Directors' duties under Cayman Islands law

This briefing provides a general overview of Cayman Islands law as it relates to directors’ duties. It is not intended to be comprehensive nor a substitute for professional advice in the context of a particular set of circumstances.

This briefing focuses on director duties, which will mainly arise in the context of Cayman Islands exempted companies. Duties of managers in the context of Cayman Islands LLC’s and of general partners in the context of Cayman Islands exempted limited partnerships are not considered but will vary, potentially significantly, from the duties set out in this briefing.

Framework

As a general framework, Cayman Islands law is derived from the English common law and, therefore, regard must be given to the English common law principles and statues in conjunction with relevant decisions of the Cayman Islands courts, especially as the duties of a director are not codified under the law. Accordingly, directors’ duties are governed by the Companies Act (as Revised) of the Cayman Islands, any regulatory laws that apply, the common law and the memorandum and articles of association of the relevant company.

Role of directors

Whilst the role of a director may vary, a director will generally be responsible for the day-to-day management and control of the company. Where there is more than one director, the directors are expected to act collectively as a Board of Directors (except to the extent that the Board has delegated specific functions, e.g. to a managing director) and have the authority to manage the company in the company’s best interests. Consequently, it is important that all transactions, associated agreements and documents are always considered and approved by the Board at a Board meeting or by written resolution signed by all directors. It is not appropriate for a single director or officer to approve or sign unless authority to do so has been conferred upon him at a Board meeting or by written resolution signed by all directors. Where a company has a sole director, it is still advisable for written resolutions to be executed to record decisions and maintain corporate governance standards, as well as to reflect the requirements of the Companies Act or under the articles of association of the company.

The first director(s) of the company are generally appointed by the subscriber to the memorandum of association. Thereafter, directors will generally be appointed by a resolution of the shareholders or a resolution of the directors. Depending on what the company’s Articles provide, directors will either serve indefinitely or for a specified term after which they may be eligible for re-election to the Board. Most Articles provide that all powers of the company are vested in the directors, except for those specifically reserved to the shareholders, either under the Companies Act or under the Articles.

Board meetings

There is no specific requirement under general law as to the frequency with which Board meetings must be held (although, where economic substance legislation or a regulatory law or policy applies, there may be additional requirements and the Articles may also prescribe frequency). Instead, the law requires that Board meetings be held sufficiently frequently to enable the directors to fulfil their obligations to the company.

The company’s Articles may specify the notice that must be given of a Board meeting. In the absence of any provision in the Articles, reasonable notice must be given.

Subject to the company’s Articles, Board meetings can be held via telephone or video conference or can be replaced by written resolutions signed by all directors. However, it is always important to obtain onshore legal advice to ensure that the method by which meetings are held or resolutions passed, or the physical location of directors during a meeting, does not give rise to tax or regulatory problems.

Voting at a Board meeting will generally be on the basis of one vote for each director present. If the company’s Articles provide for it, the chairman may have a casting vote where the voting on any item of business is tied.

Subject to the company’s Articles, a director can appoint a proxy or alternate to attend a Board meeting in their place. Typically, a proxy would be appointed to represent a director at one meeting or at meetings held during a limited time period, whereas an alternate would be appointed on a more long-term basis (e.g. if a director was sick). Filing requirements with the Cayman Islands Registrar of Companies may apply depending upon the terms of the appointment of the proxy or alternate.

It is always important to check that any Board meeting is quorate in accordance with the provisions of the company’s Articles.

Because a director stands in a fiduciary position, under the general law, they must avoid any conflict of interest when carrying out their duties as a director. However, in practice, conflicts of interest will arise, and the Articles will usually permit a director who has a conflict of interest to nevertheless attend a Board meeting, be counted in the quorum and vote, provided that they have already fully disclosed their conflict of interest to the Board.

Fiduciary and common law duties

Directors are subject to several fiduciary duties, which may be summarised as follows:

a director is expected to act in good faith and in the best interests of the company;
a director should not exercise their powers for an improper purpose;
a director should not fetter their powers;
a director should not to misapply the assets of the company;
a director should avoid conflict of interest; and
a director should not make a secret profit from their position.

Each of these duties is owed to the company and derives from the fact that, under the law, a director is regarded as a fiduciary with obligations similar to those of a trustee. Generally, in this context the company will be represented by the interests of all of its shareholders. However, where the company is insolvent or of doubtful solvency at the relevant time, due regard must be given by the directors when exercising their duties to the interests of creditors of the company. Where financial loss arises as a result of a breach of any of the above duties, a director may be held personally liable to the company for such loss.

In addition to fiduciary duties, directors are subject to a common law duty of care and skill. This duty has, through a succession of judicial authorities in a number of English common law jurisdictions, been tightened over recent years and the approach in those cases has been affirmed by the Cayman courts. Generally, regard will now be given both to the knowledge, skill and experience that could reasonably be expected of the role that a particular director fulfils and to the actual knowledge, skill and experience that the particular director in question possesses, i.e. the test is both objective and subjective. This development in the law is a reflection of the commercial reality that it no longer suffices for a director to be simply a well-meaning amateur but, in most instances, it will be expected that they will be competent and experienced and will adopt a responsible and professional approach to the role.

A director may also be held personally liable where they have been fraudulent or have acted outside their authority.

