Directors' duties and responsibilities: commission issues guidance - International Law Office

International Law Office

Company & Commercial - Isle of Man

Directors' duties and responsibilities: commission issues guidance

October 17 2011

Types of company
Definition of 'director'
Shadow directors
Nominee directors
Duties and responsibilities
Delegation of powers
Liability


In August 2011 the Financial Supervision Commission, which operates principally as the Manx government's regulatory authority for financial services, issued detailed guidance on the responsibilities and duties of directors under Isle of Man law. While the guidance is aimed primarily at assisting directors of companies which hold a financial services licence under the Financial Services Act 2008, the guidance is relevant to all directors of Isle of Man companies. The guidance provides a useful summary of the key aspects of the law in this area and goes some way to correcting a number of common misconceptions about the role and status of company directors in the offshore services arena.

Types of company

When considering any aspects of Isle of Man company law, the distinction first has to be made between the two separate yet parallel statutory regimes which exist. Leaving aside the more exotic corporate manifestations such as limited liability companies, protected cell companies and the like, the 'standard' model company comes in two species in the Isle of Man; those incorporated under the Companies Act 1931-2004 and those incorporated under the Companies Act 2006.

This basic distinction gives rise to the first important point to be made about directors of Isle of Man companies. With 1931 act companies, only natural persons can act as directors. Corporate directors are not permitted. With 2006 act companies, corporate directors are permitted provided that they hold the appropriate financial services licence or are a subsidiary of such a licence holder.

Definition of 'director'

While there are certain formalities that should be adhered to with respect to the appointment of directors, a further important principle is that a director need not be formally appointed in order to be recognised as such under Isle of Man law. The definition of 'director' includes persons acting as directors, regardless of how they may otherwise be labelled or described. Consequently, the actions of persons holding themselves out as directors will not generally be invalidated merely by lack of proper appointment; the substance of the arrangement is the important factor. The guidance confirms that Isle of Man law recognises a person as a director by his or her function and the authority and power that he or she exercises.

Shadow directors

Isle of Man law recognises the notion of a de facto director. The commission's guidance further confirms that while the term 'shadow director' appears in neither the 1931 or the 2006 act, both acts make explicit reference to persons in accordance with whose "directions or instructions the directors are accustomed to act". Thus Isle of Man law recognises the concept of a shadow director. The guidance further confirms that it is contrary to the principles of good corporate governance for a company to have shadow directors or to allow persons who have not been properly appointed as directors to act ostensibly in such capacity.

Nominee directors

Of particular relevance to offshore businesses and the provision of fiduciary and corporate services is the guidance in relation to so-called 'nominee' directors. The guidance makes plain that the concept of such nominee directors does not exist in law. All directors are regarded as being subject to the same degree of responsibility and fiduciary duty. A director, who slavishly follows the wishes or orders of others, be they co-directors, shareholders, beneficial owners or other third parties will very likely find him or herself in breach of duty. Merely rubberstamping the decisions of others is unacceptable. The role which the non-executive director plays in terms of objectivity and independence in relation to good corporate governance is recognised but at the same time it is emphasised that Isle of Man law makes no distinction between the standards to be observed by executive and non-executive directors in discharging their duties in law. Such duties exist in relation to:

  • loyalty;
  • obedience;
  • independence;
  • secret profits;
  • conflicts of interest;
  • care, skill and diligence; and
  • fairness.

Duties and responsibilities

Loyalty
A director must act in good faith in what he or she considers to be the best interests of the company.

Obedience
A director must act in accordance with the company's constitution (the memorandum and articles of association) and must exercise his or her powers only for the purposes allowed by law.

Independence
A director must not agree to restrict his or her power to exercise an independent judgement.

Secret profits
A director must not use the company's property, information or opportunities for his or her own benefit, or for anyone else's benefit, unless either the company has agreed to this in general meeting, or the company's constitution expressly provides for this. It should be noted that consent may not be sufficient in certain circumstances.

