Cayman Islands and British Virgin Islands
A director is appointed by company shareholders to manage the day-to-day affairs of a company. With such management comes certain legal and fiduciary duties, and a director must act in the best interests of that company and its shareholders. Amongst these duties, is the ‘disclosure of interest’, which is the focus of this article with respect to BVI and Cayman Islands companies.
Directors’ conflicts of interest provisions under the laws of the Cayman Islands rely on common law and also the practice where the requirement for disclosure of a director’s interests in a transaction is typically set out in a Cayman Islands company’s articles of association instead of any legislation. British Virgin Islands (BVI) law on the other hand provides detailed statutory provisions in sections 124 and 125 of the BVI Business Companies Act (Revised) (the BCA). The BCA does not however repeal common law rules. Directors of BVI companies should therefore seek to continue to abide by their common law duties.
The common law duties are equally applicable to both Cayman Islands companies and BVI companies.
What are the common law duties?
Broadly speaking, as a matter of common law, directors should not open themselves up to the charge that there is a conflict, or potential conflict, between their duties to their company, and the personal interest or duties they owe to one or more third parties. Failure to be watchful in respect of these common law principles may invite a wide range of remedies being entertained by an administrator, liquidator or court, including the possibility of setting aside the relevant transaction, and/or the awarding of liquidated damages.
Common law rules have long provided a shield to directors in such circumstances.
Firstly the disclosing director must disclose the conflict of interest to his fellow directors prior to the transaction’s approval and execution. Disclosure must be ‘full and frank’. Thereafter the disclosing director and the company have two options. They can either:
- (a) put the conflict of interest to the members of the relevant company prior to the execution of the transaction, and have the members consent to the company’s entry into the transaction,
or
- (b) the relevant director be recused from the approval of the transaction.
What is the statutory position with regard to directors’ conflicts of interest?
For Cayman Islands’ companies, as mentioned above, the requirements for handling disclosure of a director’s interests in a transaction is most often set out in a Cayman Islands company’s articles of association as the Cayman Islands Companies Act (Revised) is silent on the matter. BVI law includes detailed statutory provisions in the BCA regarding the disclosure of a director’s interests in a transaction.
In summary, sections 124 and 125 of the BCA provide the general rule that a director must disclose any interest in a transaction to be entered into by that BVI company to every other director on the board. The provisions specify that a general disclosure by a relevant director that he is a shareholder, director, officer or trustee of the counterparty or is to be regarded as interested in any transaction with that counterparty or person is deemed sufficient, and once made, the disclosing director is not restricted in his actions relating to the transaction, and may vote on its approval.
The BCA provides an exception to the need to disclose a conflict of interest where the proposed transaction is between two counterparties, one of which is the sole director and the other is a BVI company of which he is a director, and where the transaction is entered into in the ordinary course of that BVI company’s business, and on usual terms and conditions (the Commonality of Information Exception).
Consequences of non-disclosure
Failure to disclose a conflict of interests under the BCA has two statutory consequences.
- The non-disclosing director commits an offence and is liable on summary conviction to a monetary fine
- The relevant transaction may be voidable at the instance of the company. However, the transaction will not be voidable if:
- the director’s interest was not required to be disclosed owing to the Commonality of Information Exception; or
- the material facts of the director’s interest in the transaction were known by the company and the company’s shareholders and they approved or ratified it; or
- the company received fair value for the transaction.
The consequences of the failure to disclose a conflict of interest under Cayman Islands law is set out in the above under common law duties.
Risk mitigation
Third parties entering into a transaction with a Cayman Islands or BVI company can mitigate their risk of having to deal with a conflict of interest by taking a few simple steps:
- review the company’s memorandum and articles for relevant provisions relating to conflicts
- review the board approvals for disclosure of conflicts and ensure they are adequately and appropriately made in accordance with the BCA and comply with common law principles
- where a conflict of interest exists, a good general rule for a counterparty is to have the members approve the transaction and thereby do away with any risk of having the transaction stalled for any reason, or at worst voided down the line – where some of the above is not readily available or revealing regarding the Cayman Islands or BVI, a counterparty can include a good faith provision, and a due authority warranty or undertaking in the relevant transaction documents for the company to make.
Accordingly, directors should be mindful of their duties when authorising transactions, especially where they may be interested / have a conflict of interest. Should you require assistance or clarification on any of your matters, Marbury would be happy to assist with the provision of legal advice through their affiliated law firms.