Statutory duties (all companies)

Under the Companies Act, a director is subject to several statutory duties, which include, but are not limited to:

Directors are required to keep proper minutes of all Board meetings. The minutes should be signed by the chairperson of the meeting and held on the company’s minute book.
The directors are responsible for ensuring that the company’s register of members, register of directors and officers and register of mortgages and charges are kept up to date. The latter two registers must be kept at the registered office of the company in the Cayman Islands whereas, in the case of an exempted company (i.e. a company carrying on business mainly outside the Cayman Islands), the register of members can be kept anywhere.
The directors must ensure that the company keeps proper books of accounts which reflect a true and fair view of the state of the company’s affairs and explain its transactions. Please note that under Cayman Islands law, apart from regulated entities (e.g. investment funds, banks, trust companies, insurance companies, virtual asset service providers and the like) there is no requirement for accounts to be audited.
A Cayman Islands company is subject to a number of filing requirements with the Cayman Islands Companies Registry, and it is the responsibility of the directors to ensure that these filings are made. Examples include: a change to the company’s name, change of registered office, change in directors or officers, any amendments to the company’s memorandum of association or Articles and the passing of any special resolution by the shareholders. Appointments of, or changes in, directors or officers must be filed within specific deadlines and failure to do so will lead to default penalties, which can be significant. Because of the importance of ensuring that all filings are made on a timely basis, it is essential that all minutes and resolutions, whether at Board level or shareholder level, are immediately provided by email to the registered office and the company’s Cayman Islands legal counsel who will then attend to the necessary filings on behalf of the directors.
An exempted company has a specific obligation to file an annual return with the Cayman Islands Companies Registry (together with an annual filing fee) confirming that, since the previous return or since registration, there has been no alteration in the memorandum of association (other than any alterations already reported), the company’s operations have been carried on mainly outside the Cayman Islands and the company has not traded in the Cayman Islands with anyone except to further the company’s business carried on outside the Cayman Islands.

Statutory duties of segregated portfolio companies

A segregated portfolio company (an “SPC“) is a particular type of Cayman Islands exempted company which is able to create one or more segregated portfolios to segregate pools of assets and liabilities within a single company. Although a segregated pool may be thought of as a silo or sealed compartment within the company, each of them is not a separate legal entity in its own right. Directors of an SPC are subject to several specific statutory duties, which include, but are not limited to:

The directors must have procedures in place to identify, segregate and keep separate any assets of one portfolio from the assets of another segregated portfolio (“SP“). Therefore, it is important that each SP has its own bank account, brokerage account, custody account, etc. Physical segregation rather than accounting segregation is also essential. Any co-mingling of assets across the portfolios are likely to compromise the integrity of the SPC structure.
The directors must have procedures in place to ensure that any transfers of assets or liabilities between the portfolios are made at full value.
Where an agreement, contract, deed or other document (collectively the “documents“) is entered into by an SPC, the directors of the SPC are required to express execution of the documents as “by the [SPC] for and on behalf of the SP” or “by the [SPC] for the account of the [SP]” or “by the [SPC] in the name of the [SP]”. The directors must also ensure that the documents properly identify the relevant SP. Previously, directors of an SPC could incur personal liability as a result of failing to identify which segregated portfolio the SPC was contracting or transacting for. However, the Companies Act no longer deems such personal liability and provides instead a remedial procedure where such a failure does arise.
Directors are required to make any necessary enquiries to determine the correct SP that the documents or transaction should be attributed to.
Directors should make the correct attribution and notify all relevant parties in writing of the attributions and their rights. Any party notified, or any party who should have been notified, has the right to object to the court within 30 days of receiving the written notice about the attribution, and the court shall have the power to order the correct attribution to the relevant SP or general asset, or make any other ancillary order it deems just and equitable in the case.

Indemnification of directors and insurance

It is usual for the Articles of a company to indemnify the directors out of the assets of the company in respect of any personal liability that they may incur in acting as a director of the company. Generally, the indemnity clause excludes recovery where losses arise from a director’s actual fraud or wilful default. With an increased focus on corporate governance, directors and officers liability insurance has become fairly common for directors.

Additional requirements for directors of regulated companies

In addition to the various responsibilities outlined above, the Directors Registration and Licensing Act (as Revised) of the Cayman Islands requires that individual and corporate directors of regulated mutual funds or other companies who are registered as ‘registrable persons’ under the Securities Investment Business Act, prior to being appointed as a director be either registered or licensed with the Cayman Islands Monetary Authority (“CIMA“). Directors of a private fund are not subject to the Directors Registration and Licensing Act.

A director of a company which is licensed by CIMA (e.g. a bank, trust company or insurer) must also have regard to CIMA’s Statement of Guidance: Corporate Governance (“the SOG“) which is designed to establish best practice guidelines for licensees with regard to corporate governance. The SOG underlines the critical importance of good corporate governance whilst recognising that the way standards are to be achieved may differ according to the licensee’s structure, size and complexity. The SOG addresses such issues as Board composition, division of responsibilities, risk management and conflicts, audit function and regulatory compliance. Any director of a company licensed by CIMA should consider the SOG carefully.

For directors of an investment fund registered with CIMA under section 4(3) or 4(4)(a) of the Mutual Funds Act and those investment funds registered with CIMA under the Private Funds Act, specific guidance is given in CIMA’s Statement of Guidance for Regulated Mutual Funds: Corporate Governance (the “SOG”). The purpose of this SOG is to provide guidance on the minimum expectations for the sound and prudent governance of a regulated mutual fund or private fund, but it is not intended to be prescriptive or exhaustive. This SOG states that the size, nature, and complexity of a regulated mutual fund are fundamental factors in determining the adequacy and suitability of its governance framework. This SOG provides guidance on various matters, including legal and regulatory compliance, oversight of service providers, conflicts of interest, frequency of Board meetings (a minimum of two Board meetings each year), communication with investors, number of directorships held, and various specific duties expected of a director of a regulated mutual fund or private fund. Any director of a regulated mutual fund or private fund should consider this SOG carefully.