Company Directors' Duties in Gibraltar Law: The Case for Caution

By Daniel Benyunes, Barrister at Charles Gomez & Co

The role of a company director, whether executive or non-executive, comes with profound responsibilities that cannot be overstated. Directors are fiduciaries, entrusted with the stewardship of a company's operations and bound to exercise their powers in the interests of the company, and sometimes, even the interests of third parties dealing with the company in good faith.

The law relating to directors' duties has been clarified and defined over the years, with the recent statement of law made by the UK Supreme Court in the case of BTI 2014 LLC v Sequana S.A. [2022] UKSC 25. While the Gibraltar Companies Act 2014 provides the primary statutory framework, UK decisions remain at least highly persuasive and often binding given Gibraltar's adherence to the Common Law and principles of judicial precedent.

The law places great emphasis on a director's obligation to ensure that a business is run with rigour, care, and diligence. It is far removed from just being a position of prestige and is one of substantive accountability. Directors must keep themselves fully informed of all relevant matters concerning the company’s operations and affairs. This extends beyond passive engagement; it involves active interrogation of co-directors' decisions and professional advisers’ recommendations. Any concerns, particularly about potential shortcomings must be expressed to the board in writing and followed up rigorously.

The Companies Act 2014 contain a number of specific administrative duties such as the requirements to make statutory filings, file accounts and maintain statutory registers.

However, it is in the Common Law duties where substantive and strict obligations reside. Failures in this area can be expensive and on occasion, life-changing for those who can, sometimes even inadvertently find themselves on the wrong end of an action for negligence or regulatory sanctions.

It is well to start with a high-level overview of some of those duties.

The duty to act within established powers

Directors are bound by the company’s constitutional documents—its memorandum and articles of association—and must act within the confines of these instruments. Directors are prohibited from using their powers improperly for personal gain or for any purpose outside the scope of their legal mandate. Deviations can lead to legal claims for misconduct or worse.

The duty to promote the company’s commercial success

This is without doubt pivotal to the performance of a director’s duties, requiring all decisions be made carefully, competently and in good faith for the benefit of the company as a whole and, potentially also for creditors, i.e. those who have put themselves in a position of potential detriment by relying on a company’s promises. Directors must have regard to a range of factors, including the company’s long-term viability, the interests of its employees, and its reputation. Where a company is in financial stress which could reasonably lead to insolvency, i.e. its inability to pay its debts when they fall due, the scope of this duty can extend far and wide and encompass third parties. This exacting duty requires vigilance and a close monitoring of activities. Directors are the people with the closest connection to the running of a company and the proverbial buck stops with them. In extreme cases, there might be a risk of criminal liability as well as civil liability. An example of this is the offence of trading whilst insolvent.

The duty to exercise independent judgment

Even when a director sits on the board of a group of companies, their duty is owed to each company individually. Directors must not blindly follow the instructions of others or be unduly influenced by them—whether they be promoters, fellow directors, shareholders, or professional advisers—but must exercise their own independent judgment. While seeking expert advice is certainly required, the final decision rests with the director, and he or she must act independently.

The duty to apply reasonable care, skill, and diligence

This duty sets both an objective and a subjective standard. A director must exercise the level of care, skill, and diligence that would reasonably be expected of someone carrying out their functions. Executive directors, given their involvement in day-to-day management, may be held to a higher standard than non-executive directors. However, non-executive directors should not think this as any form of exemption from their duty. NEDs must remain actively involved in the company’s affairs and not simply function as passive attendees at board meetings. The whole purpose of an NED is to provide independent oversight and bring external expertise to the company, and as such, they bear significant responsibility. In reality, a person who has no experience or expertise or other value to offer the company should not agree to accept such a position except in a company which is engaged in the kind of business that will not expose it to moderate to high-level risk.

Duty not to accept benefits from third parties

Directors must not allow their position to be exploited by accepting any benefits, financial or otherwise, from third parties without declaring them to the company and obtaining express sanction. This prohibition is particularly important in industries prone to conflicts of interest. Transparency and integrity are paramount.

Declaration of Interests

Transparency is an essential requirement to good corporate governance. Directors must declare any interest in proposed transactions or arrangements involving the company. This duty ensures that potential conflicts are disclosed at the earliest opportunity, allowing the board to assess the transaction in the interests of the company without the taint of undisclosed conflicts.

