Directors of Cayman Islands companies owe common law fiduciary duties to their company, including the duty to exercise their powers in good faith in the interests of the company and for a proper purpose. Directors may be sued by the company if they breach those duties. But what if the director’s actions and decisions are untainted by impropriety?
At common law, a director is in the position of a trustee, being a fiduciary custodian of the company’s property (Burnden Holdings (UK) Ltd. V. Fielding, UK Supreme Court 2018). Any decision taken in bad faith or outside the powers of the director or for an improper purpose will probably be void.
If the decision is within the powers of the director, taken for a proper purpose in good faith, but is mistaken in the sense that it fails to achieve its intended aim, under the principles of 1974 English case of Hastings–Bass v. IRC, the Court may intervene to set aside the mistaken decision if it is clear that the trustee would not have acted as he did if properly appraised.
Later English authority significantly limited the scope of Hastings-Bass, in particular by narrowing it to cases where the trustee had acted within its powers but in breach of trust. The doctrine of common law mistake could apply, but only where the mistake was of sufficient gravity (a fact sensitive consideration) and it would be unconscionable or unjust to allow the mistake to go uncorrected (a high hurdle to clear).
Directors have been held to fall within the Hastings-Bass principle both in England and in Cayman Islands (Ta-Ming Trust, 2010), by virtue of the fiduciary nature of their powers. It will be apparent that setting aside mistaken decisions of directors taken in good faith within their powers, can be problematic. The new Cayman Islands Trusts legislation (the Trusts (Amendments) Law 2019) will significantly reduce such problems, by affording a statutory basis for setting aside the mistaken exercise of a fiduciary power, in particular by conferring on the Court jurisdiction to set aside such a mistaken decision, whether or not the holder of the power was acting in breach of trust in taking that decision. The extent to which this new jurisdiction is resorted to in the case of directors, and its effectiveness, remains to be seen.