Discussion surrounding the appointment and duties of Cayman directors have been under the spotlight as there is significant pressure from the to ensure that the Cayman Islands strengthens the effectiveness of its Anti-Money Laundering (AML) / Combatting the Financing of Terrorism (CFT) regime. While numerous companies and funds are looking for answers on what is necessary to be compliant and reduce risk, we shed some light on the issue and explore the who, what, when, where and why of Cayman directors.

LEGAL SYSTEM AND LAWS OF THE CAYMAN ISLANDS

Building blocks are important and without an understanding of the foundations of the Cayman Islands legal system, it will be difficult to paint the picture of how Cayman directors fit in the legislative and regulatory picture. The Cayman Islands is a dependent territory of the United Kingdom and its legal system is based on English common law, locally enacted statutes and Orders-in-Council (adopted laws) that have modernised its common law.

Where the obligations and duties of Cayman directors might have stemmed from the UK common law, the majority of these duties have been ventilated in the Cayman courts and subsequently adopted; however, it is important to note that English and Commonwealth judgements still carry persuasive value. As such the baseline for the Cayman directors duties is set on a holistic approach of English common law, Caymanian statute and regulation.

The Companies Act (2021 Revision) (“the Companies Act”) places explicit duties on Directors (executive and non-executive) of companies formed in the Cayman Islands, and more stringent duties are placed on Cayman Directors of funds registered in terms of the Mutual Funds Act (2021 Revision) (“the Mutual Funds Act”). In addition the Directors Registration and Licensing Law, 2014 (as amended) (“the DRLL”) requires that certain Cayman directors be registered and/or licensed by the Cayman Islands Monetary Authority (CIMA). The law is applicable to the following persons:

• Persons and entities who act as directors of companies which are regulated mutual funds under the Mutual Funds Act;
• Directors of certain companies which are registered with CIMA as Registered Persons under the Securities Investment Business Act (2020 revision) (“the SIB”); and
• Persons and entities who act as managers of limited liability companies formed in the Cayman Islands under the Limited Liability Companies Act (LLCs).

With a better understanding of the legal system and prevailing laws imposed on Cayman directors, we can now get into the different types of directors.

THE WHO — THE DIFFERENT CLASSES OF CAYMAN DIRECTORS

With no stonecast definition of a Cayman director under the aforementioned laws, it is common practice that directors may be named individual persons, or in some cases, corporate bodies. In terms of the DRLL, there is no prerequisite for qualification, status or residency to be appointed to office as a Cayman Director in accordance with the memorandum of incorporation (MOI) / articles of association (AOA).

A director will either hold the office of executive director (who forms part of the executive team or is an employee), or a non-executive director (who is independent to the company and board). Despite the scaling of cost and feasibility for both exec and non exec directors, there has been a growing interest for independent non-execs as CIMA has issued guidance requiring a minimum of two natural persons being appointed for certain funds.

From an appointment perspective there are four major classes of Cayman directors, namely:

• De-jure directors: those directors that have been validly appointed in accordance with the AOA ;
• De-facto directors: those who claim to be directors and assume their duties but are not appointed as such;
• Shadow directors: those who direct the directors but are not called directors in terms of the Companies Act; and
• Nominee directors: those directors nominated by a particular shareholder.

Despite the different offices held, there is no major difference in the core duties of exec and non-exec directors; however, non-exec directors are more so involved in compliance and development.

As the scene is set for who can be a director, we can now focus on their pursuant duties and obligations. In essence, regardless of the capacity in which the director is appointed, he or she must have the necessary skill, care and diligence; stay independent; and act according to the best interest of the company or fund.

THE WHAT — DUTIES AND RESPONSIBILITIES OF CAYMAN DIRECTORS

The duties of a Cayman director can be divided into three major subsets being that of:

1. common law (non-fiduciary of skill, care and diligence),
2. fiduciary (acting in good faith) and
3. statutory duties (imposed in terms of the relevant laws).

