Directors’ Duties in the Cayman Islands: Practical Guidance for Boards and Managers

Directors’ Duties in the Cayman Islands: Practical Guidance for Boards and Managers

Directors of Cayman Islands companies operate within a mature legal framework derived from English common law principles, Cayman statute, and a growing body of local and persuasive overseas case law. While directors’ duties are not exhaustively codified, Cayman courts have articulated clear standards governing how directors are expected to exercise judgment, manage risk, and respond to financial pressure.

These standards become particularly exacting when a company encounters financial distress. Understanding how directors’ duties operate in practice and how they evolve as circumstances change is critical for boards overseeing Cayman entities, including investment funds, holding companies, and operating structures.

This article outlines the core duties owed by Cayman directors, the implications of financial distress, and the principal areas of personal exposure.

Core Fiduciary Duties

At common law, directors owe fiduciary duties to the company itself. These duties require directors to act honestly, loyally, and in what they genuinely consider to be the best interests of the company.

Acting in Good Faith

Directors must act bona fide in the interests of the company as a whole. This typically involves balancing short term commercial considerations with the longer term interests of the company and its members.

Proper Purpose

Directors’ powers must be exercised for legitimate corporate purposes and in accordance with the company’s memorandum and articles of association, together with any valid board or shareholder resolutions. Even well-intentioned decisions may be challenged if powers are used for an improper purpose.

Conflicts of Interest

Directors must avoid situations where personal interests, or duties owed to third parties, conflict with their duties to the company. Where a conflict cannot be avoided, it must be fully disclosed and addressed in accordance with the company’s constitutional framework.

Independent Judgment

Directors are expected to exercise independent judgment. While shareholder views, lender pressure, or sponsor expectations may be commercially relevant, directors cannot simply follow instructions if doing so would not be in the company’s interests.

No Secret Profits

Any benefit obtained by a director by virtue of their office must be disclosed and accounted for to the company unless properly authorised. This applies equally to indirect or non-cash benefits.

Duty of Skill, Care, and Diligence

In addition to fiduciary obligations, directors owe a duty to exercise reasonable skill, care, and diligence. Cayman courts apply a combined objective and subjective test that was considered in Weavering Macro Fixed Income Fund Limited (in liquidation) v Stefan Peterson and Hans Ekstrom [2011] 2 CILR 203:

• the standard of a reasonably diligent person performing the same role; and
• the higher standard that may be expected where a director holds particular expertise or experience.

In practical terms, this duty requires directors to remain actively engaged in the company’s affairs to a minimum objective standard. Directors also have a continuing duty to acquire and maintain sufficient knowledge and understanding of the company’s business to enable them to properly discharge their duties.

Financial and Operational Oversight

Directors should maintain a working understanding of the company’s financial position, including cash flow, liabilities, and potential risks. Passive reliance on management is unlikely to be sufficient.

Use of Advisers

Professional advice should be sought where matters fall outside a director’s expertise. However, reliance on advisers does not displace the need for directors to apply their own judgment and to understand the substance of the advice received.

Delegation

Operational responsibilities may be delegated, but oversight cannot be abdicated. Directors remain responsible for ensuring appropriate systems, controls, and reporting lines are in place.

Duties When a Company Faces Financial Distress

A material shift occurs once a company becomes financially unstable. While directors’ duties remain owed to the company, the interests of creditors increasingly become relevant and, in certain circumstances, take priority.

The UK Supreme Court’s decision in BTI 2014 LLC v Sequana S.A. [2022] UKSC 25 which is highly persuasive in the Cayman Islands clarifies that directors must have regard to creditors’ interests where they know, or ought reasonably to know, that:

• the company is insolvent or bordering on insolvency; or
• an insolvent liquidation or similar process is probable.

As insolvency becomes inevitable, creditors’ interests become paramount. Decisions that may have been unobjectionable in solvent circumstances such as distributions, asset transfers, or related party transactions, may expose directors to challenge if they prejudice creditors.

Cayman insolvency is assessed primarily on a cashflow basis i.e. whether the company can meet its debts as they fall due, including debts due in the reasonably near future.

Statutory Exposure and Personal Liability

Beyond common law duties, Cayman legislation imposes significant civil and criminal liabilities on directors.

Companies Act

The Companies Act includes offences relating to:

• fraud in anticipation of winding up, including concealment of assets or falsification of records;
• fraudulent trading, where business is conducted with intent to defraud creditors; and
• transactions at an undervalue or preferential payments made prior to liquidation.

Wider Regulatory and Criminal Regimes

Depending on the nature of the entity, directors may also face liability under regulatory and criminal statutes, including the Mutual Funds Act, Private Funds Act, Directors Registration and Licensing Act, Proceeds of Crime Act, and Securities Investment Business Act.

These regimes place a premium on accurate record keeping, transparent decision making, and early identification of solvency or compliance concerns.

Practical Governance Measures

Directors can materially reduce personal risk through disciplined governance practices:

• maintaining appropriate D&O insurance, subject to standard exclusions;
• ensuring indemnities are properly documented and understood;
• actively participating in board decision making, with accurate minutes;
• monitoring solvency indicators and cash flow forecasts; and
• managing conflicts through early disclosure and formal documentation.

Cayman case law illustrates how failures in basic governance and oversight can give rise to personal liability even where directors believed they were acting appropriately.

Closing Observations

Cayman directors are expected to exercise informed, independent commercial judgment, particularly in periods of financial uncertainty. Courts have demonstrated an increasing willingness to scrutinise director conduct where governance breaks down or creditor interests are compromised.

Early recognition of risk, careful documentation, and timely specialist input are often decisive in determining outcomes for the company and for directors personally.

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