Cayman Fund Directors: Duties and Appointment Criteria

Cayman fund director duties are the fiduciary, common law and statutory duties a director owes to the fund company: to act in good faith in its best interests, to use powers for their proper purpose, to avoid conflicts and to exercise reasonable skill and care. Who is appointed matters, and directors drawn from a CIMA-regulated firm are themselves subject to regulatory oversight.

Key takeaways

• There are no residency requirements for directors of Cayman investment funds, but professional independent directors are commonly drawn from regulated firms.
• A Cayman company manager is supervised by CIMA, including inspections, enforcement powers and administrative fines; registration under the Directors Registration and Licensing Act (As Revised) alone is not regulatory oversight.
• Directors owe duties to the company as a whole, not to individual shareholders, and must act fairly between different groups of shareholders.
• The standard of skill and care is moving from a subjective to an objective test, and directors cannot absolve themselves of responsibility by delegating.
• When a company is insolvent or of doubtful solvency, directors must consider the interests of creditors, which may become paramount.

Appointing directors from a regulated firm or unregulated individuals

There are fundamental differences between appointing fund directors who are regulated and subject to oversight, and appointing an individual or company that is not. It is an important question when selecting a director for a fund and protecting the interests of investors.

With increasing regulation and investor due diligence, fund managers need to give investors comfort that the directors they appoint are suitably qualified and experienced, and are themselves subject to regulatory oversight across a wide range of risks. Appointing regulated directors reduces, but does not remove, governance risk.

For Cayman funds, there are no residency requirements for directors of investment funds. In most cases, however, professional independent directors are appointed because of the expertise they bring combined with the fact that they work for a regulated firm. Bell Rock's independent director services are provided on that basis.

What does regulation of a director firm involve?

Cayman director firms that are licensed company managers are supervised by the Cayman Islands Monetary Authority (CIMA), the financial regulator for the Cayman Islands. Supervision entails periodic compliance and prudential inspections, backed by enforcement powers and penalties for breaches.

Penalties range from fixed, non-discretionary fines for minor breaches to substantially larger discretionary fines for serious and very serious breaches. The categories of breach and the amounts applicable to each are prescribed by regulation, and the current position is published by CIMA. CIMA has imposed administrative fines on regulated firms for AML failings, which illustrates that this oversight is applied in practice.

CIMA's rules and guidance for company managers

Section 34 of the Monetary Authority Act (As Revised) enables CIMA to issue or amend rules, statements of guidance and statements of principle. Section 48 provides for a Regulatory Handbook setting out CIMA's policies and procedures in carrying out its regulatory and co-operative functions. For a licensed company manager, CIMA's requirements and expectations extend to:

• corporate governance;
• business continuity planning;
• external audit of the firm's financial statements;
• internal audit;
• market conduct;
• cybersecurity and data security controls, including an independent cybersecurity audit by a professional firm;
• internal controls and record keeping;
• professional indemnity insurance;
• succession planning;
• outsourcing;
• marketing policies;
• recruitment of employees;
• AML/CFT policies and procedures;
• appointment of an AML compliance officer, money laundering reporting officer and deputy;
• regulatory fees payable to CIMA for each client the company manager serves;
• annual regulatory fees payable to CIMA; and
• prudential reporting.

Director registration and licensing

Registration or licensing under the Directors Registration and Licensing Act (As Revised) is a mandatory requirement for directors of covered entities, and an annual fee is payable. It is not, however, the same as a director being subject to regulatory oversight. The registration categories are set out in our summary of CIMA's corporate governance guidance for regulated funds.

Conflicts of interest and independence

Directors must be able to demonstrate that they act independently in their decision-making. This is difficult to demonstrate if a director is also affiliated with the fund manager, the fund administrator or another service provider to the fund. Directors should be genuinely independent.

A director must not put himself or herself in a position where there is an actual or potential conflict between personal interest and duty to the company.

A director owes fiduciary obligations to the company that require the observance of general standards of loyalty, good faith and the avoidance of a conflict of duty and self-interest (Cayman Islands News Bureau Limited v Cohen and Cohen Associates Limited [1988-89] CILR 195, Grand Court). A fiduciary will not be allowed to benefit from a gain or advantage obtained by acting in conflict with, or not in accordance with, his or her fiduciary duties (Corporacion Nacional Del Cobre de Chile v Interglobal Incorporated and Avendano Sabugao [2002] CILR 298, Grand Court).