Conflicts of interest
Directors must exercise great care if a situation arises which could lead to a conflict (actual or potential) between their personal interests and their duties owed to the company or to a third party. A director must account to the company for any benefit received from a transaction that arises from a conflict of interest or duty. This applies regardless of whether the company sets aside the transaction. Where the company's constitution expressly permits the transaction, a director will not have to account to the company provided that the relevant requirements and terms of the company's constitution have been strictly adhered to, or where the interest or duty has been fully and properly disclosed to the board of the company.

Sections 103 to 105 of the 2006 act expressly permit a director of a 2006 act company to retain the benefit derived from an interest in a transaction, provided that the director has disclosed his or her interest to the board of directors of the company. Disclosure must be made as soon as he or she becomes aware that he or she has a conflict of interest. Subject to any provision to the contrary in the company's constitutional documents, and having disclosed his or her interest, a director may participate in any decisions that the board takes in relation to that matter. The duty of directors to disclose any interest to the board of directors of the company is set out in Section 148 of the 1931 act and Section 104 of the 2006 act.


Care, skill and diligence
A director owes the company a duty to act with the care, skill and diligence that a reasonable person would exercise. In determining whether a director has acted with due care, skill and diligence, consideration will be given to:

  • 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, and
  • the director's actual knowledge, skill and experience.

Fairness
A director must ensure that his or her dealings with members are conducted impartially.

While it can be seen that the standard of care, skill and diligence expected of a director will generally be that of the reasonable person a higher standard is generally considered to be required of those who offer their fiduciary services as directors by way of their profession or business.

Failure properly to discharge the duties and responsibilities of a director are likely to result in a civil and/or criminal penalty. There is also the possibility of facing disqualification proceedings under the Company Officers Disqualification Act 2009.

Delegation of powers

An issue which often arises with respect to the provision of corporate services is the extent to which the professional fiduciary may delegate his or her powers as a director. Usually the articles of an Isle of Man company will permit a certain degree of delegation. However, this should not be seen as a means of delegating responsibility. Under Isle of Man law directors cannot delegate or abrogate their overall responsibility for the affairs of the company. The directors remain accountable for the exercise of powers even when delegated. The guidance confirms that the directors must adequately monitor the exercise of any delegated powers on an ongoing basis. Key decisions concerning the business and activities of an Isle of Man company which is used as part of an offshore structure will usually refer to transactions being undertaken in other jurisdictions. In these circumstances, it is vital for the directors of the Isle of Man company, especially where they are acting in such capacity by way of a fiduciary services business, to be properly engaged in the decision-making process in a fully informed manner. While it may be acceptable to delegate responsibility for formally executing a foreign contract to a third party, absolving oneself from the responsibility of deciding whether, in principle, the contract should be entered into by the company will expose the director to substantial risks.

In a similar vein, the directors should never act merely as agents of the shareholders or at their direction in relation to the management of the company's affairs. Shareholders cannot determine how the directors should exercise their powers. Under Isle of Man law a very clear line is drawn: directors are responsible for the management of the company, not the shareholders.

Liability

The commission's guidance also draws together the various relevant principles of Isle of Man law whereby directors may incur personal liability for their actions, both civil and criminal. Various statutory offences exist under the 1931 act and the 2006 act in relation to compliance with the legislation.

For breach of common law fiduciary duties, a director may be liable to indemnify the company for any losses it may incur. A director may also be required to account to the company for any personal profit arising through a breach of duty. There is also the possibility for potential liability as a constructive trustee where the director has engaged or assisted in unlawful conduct which has resulted in the director being in receipt of funds or other property.

The statutes themselves also impose personal liability upon directors in certain specific cases of wrongdoing. The statutory concept of fraudulent trading is one such example. Where a director allows the company to continue in business and incur debts to its creditors in circumstances where the director knows there is no reasonable prospect of the debt being met, the director can be held personally liable for such debts.

For further information on this topic please contact Christopher J Murphy at M&P Legal by telephone (+44 1624 695800), fax (+44 1624 695801) or email (cjm@mplegal.im).


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