Isle of Man: Memorandum On The Duties Of The Directors Of An Isle Of Man Company

Introduction

This memorandum summarises the duties and responsibilities of the directors of a company incorporated in the Isle of Man. It is not an exhaustive list of all the considerations which may arise and the Company's financial, legal and other advisers should be consulted where there is any doubt.

The overriding duty of the directors of the Company in all circumstances is to the Company and its shareholders. The directors must also look to the interests of the Company's creditors if the Company is or is approaching insolvency.

The directors are entitled to rely on, and may have a duty to take account of, advice from financial and other advisers.

The directors must not act for an improper purpose or in their own interests. It follows that they may not adopt a course of action designed to maintain their own management control of the company.

Directors' Duties

Traditionally, Isle of Man company legislation has been based on English company statutes and the English Companies Act 1929 was the foundation for the Isle of Man Companies Acts 1931-2004 which remain in force today (the "1931 Act" or "CA31" where the context requires).

In 2006, the Isle of Man Companies Act 2006 was enacted (the "IOM Act", the "2006 Act" or the "CA06" where the context requires). The Isle of Man Companies Act 2006 introduced a simplified corporate vehicle into Isle of Man law with similarities to similar corporate vehicles found in the British Virgin Islands.

The Isle of Man provides a parallel regime for the incorporation and registration of 1931 Act and 2006 Act companies.

Note that the Isle of Man Act called the "Companies Act 2006" bears no relation to the United Kingdom Companies Act 2006 (the "UK Act") except (co-incidentally) the same name. Accordingly, the codification of Directors' duties in the UK Act does not apply to the Company. However, the relevant Isle of Man law largely reflects the same common law principles that have now been codified in UK Act.

Directors are subject to certain minimum standards of care, skill and diligence in discharging their duties. Set out below is a summary of the main duties of a director to his company. It is not an exhaustive and complete statement of a director's duties and the law is subject to change.

We consider that Isle of Man law in relation to duties of directors of 2006 Act companies is no different to that in relation to 1931 Act companies (subject to specific statutory provisions: for example there may be differences in relation to preparation of financial statements, however we do not consider these would be relevant in this context).

Although the IOM Act does not use the actual term "shadow director", various provisions refer to persons in accordance with whose directions or instructions the director(s) are accustomed to acting. A "shadow director" must comply with the same standards as a properly appointed director. Directors should not allow a person who has not been formally appointed to act as a director, nor should they allow their discretion to be fettered by such a person. Similarly, a person who has not been appointed as a director should not seek to direct or instruct the directors.

Similarly, there is no such entity in law as a "nominee" director. Every director has exactly the same responsibility to the company as a whole and if he neglects that responsibility, he will be guilty of a breach of duty. Directors must not simply "rubber stamp" decisions made by others, whether other directors, shareholders, beneficial owners or other third parties.

The law relating to the standards to be observed by directors in discharging their duties applies no distinction between executive and non-executive directors.

The following duties are relevant:-

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

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

Independence - A director must not agree to restrict his power to exercise an independent judgement. But if he considers in good faith that it is in the interests of the company for a transaction to be entered into and carried into effect, he may restrict his power to exercise an independent judgement by agreeing to act in a particular way to achieve this.

No secret profits - A director must not use the company's property, information or opportunities for his own or anyone else's benefit unless he is allowed to by the company's constitution or the use has been disclosed to the company in general meeting and the company has consented to it (although this may not be sufficient in some circumstances: the directors are not agents of the members, and cannot be instructed by the members in general meeting as to how they should exercise their powers).