A conflict of interest arises where a director seeks to exploit the assets or opportunities of the company for personal benefit. At common law, a director may not enter into a valid contract with the company, directly or indirectly (other than a service contract), unless the company approves it in general meeting or the articles permit the transaction.

A director's duties

It has long been established that a director owes both common law and fiduciary duties to the company. In essence, directors, operating and making decisions as a board, are required to:

• act in good faith in the best interests of the company;
• use the powers conferred on them for their proper purpose; and
• exercise whatever skill they possess, and reasonable care, when acting in the company's interests.

Where a director breaches a common law or fiduciary duty, the company can take action to recover its property or obtain damages from the director as compensation for loss. The company is also entitled to recover any personal profit the director has made by exploiting his or her position.

To whom the duty is owed

Directors' duties are generally owed to the company as a whole and not to individual members. It follows that enforcement of a director's duties is for the company alone, subject to limited exceptions, for instance where a derivative claim can be brought by a minority shareholder.

In this context, the company is usually defined by reference to the shareholders as a whole, rather than any particular shareholder. As a general principle, directors need to balance the short-term interests of present members against the long-term interests of future members.

Where there are different groups of shareholders with different interests, the directors must act fairly between them. There is an element of objectivity in this test (Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11, followed by Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155, both English first instance decisions). For a fund, this is particularly relevant where there are several share classes or where the company is a segregated portfolio company; see our guide to Cayman segregated portfolio company formation.

While the interests of the shareholders as a whole are paramount when a company is a going concern, it is well settled that where a company becomes insolvent or nearly so, the interests of the company include those of its creditors, and the creditors' interests may become paramount.

Duty to act in good faith

A director must act in good faith in dealings with or on behalf of the company, and must exercise the powers conferred and fulfil the duties of the office honestly.

Duty to exercise powers for a proper purpose

The company's memorandum and articles of association, relevant shareholders' resolutions and board minutes determine the powers conferred on directors and the context in which they can reasonably be exercised. A director who exercises those powers over the company's assets other than for the purposes intended, or for the benefit of the company as a whole, will be liable for breach of duty.

Duty not to fetter discretion

A director must not, in general, fetter his or her discretion to act in the best interests of the company. A director must not agree with a third party how he or she will exercise that discretion, because doing so would prevent the exercise of independent judgement at the appropriate time. A director appointed by a shareholder therefore cannot agree with that shareholder to vote at board meetings in a particular way, even if voting that way would not otherwise be a breach of duty.

This is distinguishable from a case where the directors enter into an agreement on behalf of the company under which they bind themselves to vote so as to ensure that the company performs its obligations under that agreement (Fulham Football Club Limited and Others v Cabra Estates plc [1994] 1 BCLC 363, English Court of Appeal).

Secret profits

A director's fiduciary position precludes him or her from taking a personal profit from opportunities that arise from the position as director, even when acting honestly and for the good of the company. Any such profit must be repaid to the company unless it was disclosed and authorised in advance. This applies whether the profit arises from a contract with the company or with a third party.

The duty of skill and care

Directors' fiduciary duties impose a largely negative obligation to do nothing that conflicts with the company's interests. At the same time, when acting in the company's interests, directors are expected to exercise whatever skill they possess and reasonable care.

Case law has long established that a director must attend diligently to the affairs of the company and, in performing those duties, display the "reasonable care ... an ordinary man might be expected to take in the same circumstances on his own behalf" (Re Brazilian Rubber Plantations and Estates Ltd [1911] 1 Ch 425, English first instance decision).

The leading case on the nature and extent of the duty is the English Court of Appeal decision in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (City Equitable), approved by the Cayman Islands Court of Appeal in Paget Brown and Company Limited v Omni Securities Limited [1999] CILR 184 and more recently in In the Matter of Bristol Fund Limited [2008] CILR 317 (Grand Court). City Equitable established three basic principles:

• a director is not an expert and need only display the skills he or she actually possesses;
• a director need not give continuous attention to the business; and
• a director is entitled, in the absence of suspicious circumstances, to rely on the experience and expertise of co-directors and other officers of the company.

Degree of skill

The level of skill required under City Equitable is subjective. A director is not expected, merely by virtue of office, to possess any particular skills, and performance is judged by how he or she applies the skills actually held.

