Directors duties and good governance. The
challenges and duties of directors, including non-
executive directors, from an offshore perspective
Eleanor Morgan, Head of Litigation, BVI

Directors’ Duties
• How do they arise?
• Who owes them?
• To whom are they owed?
• What are they? (Looking at fiduciary and non-fiduciary duties)
• What are the consequences of a breach?
• Can liability for breach be excluded by contract?
• Focusing on two challenges for offshore directors:
– Delegation of duties/Supervision – when to step in
– When might an indemnity or exclusion clause not save you?
Slide 2Eleanor Morgan

Sources of Directors’ Duties
Slide 3
Common
Law
Statute
Directors’
Duties
Regulation
Articles Contract
Eleanor Morgan

Who owes the duties: what is a “director”?
• Titles largely irrelevant
– Executive
– Non-executive
– De facto
– Alternate
– Nominee
Slide 4Eleanor Morgan

Directors’ Duties: To Whom Are They Owed?
• Owed to the company only, not to individual shareholders
– Only the company can bring a claim against its directors for loss
suffered by the company. Absent a derivative action, the
shareholders have no direct claim against the directors for that loss
(“the Rule in Foss v Harbottle”)
– Contrast position where in an insolvency context
• Directors can act in such a way as to incur duties to others
Slide 5Eleanor Morgan

Directors’ Duties: What are they?
• Fiduciary
• Non-fiduciary i.e. the duty of care, skill and diligence
Slide 6Eleanor Morgan

Fiduciary Duties
• Fiduciary duties arise out of a trust relationship
• An obligation to act for another’s benefit (in priority to your own interests)
• Developed by case law
• Go to honesty, loyalty and good faith/integrity, not competence
• Deliberately harsh penalties to encourage discharge of trust obligations
Slide 7Eleanor Morgan

Slide 8
NO SECRET
PROFITS
NO
FETTERING
DISCRETION
CONFIDENTIALITY
NO CONFLICTS OF
INTEREST
DECLARE
INTEREST LOYALTY
INDEPENDENT
JUDGMENT
PROMOTE
SUCCESS OF
THE
COMPANY
NO
MISAPPLICATION
COMPANY’S
PROPERTY
NOT
EXCEED
AUTHORITY
FAIR
DEALINGS
BETWEEN
SHAREHOLDERS
ACT WITHIN
ARTICLES
OR
CONSTITUTION
Directors’ Fiduciary Duties
HONESTY
Eleanor Morgan
GOOD
FAITH
POWERS
FOR
A
PROPER
PURPOSE

Duty to Avoid Conflicts of Interest
Slide 9Eleanor Morgan

Slide 10Eleanor Morgan
Avoiding Conflict
• Nominee directors
• Section 120 BCA
– Joint Ventures, wholly owned subsidiaries
– If expressly permitted by the company’s memorandum and articles of
association

Conflict – disclosure of interests
• Section 124 BCA
– Disclose interest to the board
– Can still vote
– Failure to disclose:
• USD$10,000 fine
• transaction voidable
– Conflict with section 31 BCA?
Slide 11Eleanor Morgan

Non Fiduciary duties
• A director must exercise reasonable care skill and diligence
• Codified in section 122 BCA
• Both an objective and subjective test
• Primarily the duty is concerned with competence
• Terms of employment or service contract may be relevant
• Directors are not held liable for mere errors of judgment
Slide 12Eleanor Morgan

Duty of Care, Skill and Diligence
• Directors are expected to:
• …exercise the care, diligence, and skill that a reasonable director would
exercise in the same circumstances taking into account, but without
limitation
– The nature of the company;
– The nature of the decision; and
– The position of the director and the nature of the responsibilities
undertaken by him.
(section 122 BCA)
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Slide 14Eleanor Morgan
Care, Skill and Diligence
• Not expected to have expertise to monitor sophisticated trading
techniques in a direct hands on manner, but individual experience is
relevant
• Expected to satisfy themselves that service providers complying with
scope of tasks delegated to them i.e. investment manager complying with
investment criteria and restrictions and that no functions being left
undone
• Expected to satisfy themselves of financial position of company to perform
an overall supervisory role

