In a series of articles, Director Alex Spencer summarises the duties and responsibilities of the directors of a company incorporated in the Isle of Man. This 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.
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:
“Decisions of English courts, particularly decisions of the House of Lords and the Court of Appeal in England, are not binding on Manx courts, but they are of high persuasive authority, as was correctly pointed out by Glidewell, J. A. in giving the judgment of the Staff of Government Division (Criminal Jurisdiction). Such decisions should generally be followed unless either there is some provision to the contrary in a Manx statute or there is some clear decision of a Manx court to the contrary, or, exceptionally, there is some local condition which would give good reason for not following the particular English decision. The persuasive effect of a judgment of the House of Lords, which has largely the same composition as the Judicial Committee of the Privy Council, the final Court of Appeal from a Manx court, is bound to be very high.”
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 respect of the cause of action in this case, it should be noted that fiduciary duties owed by directors are in general owed exclusively to the company and not to the shareholders personally. Some of the duties of a director can be briefly summarized as follows:
(a) to act in good faith in what he believes to be the best interests of the company as a whole;
(b) to exercise his powers for the purposes for which the powers were conferred;
(c) to exercise his powers fairly as between different sections of shareholders;
(d) save so far as permitted by the constitution of the company, not (without the informed consent of the company) to put himself in a position in which his personal interests or duties to others are liable to conflict with his duties to the company; and
(e) to exercise his independent judgment in relation to the exercise of his powers, and not to abdicate them or (save where necessary in the interests of the company) to fetter them or (save where permitted under the constitution of the company or where necessary in the interests of the company) to delegate them.
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:
- (i) 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)
- (ii) 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);
- (iii) 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;
- (iv) 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;
- (v) 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 CILR 203 @ 10, 11; Bairstow v Queens Moat Houses Plc [2000] BCC 1025 @ 1033.);
- (vi) 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);
- (vii) A director is fixed with actual and constructive knowledge.
- (viii) 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);
- (ix) 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).
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