The concern with this subjective test is that it exonerates the incompetent but honest director on the basis that he or she can do no better. In practice, such a person is unlikely to remain a director for long.

The English courts have increasingly applied an objective test to the standard of skill and care, and the Cayman Islands courts are likely to follow this approach. On that basis, the standard expected of a director has been held to be that of "a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has".

Where a director has a service contract with the company and is contractually obliged to perform specific tasks based on his or her expertise, knowledge and experience, the director will be required to display the objective level of skill implied by that contract.

Attention to the business

It was held in City Equitable that:

"a director is not bound to give continuous attention to the affairs of the company. His duties are of an intermittent nature" (Re City Equitable Fire Insurance Co Ltd [1925] Ch 407)

This dictum is more appropriate to a director who does not have a service contract with the company, and refers specifically to attendance at board meetings. A director's service contract normally requires full attention to the business of the company.

Reliance on others

Generally, a director is entitled to rely on fellow directors and officers of the company. In Dovey v Cory [1901] AC 477 (House of Lords), it was held that a director was entitled to rely on a subordinate put in a position of trust. Similarly, in City Equitable it was held that:

"In respect of duties ... that may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly" (Re City Equitable Fire Insurance Co Ltd [1925] Ch 407)

In that case, the directors were entitled to sign cheques that appeared to be properly authorised, although the cheques were subsequently put to an unauthorised use.

Directors may also rely on the opinions of outside experts, and in appropriate circumstances may be negligent if they do not obtain an outside opinion. In Coulthard v Neville Russell [1998] 1 BCLC 143 (English Court of Appeal), it was held that auditors could owe a duty of care not only to the company but also to its directors, to warn them that payments and other financial arrangements amounted to unlawful financial assistance for the purchase of the company's own shares.

Directors cannot absolve themselves entirely of responsibility by delegating to others. In Selangor United Rubber Estates Ltd v Cradock [1967] 2 All ER 1255 (English first instance decision), the directors were held liable where they should have been aware of a wrong, even though they were in fact ignorant of it. Ignorance is therefore not necessarily a defence: directors are expected to exercise judgement and to delegate and supervise in a way that would uncover unauthorised or unapproved actions.

In Re Barings plc; Secretary of State for Trade and Industry v Baker (1998) BCC 583, when making a disqualification order, the judge held that while directors may delegate functions, the high level of responsibility of their office requires them to supervise the delegated functions, even where they trust the competence and integrity of those below them. Consistent with this, in Re Barings plc (No 5) [2000] BCLC 523, the English Court of Appeal held that:

"the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions" (Re Barings plc (No 5), English Court of Appeal)

For a fund board, supervision of delegated functions includes oversight of the valuation process; see our guide to hedge fund valuation policies.

Directors' duties in an insolvency context

When a company encounters financial difficulty and is insolvent or of uncertain solvency, Cayman Islands law requires directors also to consider the interests of creditors as part of their duty to act in the interests of the company. This is shown by the Cayman Islands decision in Hutchinson Limited, Crain Creek Limited, Mountain Dew Limited and Forum Limited v Cititrust (Cayman) Limited and Ten Others [1998] CILR 43 at 61:

"It is settled law in the Cayman Islands and England that when a company is insolvent or doubtfully solvent it is incumbent upon its Directors to keep its assets inviolate for its creditors. If directors fail to perform this duty they will be in breach of their fiduciary duties." (Hutchinson v Cititrust [1998] CILR 43)

The court's approach is also shown by the Cayman Islands case of Prospect Properties Limited (In Liquidation) v McNeill and J.M. Bodden II [1990-91] CILR 171, which approved the New South Wales Court of Appeal decision in Kinsela v Russell Kinsela Pty Ltd (1986) 4 ACLC 215 at 223. In Kinsela it was held that in a solvent company the shareholders as a general body are regarded as the company when questions of directors' duties arise, but that where a company is insolvent the interests of the creditors intrude: through the mechanism of liquidation they become prospectively entitled to displace the power of the shareholders and directors to deal with the company's assets, which are in a practical sense their assets pending liquidation, a return to solvency or some alternative administration.

Depending on the circumstances, the creditors' interests may therefore be paramount over the shareholders' interests. The directors must have regard to all the general creditors, not one creditor or a section of creditors (Re Pantone 485 Ltd [2002] 1 BCLC 266, English first instance decision). On insolvency or uncertain solvency, the directors must have regard to the best interests of the general body of creditors. There are no prescribed statutory duties in this context; the duties are determined by the common law. Where a company cannot continue, the closure route is considered as part of Bell Rock's liquidation and entity closure coordination.

