held is therefore an objective one, being that of a reasonable person who (a) has the same level of knowledge, skill and experience as the director in question and (b) has the knowledge, skill and experience that may be reasonably expected of someone in that director's position.

There are several factors which can be taken into account when evaluating the level of diligence and skill that is reasonably expected of a director, including:

• the director's role in the governance and management of the company;
• the skill which the director has held themselves out as having;
• the director's remuneration; and
• the size of the company and the nature of its business.

While not every commercial misjudgement by a director results in a breach of the duty of care, the objective standard implies that no reasonably diligent director with the relevant level of knowledge, skill and expertise would have acted as the director in question did.

Duties in instances of insolvency

Under the Companies Law, where in the course of the winding up of a company it appears that a past or present director has (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, the director may be made accountable to the company for any misappropriated funds with interest. Furthermore, the Companies Law provides that if, in the course of the winding up of a company, it appears that any of the business of the company has been carried on with an intent to defraud creditors or for any fraudulent purposes, then anybody, including any director who knowingly did so, may be ordered to make appropriate contributions to the company's assets.

The Companies Law also provides that where a company is in insolvent liquidation and, before the commencement of the winding up, a director knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation, that director may be made liable to make appropriate contributions to the company's assets - unless the director concerned took every step possible to minimise the potential loss to the company’s creditors that he ought reasonably to have taken. Where a company is insolvent or is becoming insolvent, a director's duty shifts to acting in the best interests of the company's creditors. This duty, however, retains the objective standard of reasonableness used to determine the standard of care to which the director is held.

Indemnity and the limitation of a director's liability

The Companies Law prohibits a company from exempting a director from liability to the company and makes invalid any indemnification by a company of any of its directors or the directors of an associated company against any liability in relation to the relevant company, in connection with any breach of duty, breach of trust, default or negligence of that director. However, the Companies Law does not prevent a company from purchasing and maintaining indemnity insurance against such liability for a director. Additionally, companies are permitted, subject to limitations, to indemnify directors against certain liabilities to third parties.

Ratification of the conduct of directors

The Companies Law provides that shareholders may ratify the acts or omissions of a director in instances where such conduct exceeds their powers or amounts to negligence, default, breach of duty or breach of trust in relation to the company. The decision to ratify such conduct must be taken by the members by means of an ordinary resolution and subject to any further requirements contained within the company's memorandum and articles of incorporation. However, members with a personal interest, direct or indirect, in the ratification are not eligible members according to the Companies Law.

Liability of directors for breach of duties

The consequences of a breach of duties towards a company by a director may include:

• 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; and/or
• rescission of a contract where the director has failed to disclose an interest.

Granting of relief

The Companies Law provides that, if in proceedings for breach of duty it appears that a director is or may be liable but that he acted honestly and reasonably, and having regard to all the circumstances of the case, he ought fairly to be excused, the Court may relieve the director, either wholly or in part, from liability on such terms and conditions as it thinks fit.