Common law and non-fiduciary duties

Skill, care and diligence is at the forefront of the non-fiduciary duties of directors. In the matter of Re D’Jan of London Limited [1994] 1 BCLC 561 per Hoffman J , the court held that conduct required of a Cayman director is that of:

easonably diligent person having both — (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.

In the matter of Weavering Macro Fixed Income Fund Limited (in Liquidation) v Peterson and Ekstrom in the Grand Court August 2011 the court confirmed the reasoning of Re Barings Plc (No 5) [2000] BCLC 523 wherein it was held that the actions of the directors should evidence their skill care and diligence in that:

CIMA’s Statement of Guidance for Regulated Funds — Corporate Governance and the UK Corporate Governance Code , although not binding, echoes the above judgement’s sentiment in that it makes good practice for directors to act independently and when performing their duties to promote the success of the company. This is cemented and held per Weavering, Jones J that directors

apply their minds and exercise independent judgment, in the ordinary course of business, in respect of all matters falling within the scope of their supervisory responsibilities”.

It is thus expected of directors to act as a reasonable person would, with the skill and knowledge he or she actually possesses and that they are not liable for mere errors in judgement. The Cayman director needs not be an expert in the field of the company or fund, nor is there need to attend all meetings; however, he or she may delegate their powers.

Fiduciary duties

In addition to the common law duties, fiduciary duties are also imposed on Cayman directors which are summarized as: “the observance of general standards of l oyalty, good faith, and the avoidance of a conflict of duty and self interest ( Cayman Islands News Bureau Limited v Cohen and Cohen Associates Limited [1988–89] CILR 195 ). The Cayman directors fiduciary duties are follows:

Life is blown into the fiduciary duties of a Cayman director when a director undertakes to act on behalf of the company or fund under a relationship of trust and confidence. The main difference between that of the common law and fiduciary duties is the undertaking of loyalty and fidelity.

Statutory duties

There is no closed set of statutory duties imposed on Cayman directors; however, where a holistic view of legislation applicable to companies and funds are applied, the below serves as a steadfast summary:

• To maintain the register of members, register of Directors and Officers and Register of Mortgages and Charges;
• To maintain proper books of account for the fund or over see the appointment and performance of this function by a service provider;
• To ensure compliance with the AML Regulations;
• To ensure offering documents are up to date;
• To ensure that the Fund is audited on an annual basis;
• To ensure an annual general meeting is called at least once a year;
• To comply with reporting obligations including:
• Filing of annual return;
• Filing of Offering Document and annual audited financial statements with CIMA;
• Filing changes to directs, officers or registered office; and
• To ensure they comply with the requirements of the DRLL.

Some of the international reporting duties that Cayman directors may hold are in terms of US Foreign Account Tax Compliance Act (FATCA) wherein it is required to report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments, and to exchange information with other jurisdictions on an annual basis as required by the Common Reporting Standard issued (CRS) by the OECD.

Cayman directors have a duty to adhere to the General Data Protection Regulation (GDPR) and Cayman Islands Data Protection Act, 2017 , when processing personal data of a data subject. Lastly, Cayman directors must adhere to the International Tax Co-operation (Economic Substance) Act (Revised) and its regulations for filing returns. Seeing that there is a mammoth set of duties to consider when sourcing, or being appointed as a Cayman director, it is paramount to ensure that you have a firm grip on to whom these duties are owed.

THE WHEN — LIABILITY OF CAYMAN DIRECTORS

The question then becomes, to whom the Cayman director’s duties are owed and when are they liable? Should one follow the normal path of litigious reasoning, to bring an action or application, the plaintiff or applicant must have locus standi i.e. the title to sue or bring an application. The party thus has locus standi should he, she or it have the necessary ability or capacity.

As stated above, and held in english case of Foss v Harbottle (1843) 2 Hare 461 directors have fiduciary and common law duties towards the fund or company, therefore, the fund or company would have the necessary standing, or if your will, locus standi to bring the action or application and not the shareholders or connected third parties. This does not, however, circumvent certain instances where the shareholders (where a fiduciary duty is owed directly or in terms of a derivative action) and/or third parties (in contract, tort or by order of court), may bring an action or application against a Cayman director on behalf of the company, or in their own right.

