The blame game

Guernsey is revisiting its laws on company directors following the Enron collapse, but it is unlikely to adopt a statutory code of practice. Alison Ozanne and Doug Hayter report

As the corporate world awaits the sentences for Enron’s founder Kenneth Lay and former chief executive Jeffrey Skilling after the guilty verdicts returned on 25 May, the issue of how best to regulate the actions of directors and officers of companies continues to be debated by legislators around the globe.

It is likely that Guernsey’s decision not to adopt a statutory code will leave directors, and their insurers, with a diminishing body of case law from which to seek guidance for the proper performance of a director’s duties. Some compensation, however, may be found in Guernsey’s proposals to allow companies to indemnify their directors in a wider range of circumstances.

The situation
The collapse of several large companies, including Enron, has been followed by public criticism of, and often legal proceedings against, directors and officers of those companies.

Even if the directors are later exonerated, the damage to their professional reputation from such proceedings is often irreversible, not to mention the personal and financial strain that such scrutiny inevitably causes.

Where directors are found guilty, the penalties can be extreme: former Worldcom chief-executive Bernard Ebbers was sentenced to 25 years in jail for his part in the $11bn (£6.9bn) fraud perpetrated by the telecoms giant.

At 63, this will probably mean he will spend the rest of his life in prison. This can be compared with the 20-year sentence imposed on John Walker Lindh for aiding the Taliban. There is, therefore, an acute need for all parties to know where the law stands on this issue.

Both Guernsey and the UK are looking at reforms to directors’ duties and the enforcement of those duties. However, while the timing is the same, the approach being taken by the two jurisdictions is not.

The UK
The March 2005 UK white paper, ‘Company Law Reform’, proposed that a statutory code of directors’ duties (similar to that found in Australian and New Zealand company law legislation) should replace both existing common law duties and any equitable duties. Seven general duties will be imposed:
#to act within the company’s powers;
#to promote the success of the company;
#to exercise independent judgment;
#to exercise reasonable care, skill and diligence;
#to avoid conflicts of interest;
#not to accept benefits from third parties; and
#to declare interests in proposed transactions or arrangements with the company.

Responses to the white paper have been received and a draft Company Law Reform Bill was introduced to the House of Lords on 1 November 2005 and brought forward to the House of Commons on 24 May 2006.

The wording of the Company Law Reform Bill is currently on the House of Lords section of the UK Parliament’s website, with the relevant sections for directors’ duties at clauses 156-167.

The Department of Trade and Industry expects the bill to get royal assent by late 2006, with the bill coming into force not earlier than April 2007.

The Guernsey regime
Under Guernsey law, company directors and officers may be exposed to both civil and criminal liability for actions purportedly taken on behalf of a company.

The regime which governs the duties and liabilities of directors and officers is an amalgam of elements which reflect the number of different roles that directors and officers play: a director or officer is in a position of trust within the company and is therefore bound by general fiduciary duties.

Directors and officers are also not acting on their own behalf, but on behalf of the company and so are bound by the rules of agency. They are also bound by additional duties established by both statute and case law.

The statutory provisions relating to Company Law are more limited in Guernsey than in the UK. Judge-developed case law therefore continues to play a vital role in defining the duties owed under Guernsey law.

In contrast to the UK, Guernsey’s Department of Commerce and Employment green paper, published in July 2005, outlined proposals for reform of Guernsey’s existing company law but rejected the suggestion that a code of directors’ duties should be adopted in Guernsey.

The report concluded that following consideration of a general codification, it would be preferable to retain the benefit of English and Commonwealth case law on directors’ duties.

Responses to Commerce and Employment’s green paper were requested by 30 September 2005. The States Law Drafting Officer is currently working on these proposals in the light of responses received, but there is no suggestion that codification will be adopted. It is expected that the law will be enacted in mid to late 2007.

The future
In the short term, the UK can expect a flurry of case law on the interpretation of the seven proposed general duties. Such case law may well provide a useful source of information for Guernsey lawyers, as English courts seek to describe what the position was in common law before turning to the changes introduced by the Company Law reforms.

However, there is a danger that as time passes, it will become more difficult to find common law cases that are applicable to a regime of non-codified directors’ duties, such as Guernsey proposes retaining.

It would seem that this will make the job of those advising Guernsey’s directors harder, as there will be fewer relevant cases discussing new problems in what is a constantly changing area. However, not for the first time, Guernsey may in the end benefit from seeing how the UK reforms play out in practice and retaining its freedom to adopt the best of them. n
Alison Ozanne is a partner and Doug Hayter an associate at AO Hall