Conflict of Interest - Directors must not put themselves in a position where there is a conflict (actual or potential) between their personal interests and their duties to the company or between their duty to the company and a duty owed to another person. If there is a conflict between an interest or duty of a director and an interest of the company in any transaction, the director must account to the company for any benefit he receives from the transaction. This applies whether or not the company sets aside the transaction. But the director does not have to account for the benefit if he is allowed to have the conflicting interest or duty by the company's constitution (and he has complied strictly with the requirements and terms of the company's Articles in that regard) or the interest or duty has been fully and properly disclosed to and approved by the company in general meeting. Chapter 3 of the IOM Act contains express statutory provisions which provide that (subject to any provision to the contrary in the company's Articles) a director of an IOM Act company may in certain circumstances have a conflicting interest with the company and still retain any benefit which he derives by reason of such interest provided that the director has disclosed his interest in accordance with, and strictly complied with, the requirements of the relevant provisions of the IOM Act. Directors must also remember their duty to disclose any interest to the board of directors of the company.

Care, skill and diligence - A director owes the company a duty to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both (a) 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 (b) the actual knowledge, skill and experience which the director has.

Fairness - A director must act fairly as between different members.

Directors must exercise their powers:

• in what they honestly believe to be the best interests of the company; and
• for a proper purpose, being the purpose for which the power is intended.

The board may delegate certain powers to one or more of their number or, if the company's Articles so permit, to non-directors (for example, in the form of a limited power of attorney to finalise and execute a contract on the company's behalf). However, the board cannot totally total abrogate responsibility: directors remain ultimately responsible for the exercise of powers they delegate and have a duty to monitor the exercise of the delegated powers.

A director may rely on information, given by an employee, expert, professional adviser or another director in relation to matters within their competence or responsibility, provided that the director acted in good faith, made proper enquiries and had no ground for suspicion.

In general terms it is for the directors to meet, discuss and if appropriate, approve the substance of any material transactions the company is entering into. To a certain extent the directors can rely on opinions provided by the company's legal advisers, accountants and other advisers but the decision of whether to enter into a transaction or not must be a decision for the directors.

Many provisions of the IOM Act impose specific duties on the company in connection with the conduct of the company's business. Generally, the duties concerned are imposed on the company itself but in addition the IOM Act provides that if an offence committed by the company is proved to have been committed with the consent or connivance of or to be attributable to neglect on the part of a director, that person as well as the company is guilty of the offence.

Where a director acts in breach of his fiduciary duty, he may be liable to indemnify the company for any loss it has suffered as a result, and to account to the company for any profit made.

In some cases the members, with full knowledge, can ratify the actions of the directors. Such ratification cannot be guaranteed and, in any event, may not be sufficient in some circumstances. It should also be borne in mind that the directors are not agents of the members, and cannot be instructed by the members in general meeting as to how they should exercise their powers.

A director may be held accountable for losses if he has not complied with his statutory and fiduciary duties or failed to exercise the requisite duty of care, diligence and skill. For example, Part III of the IOM Act only permits the Directors to make a distribution (including payment of a dividend and purchase or redemption of the company's shares) where they are satisfied on reasonable grounds that the statutory "Solvency Test" is satisfied, i.e. (i) the Company is able to pay its debts as they fall due in the normal course; and (ii) the company's assets exceed its liabilities; failing which any director in default is personally liable to repay so much of the distribution not recoverable from members.

Liability may also arise on a "constructive trust" basis if a director is engaged or assists in wrongful conduct. A constructive trust is imposed where a person receives assets and, although there is no formal recognition by him that anyone else has any interest in them, it would be inequitable to deny such an interest.

Various statutory provisions impose personal liability on directors guilty of wrongdoing. For example, if a director enables a company to carry on business and incur debts when to the knowledge of the director there is no reasonable prospect of the debts being paid (fraudulent trading), the IOM Act contains detailed provisions in relation to personal liability of directors for fraudulent trading. Where fraudulent trading has occurred, section 259 of the Isle of Man Companies Act 1931 (which is applied to the Company by virtue of section 182 of the IOM Act) permits the court to declare that the directors of a company be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct. The statutory offence of Wrongful Trading does not exist in the Isle of Man.

