The impact on the Cayman Islands, BVI and Bermuda jurisdictions following the "momentous" decision of the UK Supreme Court in relation to directors' dutiesDownload pdf
The Cayman Islands, BVI and Bermuda are frequently the jurisdiction of first choice for the incorporation of companies with commercial and other interests in other countries.
However, as common law jurisdictions which generate a much smaller body of case law compared to say England, the Cayman Islands, BVI and Bermuda pay particular heed to the decisions of other common law jurisdictions, in particular England.
The decisions of the English courts are not binding on these jurisdictions (save in respect of decisions of the UK Privy Council on appeal from the respective jurisdiction). However, these decisions are persuasive, particularly so when issued by the UK Supreme Court.
One such case is the recent decision of the Supreme Court in BTI 2014 LLC v Sequana SA and Others (Sequana). The judgment is described by one of the judges, and subsequently much-heralded, as "momentous" and confirms the existence of the common law duty of directors to have regard to the interests of the company's creditors where the company is insolvent or is approaching insolvency (the creditor duty), and clarifies what that duty entails and when it is triggered.
In Sequana, the UK Supreme Court considered for the first time and confirmed the existence of the creditor duty and further clarified that it is not a free standing duty owed directly to creditors. Rather, it falls within the duty owed by the directors to act in good faith in the interests of the company. While solvent, the directors must have regard to the shareholders in exercising the duty.
However, as the company nears insolvency, the directors' duty to the company is modified such that they must also have regard for the company's creditors. With respect to when the (modified) duty arises, the Court determined that the duty is engaged when the directors know or ought to know that the company is insolvent or bordering on insolvency (pushing the trigger point back from the Court of Appeal's formulation).
This article was originally published by Westlaw Today.
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