Directors’ Duties – “Upstreaming” and capital adequacy requirements

On 27 March 2020, the Guernsey Financial Services Commission (“GFSC”) issued a cautionary note in respect of upstreaming (https://www.gfsc.gg/news/article/directors-duties).

Upstreaming meaning the flow of resources, such as cash and other liquid assets, from a subsidiary up to a parent company may at first glance appear innocuous enough, but the sinister undercurrent that the GFSC’s press release seeks to address, and the words of warning that should be properly considered by local directors, relate to the systematic removal of assets from this jurisdiction.

In these extraordinary times, local directors may well be placed under pressure to transfer assets, declare dividends, provide intercompany loans or take other steps to support the finances of a parent company but which will weaken the financial standing of the Guernsey companies, and therefore caution is needed.

It is not the purpose of this article to consider director duties in any great detail, but broadly speaking directors must, amongst other things: (i) act honestly, and in what the director considers to be the interests of the company; (ii) balance the long and short term concerns of the company and in doing so, act in the best interests of the company as a commercial entity; and (iii) keep well in mind that the interests of the group and their local company may not necessarily be aligned.

Furthermore, in Guernsey, there are a number of statutory duties to adhere to and for certain regulated entities, capital and liquidity requirements.

On each occasion a director performs their daily tasks, they must ask themselves whether they have complied with their duties, and if unsure, stop. Take no further action. Seek professional advice.

A breach of duties that leads to insolvency can create personal liability for directors with severe financial implications. Moreover, a breach of duties can lead to fines and prohibitions imposed by the GFSC, the former will not be covered by insurance and the latter may dictate that a director leaves employment with few alternatives.

In addition the GFSC has stated that it will be increasing its financial stability monitoring work and expects companies to manage their financial and operational resilience including actively managing their liquidity. The GFSC emphasises that directors or partners of firms remain responsible for ensuring high ethical standards of behaviour during the coronavirus episode, as at any other time.

The arising consequences of breaching certain duties relating to finances can mean that a director may not immediately realise the impact, nor might the investigation swiftly follow. There can be no mistake, however, that the risks are real, the consequences potentially life altering, and if in doubt the only answer can be to take professional advice.

Ferbrache & Farrell LLP fields a strong team of dedicated advocates, with a multi-jurisdictional approach and proven track record in dealing with GFSC investigations, together with advising companies and directors of their duties and as to what steps might be taken before the damage is done.