The IOM Act also gives the court wide powers to make an order requiring a director to repay or restore any money which he has misapplied or retained or become liable or accountable for to the company or to contribute to the company's assets an appropriate sum by way of compensation.

Disqualification

Isle of Man law includes provisions which enable the court to make orders disqualifying individuals from acting as directors. In particular, the Company Officers (Disqualification) Act 2009 permits the court to make disqualification orders of between 2 and 15 years where the court is satisfied that a person's conduct renders them unfit to be an officer of a company.

The directors are responsible for the company's administration, including maintenance of proper accounting records, minutes of meetings, statutory books and filing of information at the Companies Registry. It is usual for these duties to be delegated to the Registered Agent but this does not relieve the directors of the ultimate responsibility.

Isle of Man Case Law Regarding Directors' Duties

There are few reported decisions in the Isle of Man in respect of the Isle of Man Companies Act 2006. Although, like the Companies Acts 1931 to 2004, the Isle of Man Companies Act 2006 does not set out the fiduciary or common law duties owed by a director, as noted above we consider that Isle of Man law in relation to duties of directors of 2006 Act companies is no different to that in relation to 1931 Act companies.

In this note we therefore have regard to relevant Isle of Man cases in relation to 1931 Act companies. This is supported by for example FSC v Gallacher Isle of Man High Court judgment delivered 9 December 2009 in relation to director disqualification, which discussed certain duties of directors on the footing that there was no material difference in this respect between the two types of companies.

The Judicial Committee of the Privy Council (the final court of appeal in the Isle of Man legal system) held in Frankland v R, Moore v R 1987 - 89 MLR 65 (PC) that:

Accordingly English decisions in relation to company law, including in relation to the fiduciary and common law duties owed by directors of company, are routinely cited in Isle of Man courts. This is particularly necessary as the Isle of Man does not have a corpus of authority in this area to match that of English law.

The Isle of Man courts have recognised various fiduciary and common law duties of directors. In Belgravia Corporate Services Limited v B3 Group Limited and Others 2005 - 06 MLR 139 at paragraph 85 the Isle of Man High Court said:

In FSC v Mellor and Gelling (unreported Isle of Man High Court judgement of 27 June 2003 in relation to directors' disqualification) various more specific allegations of breach of duty were upheld.

In Templeton Insurance Limited & Another v Corlett Isle of Man High Court judgment dated 18 June 2013 the court recognised the following duties:

