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Business Law | Directors’ Duties under Jersey Law

Directors’ Duties under Jersey Law

The general statement of directors’ duties in Jersey is set out in Article 74(1) of the Companies (Jersey) Law 1991. It is set out in two parts and states:

‘A director, in exercising the director’s powers and discharging the director’s duties, shall:

  1. a) act honestly and in good faith with a view to the best interests of the company; and
  2. b) exercise the care, diligence and skill that a reasonably prudent person wold exercise in comparable circumstances.’

There have been numerous decisions of the courts which elaborate on these general statements and as such it is important to consider key aspects of the case law when explaining the scope and nature of such duties.

Acting honestly and in good faith with a view to the best interests of the company

In order to understand this aspect of the duty, it is necessary to define what is meant by the best interests of the company. Companies are comprised of shareholders, directors, employees and agents and these respective groups’ interests may conflict and compete over time. The guiding principle is generally taken from the English authority Gaiman v National Association of Medical Health [1971] Ch 317 (England and Wales), which states that when acting, directors should consider the future of the company and balance any short-term benefits against the long-term interests of present as well as prospective members as a whole. Put more simply, a director should consider the collective interests of present and potential future shareholders in the company.

As regards whether any act is itself in the best interests of the company, the key authority is the English case of Charterbridge Corporation v Lloyds [1970] Ch 62. The court held that what is in the best interests of the company is that which an intelligent and honest person in the position of a director would believe to be for the benefit of the company (taking into account all the circumstances in relation to the relevant transaction).

It should also be noted that all the acts of the director must be intra vires. Essentially, this means that a director must exercise the powers available to them for the purposes for which they were intended. This stands even if the director feels that the relevant act would benefit the company. The powers of a director must always be used to benefit the company, fulfil its objects or be used in a manner that is reasonably incidental to the business.

Further, directors should be aware that their duty to the company persists post-resignation in certain circumstances. Should a director, who has resigned from a company, use knowledge gained from his prior position for personal enrichment, he may be called to account for this benefit to the company of which he was a director.

Exercising the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances

The director must not only act honestly and in good faith, but must also exercise the care, diligence and skill of a reasonably prudent person. Historically the test was simply that as set out in the statute, which effectively set a very low bar. An illustration of this is provided in the case of Re Brazilian Rubber Plantations [1911] 1 Ch 425. There were three directors of the company, one who was deaf, one who knew nothing of the relevant business, and a third who liked the other two directors and took up the position as a favour. None of them was held accountable for the subsequent failure of the company.

That original test remained until as recently as 1989 until the decision in Dorchester Finance v Stebbings and Others [1989] BCLC 498. A group of non-executive directors delegated the management of the company to an executive director and provided pre-signed cheques for his use. Following the misuse of company funds, all directors were sued and each of the non-executive directors was held liable for negligence. The court altered the relevant test and declared that from that point on directors must show such skill and care as may be reasonably expected from persons of tbeir knowledge and experience, take such care as an ordinary person might be expected to in the conduct of their own affairs, and exercise any and all powers in good faith in the best interests of the company. The courts can therefore consider the particular skills and experience of a director in considering whether or not the duty has been met.

Breaches of duty

Should the actions of a director be in breach of this duty, they may be liable for any losses incurred and be required to compensate the company. Should such a transaction personally benefit the director, it may be made void.

If a director is intending to or performs an act and is concerned of committing a breach, Article 74(2) of the Companies Law may provide some protection. If all of the members of the company (including those who hold shares which typically carry no voting rights) authorise or ratify the act or omission of the director, the offending act is no longer a breach of the duty, provided that the company will still be able to discharge its liabilities as they fall due. It should be noted that full disclosure of the relevant act or omission is essential for any such ratification to be valid.

Conclusion

It is essential that directors always keep the duty to the company in mind and that they are upfront in declaring any interests they may have in transactions to ensure that their duty is not breached. If a director is ever concerned about the consequences of any act, they should seek guidance notwithstanding the possibility of a retrospective ratification of their decisions.

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The information and opinion expressed in this briefing does not purport to be definitive or comprehensive and are not intended to provide professional advice. For specific advice, please contact Parslows, We are not responsible for, and do not accept any responsibility or liability in connection with, the content of this document or any reliance upon it

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