As companies continue to adjust to operating under the various regimes put in place by both the States of Guernsey and governments globally in response to the COVID-19 pandemic, and even now look forward to how and when restrictions may be eased, the Guernsey Financial Services Commission (the GFSC) has issued some timely guidance on matters they believe directors should give particular regard to when undertaking their role as such. In particular, this guidance warns against the upstreaming of "excess capital or liquidity" by a Guernsey entity to its parent, which might result in greater vulnerability for that entity or, in the case of a Guernsey licensee, a breach of any applicable conditions regarding financial resources.
The recent guidance also acts as an important reminder for the directors of financial services businesses based in Guernsey that they must continue to have regard for the various duties that they may owe a company by virtue of holding a position as a director of such an entity, even in these extraordinary times.
The new guidance, which was issued at the end of March, specifically reminds directors of:
"the requirements regarding financial resources, both capital and liquidity as required by various rules of the commission".
The guidance goes on to state that:
"the commission would expect directors in these challenging times to be acting appropriately before making decisions to issue dividends, upstream excess capital or liquidity, [entering into] intercompany loans or any other decision that materially financially weakens the local business, being mindful that they may not be in a position to have full and perfect information coupled as well with their duties towards their own company."
In order to help our clients navigate the often uncertain waters associated with correctly exercising their various duties, including fiduciary ones, the below sets out some general guidance for directors and companies contending with these issues during this time.
General duties and responsibilities of a Guernsey director
Each director of a Guernsey company owes certain fiduciary duties to that company. These duties are owed to the company itself and not to any individual shareholder, to the shareholders as a group nor, except in certain limited circumstances, to the creditors of the company. Key among these duties are the requirements for a director to act in good faith, to act in the interests of the company, to exercise their powers for a proper purpose and to keep the company's confidence.
It is well-documented that Guernsey's companies law - The Companies (Guernsey) Law, 2008 (as amended) (the Companies Law) - does not attempt to codify the duties and liabilities of a director, rather Guernsey law draws heavily on the English common law duties (being those in place pre-English Companies Act 2006) owed by directors to the companies to which they are appointed. The Guernsey law duties were most recently set out in a the judgment handed down in the well-publicised Carlyle case. A more detailed discussion of these issues can be found here.
In addition, the Companies Law places further obligations on the directors in relation to certain corporate acts, most notably in the form of invoking personal liability on the part of a director should they pass the solvency test for a company without genuinely believing that the company is in a positon to do so.
Director duties and the most recent GFSC guidance
When considered in the context of the current circumstances and of the GFSC's latest guidance, directors of Guernsey companies, especially those licenced by the GFSC, should take into account the following considerations, amongst other things, as part of their decision making process:
- directors should make sure that they take into consideration the full range of external circumstances before undertaking certain corporate actions. This should include the considerable uncertainty that exists currently, which may have a disproportionate impact on the company's financial position;
- the directors owe their duties to the company itself and not to the shareholders, either individually or collectively. The directors should therefore resist any pressure from other members of the company's group to act in the best interests of the group as a whole if such action would be detrimental to the company unless there is a clear rationale for doing so in the long term;
- when considering matters such as the solvency test, directors should exercise caution in relying on financial statements that were prepared and signed off too long ago as these are unlikely to give an accurate representation of the company's current financial position. Provided that the directors are satisfied that they are accurate, it may be more appropriate to consider financial statements that are in the process of being signed off or audited as these are likely to give the directors a better indication of the company's solvency;
- the current climate and the recent GFSC guidance do not necessarily act as a bar to Guernsey companies undertaking actions such as declaring dividends, entering into intercompany loans or upstreaming excess capital or liquidity. Rather, directors need to be certain that any such action is in line with their various duties to the company and will not put the company at risk of breaching the conditions of any licence that it may hold from the GFSC when taking into consideration the additional uncertainty that exists at the moment; and
- the current circumstances reinforce the importance of directors voicing their thoughts, considerations and reasoning behind any decision at the relevant meeting and in ensuring that these are full documented in the minutes of any such meeting. Most importantly, directors should make sure that they remember their duty to act independently and, where they have concerns or disagree with a course of action, ensure that these are expressed and fully taken into account in the decision making process.
Originally published 30/04/2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.