1. Fiduciary duty not to fetter discretion. A director's duty to exercise independent judgment is a duty not to fetter his discretion, whether by substituting someone else's judgment for his own, delegating his powers to someone else or otherwise: Re Englefield Colliery Co [1877] 8 Ch D 388 @ 400, 402; Re Benfield Greig Group Plc [2000] 2 BCLC 488, 40. Directors must exercise their "best independent judgment in deciding where its interests lay and lie": Re Southern Counties Fresh Foods Ltd [2008] All ER (D) 195, 57. A director who acts on the instructions of a third party is fixed with that party's knowledge: Selangor United Rubber Estates Ltd v Cradock [1968] 1 WLR 1555 @ 1577-8, 1613-14 – see also 1642 (first two paragraphs)
2. Fiduciary duty to exercise power for proper purposes. All decisions of directors, since they ultimately derive from specific or general powers conceded by shareholders, must be exercised for a legitimate purpose. This duty applies whether or not the specific power is identified in the Articles. It is of general application. It applies to the implied power to deal with the company's assets on a fiduciary basis in the day to day management of the business. It is not necessary to show the director was dishonest, or that he knew he was pursuing a collateral purpose. The proper approach was stated in Extrasure Travel Insurances Ltd v Scattergood [2002] WL 31599760 at paragraph 92 (where directors of a holding company caused a subsidiary to pay off the debts of another subsidiary, depriving it of cash);
3. Fiduciary duty to act in good faith in company's interests. A director's duty is to do what he honestly believes to be in the company's best interests. But the Court may inquire into the basis for and reasonableness of the director's belief, since "the fact that his alleged belief was unreasonable may provide evidence that it was not in fact honestly held at the time": Extrasure Travel Insurances Ltd v Scattergood at 90. Moreover, a director will be in breach of this duty if he has simply abnegated his duty: see Bishopsgate Investment Management Ltd v Maxwell [1993] BCC 120) to which reference is made below. Where a director's transfer of a company's property is prima facie in breach of fiduciary duty the burden shifts to the defendant to justify the transfer, if he can (In Bishopsgate Investment Management Ltd v Maxwell [1993] BCC 120 at 140;
4. Director as quasi-trustee. Directors are regarded as trustees of company property under their control and they are liable for breach of trust where it is misapplied: Halsbury's Laws, vol. 14(2)(13) (2009), 5th ed. 539, 586; Selangor United Rubber Estates Ltd v Cradock 1574-7. This liability is strict: Holland v Revenue and Customs Commissioners (Supreme Court) [2011] 1 All ER 430 at 46. A director may be liable regardless of whether he acted honestly;
5. Director's duty of care. A director's duty of care was summarised in Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498 @ 501 (a case concerning the signing of cheques by non-executive directors): "a) A director is required to exhibit in performance of his duties such a degree of skill as may reasonably be expected from a person with his knowledge and experience. b) A director is required to take in the performance of his duties such care as an ordinary man might be expected to take on his own behalf. c) A director must exercise any power vested in him as such honestly, in good faith and in the interests of the company..." The standard of care to be expected of a director is the standard objectively to be expected of someone in his office, to which is superadded any additional skill and experience possessed by the particular director: "The objective test sets the basic standard. It is no excuse for a director to say that, in fact, she did not have the general knowledge, skill or experience reasonably to be expected of a person carrying out her appointed functions. The subjective test potentially raises the standard by reference to any greater general knowledge, skill or experience which the particular director actually has."(Lexi Holdings Plc v Luqman [2009] BCC 716 @ 18, 36; Re D'Jan of London Ltd [1993] BCC 646 @ 648; cf. Weavering Macro Fixed Income Fund Ltd v Peterson [2011] (2) CILR 203 @ 10, 11; Bairstow v Queens Moat Houses Plc [2000] BCC 1025 @ 1033.);
6. A director must keep himself informed. "Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors" (Re Barings Plc (No 5) [1999] 1 BCLC 433 @ 488 ¶B7; cf. Awa Ltd v Daniels [1955-95] PNLR 727 @ 797);
7. A director is fixed with actual and constructive knowledge.
8. Whilst delegation, and likewise division of responsibility between directors, are permitted, it may be a breach of duty for a director to allow himself to be dominated or bamboozled by another director: "A proper degree of delegation and division of responsibility is of course permissible, and often necessary, but not total abrogation of responsibility. A board of directors must not permit one individual to dominate them and use them, as Mr Griffiths plainly did in this case. Mr Davis commented that the appellants' contention (in their affidavits) that Mr Griffiths was the person who must carry the whole blame was itself a depressing failure, even then, to acknowledge the nature of a director's responsibility. There is a good deal of force in that point...It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities. The appellants may have been dazzled, manipulated and deceived by Mr Griffiths but they were in breach of their own duties in allowing this to happen." (Re Westmid Packing Services Ltd (No 3) [1998] BCC 836 @ 842-3 per Lord Woolf; Lexi Holdings Plc v Luqman [2009] BCC 716 @ 725-6; Re Barings Plc (No 5) [1999] 1 BCLC 433 @ 488 B7);
9. Directors have a duty to "safeguard the assets of the company and for that purpose to take reasonable steps to prevent and detect fraud and other irregularities" (Lexi Holdings Plc v Luqman [2009] BCC 716 @ 725 37).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.