Delegation and Supervision
• Permitted if provided for by the articles of association
• Suitable persons: competent and trustworthy
• Directors can delegate functions, but they cannot delegate duties
• Directors retain a residual duty of supervision
o Systems for checking the performance of delegated functions
o Sufficiently informed about the business of the company to
understand warning signals which the supervisory system generates
• Limits of section 123 BCA
Slide 15Eleanor Morgan

What factors will the Court consider?
Slide 16
The
company’s
articles
The type and
size of the
company’s
business
The
company’s
management
Allocation of
responsibilities
Specific role
Knowledge,
skill and
experience
Self informed
of the
company’s
business
Reliance
Extent of
delegation The delegatee
Supervision
And
monitoring
Any
exceptional
circumstances
Eleanor Morgan

Slide 17Eleanor Morgan
Weavering – English claim
• Dabhia and Platt were directors of WCUK which acted as investment
manager of the Cayman hedge fund
• Peterson was the “leading light” of the company
• The Cayman hedge fund collapsed leaving claims against WCUK of
USD530,000,000
• Peterson had covered up huge losses in derivative trading through interest
swap transactions with worthless company under his control
• The losses had only become exposed after the collapse of Lehman in
September 2008

Slide 18Eleanor Morgan
Weavering – English claim
• Dabhia and Platt both argued that they were entitled to rely upon
Peterson who was a plausible liar with a charismatic personality and who
had an answer for everything
• Court held that had they probed the information that Peterson had given
them then they would have seen that his answers were deficient
• The Court found that the directors had no real answer for what they did
other than that they trusted Peterson implicitly
• Directors found LIABLE for breach

Slide 19Eleanor Morgan
Weavering – Cayman claim
• Cayman hedge fund listed on Irish Stock Exchange sued directors in Cayman
• Directors were close relatives of Magnus Peterson who controlled WCUK
• Signed documents without reading them, or without applying mind to contents
• In 6 years only ever spoke to Peterson, never anyone else, no agendas for board meeting or
proper minutes
• Accounts etc. signed without any inquiry whatsoever, fictitious minutes of meetings that never took
place
• Directors were found to have subordinated themselves to Petersons wishes – went through the
motions of acting as directors to keep him happy, but never applied their minds “for a moment” to
the company’s business
• Court at first instance held that directors knew they had supervisory duties but chose not to fulfil
them

Slide 20Eleanor Morgan
Madoff claim – London
• Claims against the directors of MSIL, which Bernie Madoff owned all but one share
• Claims related to certain payments to Mrs Kohn [allegedly Madoff’s “criminal soul
mate”] for advisory services, for interest paid on allegedly unnecessary loans and
payments to Madoff and family for personal expenses
• The claim was that the services provided by Kohn were worthless and not worth the
USD27m paid to her, that MSIL had paid unnecessarily USD14m in interest on loans
from Madoff it didn’t need.
• The claim was also based on payments to Madoff and family for yachts, cars and
credit card bills etc in the sum of about £5m.

Slide 21Eleanor Morgan
Madoff claim – London
• A director is not in breach of his core duty to act in what he considers in
good faith to be the interests of a company simply because if left to
himself he would do things differently. Mr Raven regarded Bernard Madoff
as a friend of many years standing whom he trusted and respected; he
would express his views to Mr Madoff candidly; sometimes his views
would prevail and he would persuade Bernard Madoff to his course, but on
other occasions if they could not agree on matters relating to the
business, he would defer to Bernard Madoff's views

Slide 22Eleanor Morgan
Madoff claim – London
If left to himself, Mr Raven would have done things differently, at least from
2003 when he focused on the payments. But he was entitled to go along with
them and treat them as being in the interests of MSIL, as he honestly did, in
the light of his belief that they were cost neutral to MSIL and that Bernard
Madoff wanted them to be paid and regarded the research as of value. There
was no breach of duty in his deferring to the views of Bernard Madoff. This is
not a case of a director allowing himself to be dominated or manipulated by a
dominant director in a way which involved a total abrogation of responsibility.
It is a case of a director honestly and reasonably deferring to the views of a
fellow director with whom he disagreed but whom he was entitled to treat as
having greater wisdom and experience.

