Knowledge

Anyone who serves as a director of a British Virgin Islands ("BVI") company is bound by certain duties.

These duties are drawn from three main sources:

• the common law built up through decisions of the BVI and English courts;
• the BVI Business Companies Act 2004, as revised/amended (the "BC Act"); and
• the company's own memorandum and articles of association (the "M&A").

A fourth set of obligations arises under the BVI Insolvency Act 2003, as revised/amended (the "Insolvency Act"), which becomes relevant once a company is insolvent or approaching insolvency.

Who is a director?

A director is ordinarily a person formally appointed to the role, who has consented to act as a director and whose name is on the register of directors of the company. However, in some cases, the law will consider other persons as directors, even if not formally appointed; this can include persons acting as a "de facto" director without formal appointment, or a "shadow director" whose instructions the board is accustomed to follow.

To whom duties are owed

As a general rule, a director's duties are owed to the company itself, not to individual shareholders or to any group of shareholders. This means that the company, acting through its current board, a liquidator, or, in limited circumstances, a shareholder bringing a derivative action with the court's permission, is normally the only party able to sue a director for breach of duty. A director does not, merely by holding office, owe duties directly to shareholders, though a closer factual relationship, for example giving advice to a shareholder during a takeover, can occasionally create such a duty.

Where a company sits within a group, a director must act in the interests of that individual company, not the group, unless the M&A have been specifically amended to permit the director to act in the interests of a parent company, joint-venture shareholder, or appointing shareholder.

Core duties

Two sets of duties overlap and reinforce each other: duties recognised at common law, and duties now codified in the BC Act. In substance they cover the same ground:

• a director must act honestly and in good faith in what they believe to be the best interests of the company;
• powers must be exercised only for the purpose for which they were given, even where the director personally believes the action serves the company;
• directors must avoid conflicts between their own interests, or duties owed to third parties, and the company's interests, and must disclose any personal interest in a transaction to the board;
• a director must not fetter their discretion by agreeing in advance to vote in a particular way on a future matter, and must not misuse company property, confidential information, or a business opportunity that comes to the director by virtue of office, even after leaving the role; and
• directors must exercise care, diligence and skill, measured by what a reasonably diligent person with the general knowledge, skill and experience of that director would do in the same role. This is both an objective and a subjective test: a director who claims or is paid for specialist expertise, such as financial or legal knowledge, will be held to a higher standard in that area.

A director may reasonably rely on the company's books, records and financial statements, and on the advice of employees, professional advisers or fellow directors and board committees, provided the reliance is in good faith and on reasonable grounds, and the director has made proper enquiry where circumstances warrant it.

Beyond these general duties, the BC Act imposes specific statutory obligations, for instance:

• directors must keep prescribed registers and records;
• a distribution to members may only be authorised where the directors are satisfied, on reasonable grounds, that the company will meet the statutory solvency test, and a director who authorises an unlawful distribution can be personally liable to repay it; and
• a shareholder-approval process must be followed before the company disposes of more than fifty per cent of its assets outside the ordinary course of business.

A company's M&A may also impose further company-specific duties, such as borrowing limits or matters requiring shareholder consent, and directors must operate within those limits.

When duties shift: the zone of insolvency

While a company is solvent, the relevant economic interests are those of its shareholders. Once a company becomes insolvent or of doubtful solvency, the position changes so directors must give weight to the interests of creditors. This is often called the "creditor duty".

BVI law treats a company as insolvent if it fails to satisfy a statutory demand, has a judgment against it returned unsatisfied, cannot pay its debts as they fall due, or has liabilities exceeding assets. Because pinpointing the exact moment the duty shifts is difficult, even for specialists, any director with concerns about the company's financial position should take BVI legal advice promptly, both to protect creditors and to protect themselves.

Personal liability once a company is insolvent

If a BVI company enters insolvent liquidation, control passes to the liquidator, who has statutory powers to investigate, demand a statement of affairs, call for documents (including legal advice previously given to the company), and examine directors. The Insolvency Act then gives the liquidator several routes to recover assets personally from directors.

Misfeasance is a broad, catch-all remedy allowing the court to order a director to repay, restore or compensate the company for any breach of fiduciary or other duty, or for misapplying company assets.

Insolvent trading arises where a director knew, or ought to have known, there was no reasonable prospect of avoiding insolvent liquidation, but failed to take every step reasonably available to minimise loss to creditors thereafter.

Fraudulent trading applies where the company's business was carried on with intent to defraud creditors; this requires proof of dishonesty and therefore carries a higher evidentiary bar but is not limited to directors and can catch anyone knowingly involved.

Fraudulent conduct is a criminal offence, punishable by a fine of up to US$10,000 and/or up to three years' imprisonment, for gifting, transferring or concealing company assets in the twelve months before insolvent liquidation.

Courts have wide discretion over the amount that a director found liable must contribute. Unlike in England, the BC Act contains no statutory power for a court to relieve a director from liability, nor any statutory mechanism for shareholders to pre-authorise a breach. Shareholders can, at common law, ratify a breach after full disclosure, but not one involving fraud, dishonesty or misappropriation of company property, and a dissenting shareholder retains the right to bring an unfair prejudice claim.

Protections available

Given the potential exposure of directors, the BC Act permits, subject to the M&A, a company to indemnify current and former directors for costs, judgments and settlements, provided the director acted honestly, in good faith, and, for criminal proceedings, had no reasonable cause to believe the conduct was unlawful. An indemnity that does not meet this standard is void.

Because an indemnity is only as good as the company's ability to pay it, and is worthless if the company itself becomes insolvent, directors are generally well advised to pair any indemnity with directors' and officers' liability insurance, commonly known as D&O cover, and to have the indemnity recorded in a standalone document, such as a service contract, letter of appointment or deed, rather than relying solely on the M&A, which can be amended.

Practical takeaways

Given the extent of directors' duties, and the potential liabilities, there are a number of steps that directors should take to reduce their exposure. These include:

• understanding and periodically re-checking the company's M&A;
• staying actively engaged with the company's business and financial position rather than treating the role passively;
• attending board meetings and reading financial statements and board papers;
• disclosing conflicts of interest promptly;
• ensuring proper records, registers and internal controls are maintained;
• securing a compliant indemnity and D&O cover before problems arise; and
• taking specialist BVI insolvency advice promptly at the first sign that the company may be entering the zone of insolvency.