Compliance; governance and financial crime

Modern corporate governance is very highly impacted by the stringent rules which apply in terms of compliance not just in areas which are regulated (i.e. most areas of business) but also where money transactions take place (i.e. every area of business).

Good governance is not optional. Each director must ensure compliance with anti-financial crime measures and to maintain the highest standards of transparency and independence. The fact that other directors may be lax in the way that they operate will not absolve the others. Each director owes their duties independently of the others.

The Gibraltar Financial Services Commission (GFSC) regularly issues guidance on governance best practices and enforces compliance with legal and regulatory obligations. Directors in regulated sectors must remain current with the GFSC’s directives to mitigate risks associated with corporate governance failures. Even directors in other fields should regularly consult the GFSC website which aims to bring the business community uptodate with best practices and risks to look out for.

Investigations and the role of directors

Directors must always be ready to respond to investigations whether internal or external, relating to all aspects of a company’s business. Keeping detailed written records of all the company’s business, decisions and transactions is of paramount importance.

They must be prepared to provide detailed explanations of the company’s management practices. There is a delicate balance to be maintained between transparency and protecting the company’s interests during such investigations, and independent legal advice is critical.

Minutes and records

Save in relation to day-to-day affairs, all discussions and decisions relating to the company’s business should be comprehensively recorded in correspondence, minutes and file notes.

It could be said that the most important person in attendance at a directors’ meeting is not the go-getting CEO or the young up and coming salesman, or even the accountant, auditor, or lawyer, but the minute taker. Every word uttered in a Board meeting can come back for scrutiny and it is therefore essential that minutes are carefully taken, and drafts circulated and re-circulated until all are satisfied that they reflect exactly what has been said. Where a director is not happy with the contents of a minute or a resolution, they must say so in writing and stand their ground.

Consequences

Breaches of directors’ duties can bring very adverse consequences. Directors who are found to have breached their fiduciary or statutory obligations may face claims from the company, its shareholders, or liquidators, particularly where creditors’ interests are compromised. Remember that where there is a risk of insolvency, shareholders cannot ratify director’s decisions which impact on third party rights, interests and legitimate expectations.

A simple guide to prospective and current directors

Before accepting a directorship, it is essential to conduct thorough due diligence on the company, its business, and its key stakeholders. Engaging with the company’s advisers, scrutinising financial statements, and seeking independent legal advice must be non-negotiable steps in the process.

For those already serving as directors, vigilance and pro-activity are crucial. If there are concerns about the company’s solvency, governance practices, or compliance with legal obligations, it is imperative to seek independent legal advice at the earliest opportunity and to act assertively.

Conclusion

The position of director carries substantial legal obligations and risks. However, for those willing to meet the challenges with the necessary skill and diligence, the role offers the opportunity to shape corporate strategy and governance. The key to success lies in maintaining an unwavering commitment to the highest standards of care, skill, and transparency.

This article is meant to serve as a stark reminder of the risks and responsibilities inherent in the role of a company director. By adhering to these legal and common-sense principles and exercising prudence, directors can ensure that their office is a source of financial and professional reward and not risk. Despite protestations in legal precedents that directors will not be judged with the benefit of hindsight, they often are.

There follows a non-exhaustive list of helpful pointers:

1. Before accepting a directorship, be sure to do your homework as to the nature of the business and the histories of its promoters, shareholders, directors (past and present), any shadow directors and advisers – ask around.

2. Insist on obtaining a written overview of the current state of the company including recent, substantial or intended transactions. If a company is about to enter into a major transaction around the time of your appointment, do not accept the position until you have had a full account of the transaction including associated legal advice and assurances.

3. There should be no objection to your pre-appointment of your questions on account of commercially sensitive information since this can be preserved by the company’s own due diligence on you and the execution of a properly drafted non-disclosure agreement (NDA). Remember that a bona fide company will appreciate your diligence and if they are not willing to candidly share information with you, they might not be the right fit for you.

4. Ask to talk to the company’s internal accountants, external auditors, solicitors and other advisers in a formal venue to get a feel for the way in which the business is run.

5. Check the company’s audited accounts for previous years.

6. When negotiating the terms of your contract of engagement, make sure that you have independent legal advice and that your lawyers send the company a list of pre-contract enquiries and consider the answers carefully. An experienced lawyer will be able to craft a suitable list of questions.

7. If you are already the director of a company and have concerns, seek urgent independent legal advice as to how to proceed.