Despite the standing to bring an action or application, prospective litigants should consider whether the director is actually liable as it is common practice that a Cayman director is not personally liable for the debts, liabilities or obligations of a company or fund. The ring fencing of the Cayman director’s personal liability stems from the contractual provisions in his or her service contract and the AOA — these provisions usually excludes liability and indemnifies the Cayman director against any loss.

In terms of the common law, a Cayman director will only be liable for willful neglect or default, fraud or dishonesty and gross negligence, the company or fund on the other hand is liable for all other losses. The locus classicus dealing with a Cayman directors liability are Renova Resources Private Equity Limited v Gilbertson; Four Others [2009 CILR 268] Re Bristol Fund Limited [2008 CILR 317] , Primeo Fund (in official liquidation) v Bank of Bermuda (Cayman) Limited and anor (unreported, 13 June 2019) CICA and Re City Equitable Fire Insurance [1925] Ch 407 , wherein it was respectively held that:

“…a director has similar irreducible “…it is not possible to give so wide an indemnity as to Liability… based on allegations of simple negligence, may, however be covered by the indemnities, as would any further legal costs incurred “an act, or an omission to do an act, is wilful where the person of whom we are speaking knows what he is doing and intends to do what he is doing . But if that act or omission amounts to a breach of his duty, and therefore to negligence, is the person guilty of wilful negligence? In my opinion that question must be answered in the negative unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty …in successfully defending against any kind of claim covered by the indemnities.” exclude liability for fraud, dishonesty or willful default on the part of directors who owe fiduciary obligations to companies… core fiduciary obligations to his company . The Chief Justice clearly considered that such irreducible core fiduciary obligations could not, because of their nature, be excluded and in my respectful view that is correct.”

Gross negligence’ is clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence. But, as a matter of ordinary language and general impression, the concept of gross negligence seems to be capable of embracing not only conduct undertaken with actual appreciation of the risks involved, but also serious disregard of or indifference to an obvious risk and

As a Cayman director can in most instances only be personally liable for willful neglect or default, fraud or dishonesty and gross negligence, it places a company or fund in a precarious position when they want to enforce action against the Cayman director in a court of law.

THE WHERE — ENFORCEMENT OF BREACH

Where a company or fund is aggrieved by the conduct of a Cayman director, or the lack thereof, they may approach a competent court for an enforcement, or a prohibition order. Where a Cayman director breaches a common law or fiduciary duty, the court may order that the party be compensated should it be proven that the director had a duty to act, there was a breach in the said duty and the subsequent breach resulted in loss to the aggrieved party.

Should a Cayman director breach his or her statutory duties, these instances will be considered in light of the relevant penalties imposed by law — i.e. fines or jail time. A must be heeded where directors issue misleading statements or fail to declare certain provisions in a prospectus or offering document to shareholders.

A Cayman director is not without right or recourse as he or she may put forward a defense that there was no breach, loss or a statement or offer document was not untrue.

Despite the good, bad and ugly, we can now finally turn to the why and need for Cayman directors.

There are many reasons why a company or fund should to appoint an independent Cayman director from statutory provisions to risk appetites to name a few; however, where there is a substantial market, companies and funds should do proper diligence when selecting their directors as held in Goodman v Cummings and DMS Governance Limited [2018 (2) CILR 234]

“…the market for Cayman funds and investment managers… depends on professionals being prepared to act as independent directors in respect of very sizeable financial undertakings , in exchange for a relatively small fee .”

Getting the balance right is paramount, especially now that the regulatory authorities’ hands are being pushed to fine and sanction non-compliant entities. It doesn’t matter what the size or maturity of your organization is, an experienced independent non-executive director can add value to your board. Whether it be to attract institutional investors or just to add experience and gain from their extensive knowledge of the industry, the directors will be able to guide your organization and ensure it meets its corporate governance requirements.

If you are interested in having one of our experienced directors help your organization please reach out to us at [email protected] to set up a call.

Hashdirectors.com