As a Jersey business owner, what do I need to understand about the role of a director?

What is a director?

The director of a company is the person responsible for managing the company’s business activities. Larger companies will have multiple directors working to manage or advise a company. Regardless of the size of your company, every company needs directors.

How are directors appointed?

The mechanism for appointing a director of a company will be set out in the articles of the company. There may also be rules governing appointment in the shareholders agreement. The Companies (Jersey) Law 1991 states that a director is: “a person occupying the position of director, by whatever name called“. Accordingly, you need not be formally appointed as a director to the company in order to owe the duties of a director.

As a director of a Jersey company what are my duties as a director?

As a Jersey director you must carry out your duties as a director in accordance with the [Companies (Jersey) Law 1991] and the articles of association. Overriding all is a duty to always act honestly and in good faith, in the best interests of the company (even where this may conflict with your personal interests) and exercise care, diligence and skill.

Before becoming a Jersey director, you should understand your role and legal obligations. Don’t become a director at the insistence of others, or on the promise that you will not have to do anything.

What does it mean by acting honestly and in good faith?

In order to understand this aspect of the directors duties, 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.

What does it mean by exercising care, diligence and skill as a Jersey director?

A 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 their 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 directors duties have been met.

How should a Jersey director manage assets, debt employees and other such issues of the Company?

A Jersey company director should understand that:

the company owns the assets and as such the director should not treat any company property, assets or funds, as if they were their own. It must be used for a proper company purpose.

the company is generally responsible for paying debts incurred by the company. If there are grounds for suspecting that the company is insolvent, the directors must not trade, incur debt, or continue to conduct business as usual as each director may end up personally responsible.

What happens if a Jersey director breaches his or her director’s duties?

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

If a director is intending to perform an act and 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.

Can I be removed as a Jersey Company director?

The articles of a Jersey company are likely to provide for a director to vacate his or her office if he is requested in writing by all his co-directors to resign.