Slide 23Eleanor Morgan
Centro claim– Australia
• ASIC v Healey [2011] FCA 717 involved claims against directors of the
Centro Group
• Public company – claim related to deficiencies in published financial
information to investors which were the directors’ responsibility under
company law
• Board had relied heavily upon the company’s auditors who had not raised
any concerns
• Court found the directors liable – they could not substitute reliance upon
advice from others for their own attention and examination of important
matters falling within their responsibilities

Consequences of a breach of a fiduciary duty
– Injunction
– Rescission/setting transaction aside
– Forfeiture of fees/profits
– Duty to account
– Equitable compensation – causation rules
– Ratification sometimes possible
Slide 24Eleanor Morgan

Exculpatory Clauses and Indemnities: Get out of
jail free?
• A contractual right to be relieved of liability or indemnified for any losses
• Exculpation clauses - not for fraud/wilful actions or neglect
• Section 312 BCA – subject to a company’s memorandum and articles,
directors’ indemnities are permitted, but only if the director:
– Acted honestly and in good faith and in what he believed to be in the
best interests of the company and, in the case of criminal
proceedings, the person had no reasonable cause to believe that his
conduct was unlawful
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Exculpation Clauses – when do they help?
Slide 26Eleanor Morgan
EXCULPATION CLAUSE
WERE THE DIRECTORS IN
BREACH OF THEIR DUTIES OWED
TO THE COMPANY?
NO YES
NO LIABILITY LIABILITY
DID THAT LIABILITY ARISE THROUGH THE
DIRECTORS OR WILFUL NEGLECT OR DEFAULT?
YES NO
NO EXCULPATION EXCULPATION

The Weavering Exculpation Clauses and
Indemnification Clause
Article 182 of Weavering’s Amended and Restated Articles of Association
stated:
Every Director, agent or officer of the Company shall be indemnified out
of the assets of the Company against any liability incurred by him as a
result of any act or failure to act in carrying out his functions other than
such liability (if any) that he may incur by his own wilful neglect or
default. No such Director, agent or officer shall be liable to the
Company for any loss or damage in carrying out his functions unless that
liability arises through the wilful neglect or default of such Director,
agent or officer. [emphasis added]
Slide 27Eleanor Morgan

Wilful Default
Wilful Default
• More than mere negligence or gross negligence
• A deliberate breach of duty, over and beyond negligence
Fraud
• An act motivated by dishonest intent – a positive act
So the Weavering directors were protected until they deliberately and
culpably breached their duties – at which point the protection fails and they
are liable
Slide 28Eleanor Morgan

Wilful Default – The Law
• Romer, J in re City Equitable Fire Insurance Company Limited, [1925] 1
Ch. 407
– Act or an omission is wilful where the person knows that what he is
doing is wrong and intends to do what he is doing.
– A person is guilty of a wilful breach of duty if
(1)the person knows that he is committing, and intends to commit a
breach of duty, or
(2)is recklessly careless in the sense of not caring whether his act or
omission is a breach of duty
Slide 29Eleanor Morgan

Wilful Default
Paragraph 12 of Andrew Jones J Judgment (Weavering first instance)
An Act, or an omission to do an act, is wilful where the person of whom we are speaking
knows what he is doing and intends to do what he is doing. But if that act or
omission amounts to a breach of his duty, and therefore to negligence, is the person
guilty of wilful negligence? In my opinion that question must be answered in the
negative unless he knows that he is committing, and intends to commit, a breach
of his duty, or is recklessly careless in the sense of not caring whether his act
or omission is or is not a breach of duty.
Two limbs:
• Knowing and intentional breach of duty, or
• Acting recklessly, not caring whether or not the act or omission is a breach of duty
Slide 30Eleanor Morgan

Any questions?
Slide 31Eleanor Morgan