Directors' duties and corporate governance

Directors' duties
Corporate governance

Directors' duties are the duties owed by executive and non-executive directors to the companies to which they are appointed and are personal to each director. By comparison, corporate governance is the collection of principles and practices surrounding how a company is operated and is the collective responsibility of the board of directors as a whole rather than each individual personally.

Directors' duties

Directors' duties in Guernsey arise from customary law, statute and contractual obligations but are not codified under the Companies (Guernsey) Law 2008, as amended. Instead, they are drawn from the English common law duties which were in place prior to the introduction of the UK Companies Act 2006.

This has been confirmed in multiple cases in the Royal Court, including the well-publicised Carlyle Capital Corporation Limited (in Liquidation) v Conway (Guernsey Judgment 38/2017), which concerned an action against executive and non-executive directors of Carlyle Capital Corporation following its collapse.(1)

The duties of company directors in Guernsey are owed primarily to the relevant company and arise from:

• customary laws, statutory laws and contractual obligations. The customary law of Guernsey with respect to directors' duties is essentially imported from the English common law (as it stood prior to the incorporation of the English common law duties into English statute);
• the Companies (Guernsey) Law 2008 and the ordinances, statutory instruments and regulations made pursuant thereto. These impose some additional duties on directors (although as explained above, this is not exhaustive); and
• the memorandum and articles of incorporation of a company. In most cases, these will set out the directors' particular rights and obligations regarding the management of the business and the company's affairs.

It is generally accepted that directors owe four fiduciary duties to the companies to which they are appointed and one competence-based duty – namely, to:

• act bona fide in the best interests of the company;
• act for proper purposes and not act for collateral or improper purposes;
• exercise independent judgment;
• avoid conflicts of interest; and
• exercise reasonable skill and care.

These duties are owed by each of the directors and are personal to each of them. They are owed to the company for its members as a whole and, in particular, not to any wider group entities or specific members (eg, where a specific member may have a right to appoint a director).

The only time that directors may owe duties to someone other than the company is when the company begins to enter financial difficulties. As set out in Carlyle at Paragraphs 432 to 435, when a company gets into serious financial difficulty, the duty to act in the best interests of the company is extended to include a duty to consider and act with proper regard for the interests of its creditors.

This shift in directors' duties is likely to be subtle initially, as it is generally in a company's best interests to have sufficient liquid assets to be able to pay its creditors in a timely manner. However, where financial difficulties continue and the interests of a company's members and creditors begin to diverge, this change in priorities should be kept at the forefront of directors' minds. In particular, the solvency position of the company should be kept under regular review to prevent a breach of the provisions of the Companies (Guernsey) Law 2008 relating to wrongful or fraudulent trading.

Corporate governance

Corporate governance for Guernsey companies can be found in a number of sources – both internal (eg, internal policies and procedures, mission statements and performance measurement systems) and external (eg, codes of practice, guidance notes and the Companies (Guernsey) Law 2008 itself). The directors of a company are the driving force in influencing its corporate governance and a failure by the directors to enforce strong corporate governance could expose them to allegations of failing to comply with the duties which they owe to the company.

One of the most significant sources of corporate governance for many Guernsey companies is the Guernsey Financial Service Commission's (GFSC's) code of corporate governance for the finance sector, which is supplemented by a series of codes of practice applicable to specific industries (eg, company directors, corporate service providers and trust service providers).

The code of corporate governance for the finance sector is structured around the following key principles and provides additional guidance on how to meet these principles:

• the board – companies should be headed by an effective board of directors which is responsible for governance;
• directors – directors should take collective responsibility for directing and supervising the affairs of the business;
• business conduct and ethics – all directors should maintain good standards of business conduct, integrity and ethical behaviour and should operate with due care and diligence and act honestly and openly at all times;
• accountability – the board should have formal and transparent arrangements in place for presenting a balanced and understandable assessment of the company's position and prospects and for considering how it will apply financial reporting and internal control principles;
• risk management – the board should provide suitable oversight of risk management and maintain a sound system of risk measurement and control;
• disclosure and reporting – the board should ensure timely and balanced disclosure to shareholders and regulators of all material matters concerning the company;
• remuneration – the board should ensure remuneration arrangements are structured fairly and responsibly and that remuneration policies are consistent with effective risk management; and
• shareholder relations – the board should ensure that satisfactory communication takes place with shareholders and is based on a mutual understanding of needs, objectives and concerns.

In addition, while the GFSC's Code of Practice – Company Directors applies only to certain persons licensed under the Regulation of Fiduciaries, Administration Businesses and Company Directors etc (Bailiwick of Guernsey) Law 2000, it is generally considered that the principles should be adopted by all Guernsey directors of companies as a matter of good corporate governance.

Finally, directors should remain aware of the industry in which they operate and any additional guidance or codes of conduct as they are published. For example, the Association of Investment Companies (AIC) has also published a code of corporate governance (which has been endorsed by the GFSC) and for entities listed on the International Stock Exchange, the Listing Rules contain a number of principles applicable to directors of issuers.(2)

For further information on this topic please contact Craig Cordle, Michelle Watson Bunn or Henry Simpson at Ogier by telephone (+44 1481 721 672) or email (craig.cordle@ogier.com, michelle.watsonbunn@ogier.com or henry.simpson@ogier.com). The Ogier website can be accessed at www.ogier.com.

Endnotes

(1) Further information on Carlyle is available here.

(2) Further information on changes to the AIC Code is available here.