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From a legal point of view, a limited company is a separate legal entity. When this kind of organization gets into debt or signs a contract, it is the company itself that is responsible, not the individual shareholders or directors. But there is an important exception to this rule when it comes to directors: when they take office, directors take on certain responsibilities for the company.
If they don’t do these things, they could get in trouble. In the Bahamas, we have a team of specialized corporate lawyers who can help with all kinds of company and business law. In this article, we look at the most common business structures in the Bahamas, the main responsibilities of company directors, and a recent case from the UK that shows how high of standard individual directors are held to when it comes to their legal responsibilities.
What are the Bahamas’ main business structures?
We help businesses in our area and around the world set up effective corporate structures. In the Bahamas, there are three major ways to run a business:
- Under the Companies Act of 1992, new businesses can be made.
- International business companies (IBCs) are formed under the International Business Companies Act of 2000. Partnerships are made under the Partnership Act of 1904.
IBCs are mostly used by foreign investors. They are easy to set up, easy to run, and less difficult to follow the rules for corporate governance than other, more traditional companies.
DIRECTORS’ DUTIES AND LIABILITIES
As a company director, a person should act honestly and in good faith, and they should only make decisions that are best for the company.
Some of the specific jobs of a director are:
- Having good intentions
- Using powers for what they were meant for
- Not going too far
- keeping from having competing interests
In short, a good way to judge the actions of directors is to think about whether or not they did their jobs with the same care, diligence, and skill that a reasonable person would use in the same situation. As we said in a previous article, company officers should also be very careful when they take on tasks that members of the company would usually do.
TMG Brokers Ltd. (in liquidation)
The 2021 case in the English High Court, which has a lot of weight in the Bahamas, is a good example of what can happen when directors lose focus. It demonstrates that a director who delegated a job to someone else does not abdicate his own responsibilities as a director for that job.
The case was about a director who used company money to make a number of large payments (Mr. Madu). Some of these payments went to another director, either directly or indirectly (Mr. Staines). When the company went bankrupt (partly because of the payments in question), the liquidator asked for the money back on the grounds that the payments were made without the right permission and were really disguised capital distributions.
Mr. Staines said that he thought the money he got from Mr. Madu was his salary and the money he owed for legitimate expenses. When he found out that the company’s accounts hadn’t been set up right for the payments, he did the right thing and gave the money back.
His argument was that Mr. Madu was in charge of the bank accounts in question and that Mr. Staines had not been asked for permission to make the payments. In the circumstances, he said that he should not be held personally responsible.
The High Court disagreed and sided with the liquidators, saying that the payments had been made without the right permission and were, in fact, disguised distributions of capital. Even though Mr. Staines had put his trust in his co-director, Mr. Madu still had to do what he was supposed to do as a director.
COMMENT
It’s important to remember that directors can rely on another director to do certain tasks without breaking their duty to act with due diligence as Mr. Staines did. In fact, in the case we just talked about, the court was “sympathetic” to Mr. Staines’s situation.
The judge didn’t think that Mr. Staines had been lying. Instead, he had been foolish and, in some ways, careless. But the court couldn’t ignore the fact that if he had even used reasonable skill and care, he would have at least seen that Mr. Madu’s actions were likely to use up so much company money that the business wouldn’t be able to pay its debts.
At the end of the day, Mr. Staines agreed to become a director of the company, but he didn’t do anything to keep an eye on the finances of the company.
In the end, the TMG case shows that directors can’t afford to be passive about doing their jobs. Individual directors can be sued and punished by the court even if they haven’t done anything wrong. This is why it’s so important for your company to have the right procedures in place to make sure that all officers do what they’re supposed to do. Our corporate lawyers can also look at how your business is set up to make sure you are using the best legal structure for your business.
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