Statutory duties under the Companies Act

The Companies Act (As Revised) contains a number of provisions relating to directors' duties. For example, liability may arise where:

• the books of account, minutes of meetings or the statutory registers of members, mortgages and charges or directors have not been properly maintained;
• a director authorises or permits a distribution or dividend in breach of the Companies Act;
• a director knowingly or wilfully authorises or permits a payment out of capital for a redemption or purchase of the company's own shares when the company is insolvent;
• there has been a failure to provide certain information to specified persons as required by the Companies Act;
• a director makes or authorises a false annual return to the Registrar; or
• an exempted company has carried on business within the Cayman Islands.

Additional duties for segregated portfolio companies

Directors of an exempted segregated portfolio company (SPC) have additional duties and liabilities, including:

• the duty to establish and maintain the segregation of each portfolio's assets from those of other segregated portfolios and from the general assets of the SPC; and
• the duty to ensure that the SPC states the capacity in which it is contracting in relevant transaction documents.

Breach of duty by directors

A director who fails in his or her duties to the company may have unlimited liability for the company's loss, even without having made any personal gain. Directors may also be directly accountable to third parties for loss or damage suffered as a result of their actions, omissions or information they supplied.

Where a director breaches a fiduciary duty or the duty of skill and care, he or she will be liable to civil action by the party to whom the duty is owed, most often the company, for any loss suffered, undisclosed profit made or advantage taken. The company may consider it appropriate to ratify the breach after the event, which is permissible in certain circumstances, or may take action to obtain:

• an injunction restraining the director from carrying out or continuing the action that constitutes the breach;
• damages by way of compensation where the director's action is negligent;
• restoration of the company's property, provided it does not prejudice an innocent third party, where a fiduciary duty has been broken and assets misappropriated;
• an account of profits made by the director;
• rescission of a contract in which the director had an undisclosed interest; or
• dismissal of the director.

Under the Companies Act (As Revised), liquidators also have a wide range of powers to take action against directors who have acted in breach of their duties. The liquidation process for funds is described in our guide to Cayman fund liquidation and CIMA deregistration.

Where Bell Rock fits

Bell Rock Group is licensed by CIMA as a company manager under the Companies Management Act (As Revised) and is subject to CIMA's supervision described above. It provides independent directors to hedge funds, venture capital, private equity, real estate and digital asset funds, investment and governance committees and regulated investment management entities. Directors are named individuals registered with CIMA under the Directors Registration and Licensing Act (As Revised), who act in their personal capacity, are not affiliated with the fund's manager or administrator, and take a limited number of board positions. Their profiles are on the Bell Rock team page, and board administration is supported through Bell Rock's board support and company secretary service.

Frequently asked questions

Do Cayman fund directors have to live in the Cayman Islands?

No. There are no residency requirements for directors of Cayman investment funds, although professional independent directors are commonly appointed from regulated Cayman firms.

Is a CIMA-registered director regulated by CIMA?

Registration or licensing under the Directors Registration and Licensing Act (As Revised) is mandatory for directors of covered entities, but it is not the same as the supervision that applies to a licensed company manager, which includes inspections, enforcement and administrative fines.

Who do Cayman fund directors owe their duties to?

To the company as a whole, not to individual shareholders. Where the company is insolvent or of doubtful solvency, directors must also consider the interests of the general body of creditors.

Can a director rely on the investment manager and administrator?

Yes, in the absence of grounds for suspicion, but delegation does not absolve a director of the duty to supervise the delegated functions.

What happens if a Cayman director breaches their duties?

The company can seek an injunction, damages, restoration of property, an account of profits, rescission of a contract or dismissal of the director, and a liquidator can bring claims against directors in breach.

Related reading

• Crypto fund governance priorities for independent boards
• Governance across a Cayman master-feeder fund
• Cayman fund audit requirements and extensions
• Setting up a Cayman fund management company
• Independent Directors: What Allocators Expect from Cayman Fund Boards
• Directors Registration and Licensing Act: Who Must Register and How
• Changing Directors of a CIMA-Regulated Fund: Filings and Timing

To discuss a board appointment, see Bell Rock's independent director services.