From a legal perspective a limited company is a fundamentally distinct legal entity. When such an organization incurs debts or takes on contractual obligations it’s the company that is responsible as opposed to the individual shareholders and directors of the company. But when it comes to directors there’s an important caveat to this principle of limited corporate liability: on taking office, directors assume certain duties toward the company. If they breach these duties they could face personal consequences. At ParrisWhittaker in the Bahamas we have a specialist team of corporate lawyers, and we advise on all aspects of company and commercial law. In this article we look at the most common types of corporate vehicle used by businesses in the Bahamas, we examine the main duties of company directors, and we consider a recent case from the UK that highlights the high standard individual directors are held to in terms of their legal duties.
WHAT ARE THE MAIN BUSINESS STRUCTURES IN THE BAHAMAS?
We help local and international businesses establish effective corporate structures. In the Bahamas the three principal ways to run a business are through:
Companies set up under the Companies Act, 1992
International Business Companies (IBCs) set up under the International Business Companies Act 2000 (
Partnerships set up under the Partnership Act, 1904
IBCs are used mainly by international investors. They are relatively straightforward to incorporate, flexible to administer and corporate governance compliance is less onerous than with other, more traditional companies.
DIRECTORS DUTIES AND LIABILITIES
In their capacity of company director, individuals should act honestly, in good faith and should only make decisions that are in the best interests of the company.
Specific duties of a director include:
Acting in good faith
Exercising powers for their proper purpose
Not exceeding powers
Avoiding conflicts of interest
In summary, a good yardstick when assessing the actions of directors is to consider whether, in performing his or her role a director has shown the same care, diligence and skill that a reasonably prudent person would exercise in the same circumstances. As we observed in an earlier article great care should also be taken by company officers when engaging agents to perform functions that would ordinarily be carried out by members of the company.
TMG BROKERS LTD (IN LIQUIDATION)
The 2021 English High Court case of TMG Brokers Ltd – which is of highly persuasive authority in the Bahamas – is a useful illustration of what happens when directors take their eye off the ball. It shows that a director who delegates a particular function to another is not absolved from his own duties as a director in respect of those functions.
The case concerned a number of significant payments made out of company funds by one director (Mr. Madu). Some of these payments were paid directly or indirectly to another director (Mr. Staines). When the company became insolvent (partly as a result of the disputed payments) the liquidator sought repayment of the monies on the basis that they had been made without proper authority and were in fact disguised distributions of capital.
Mr. Staines argued that he had understood the monies he had received from Mr. Madu represented payment of his salary and repayment of legitimate expenses. And to his credit, when he discovered proper provision had not been made for the payments in the company accounts he repaid the money. His case was that Mr. Madu had ultimate control of the relevant bank accounts and that he (Mr. Staines) had not been asked to consent to the payments. In the circumstances he maintained that he should be released from any personal liability.
The High Court disagreed and found in favour of the liquidators: the payments had been made without proper authority and did amount to disguised distributions of capital. Despite the fact that Mr. Staines had put his trust in his co-director Mr. Madu did not remove his obligation to comply with his duties as a director.
COMMENT
It’s important to note that directors can rely on another director to perform certain functions without falling foul of the duty to exercise due diligence in the way Mr. Staines was found to have done. Indeed in the case we’ve just discussed the court was ‘sympathetic’ to the position Mr. Staines found himself in. The judge didn’t think Mr. Staines was dishonest. Instead he had acted naively and in some respects negligently. But the court was unable to overlook the fact that if he had even exercised reasonable skill and care, he would, at the very least, have seen that the actions of Mr. Madu were likely to deplete company funds to an extent that the business would not be able to meet its liabilities.
At the end of the day Mr. Staines had agreed to be appointed as a director of the company but subsequently failed to exercise any meaningful oversight of the Company’s finances.
In summary the TMG case demonstrates that directors can’t afford to adopt a passive approach to fulfilling their duties. Individual directors can face legal claims and judicial sanction even in the absence of any wrongdoing on their part. This is why it’s crucial to ensure your company has the right procedures in place to ensure all officers comply fully with their responsibilities. Our corporate lawyers can also review your business structures to ensure that you are using the most appropriate legal entity for your particular operation.
CONTACT US
If you are unclear about the extent of your liabilities as a director or your company requires advice on any corporate governance issues please schedule a meeting with a lawyer at ParrisWhittaker today.
