Guernsey Court Of Appeal Clarifies Directors' Duties And Regulatory Standards

A recent Guernsey Court of Appeal judgment sheds light on directors' duties and regulatory standards following sanctions imposed by the Guernsey Financial Services Commission (GFSC).

This appeal stems from the 2016 collapse of the Providence Group, a network of companies that solicited investor funds under the guise of high returns from the Brazilian debt factoring market but in reality operated a Ponzi scheme.

Following an investigation by the GFSC, sanctions were imposed in 2021 on certain individuals who were directors of Guernsey entities of the Providence Group at the relevant times.

The individuals appealed to the Royal Court, which in 2024 set aside some of the GFSC's findings and removed certain sanctions, remitting the matter to the GFSC for reconsideration.

The GFSC then appealed this decision, while the individuals cross-appealed. The Court of Appeal upheld the need for the Royal Court to remit the case for further review but identified additional matters requiring attention. Although the Royal Court's proceedings were held in private, the Court of Appeal determined that the current appeal should be heard publicly and its judgment published, citing the public interest in transparency.

The Court of Appeal's reasoning in the main judgment is rooted in the application of the minimum criteria for licensing under Guernsey's regulatory laws and particularly the requirement that directors be "fit and proper persons". It also engages directly with questions of integrity, competence and the collective and individual responsibilities of boards.

Collective responsibility, individual accountability

The Court of Appeal examined how Guernsey's regulatory framework balances board level obligations with personal accountability.

The judgment considers the relationship between collective and individual responsibility. While company law traditionally frames directors' duties as owed individually to the company, the Guernsey regulatory regime imposes collective obligations on the board of a licensee as a whole.

The Court of Appeal endorsed the Royal Court's view that these collective obligations should not be seen as diluting personal accountability. Directors may be held to account for their own failings even if they were part of a wider board failure. Notably, one of the appellants' appeal grounds failed on this basis. The Court of Appeal held that "Director 1 was not being held 'strictly liable' for corporate failings but was being held to account for his own failings as a director."

Non-executive directors: No lower standard

Importantly, the Court of Appeal rejected the argument that non-executive directors should be treated differently from executive directors for regulatory purposes. The Court of Appeal held that

"There is no material distinction between executive and non-executive directors in this context... the duties imposed on the board of a licensee under the Licensees Rules apply to the directors collectively, whether or not they are 'executive' directors."

Non-executives may not be considered part of "senior management" for every regulatory rule, but they remain fully subject to the fit and proper person test and must discharge the same regulatory responsibilities as their executive counterparts.

This finding reinforces the point that non-executive directors must remain actively engaged and informed, regardless of their operational role.

Knowledge and oversight

The Court of Appeal made it clear that directors cannot adopt a passive role when it comes to understanding their business or ensuring compliance. Relying solely on professional advisers, clean audit reports or the actions of fellow board members is not sufficient.

Directors are expected to actively maintain a working knowledge of the business and to engage with regulatory obligations. In one example, the Court found that a director failed to act on clear legal advice regarding anti-money laundering (AML) duties, instead choosing to follow his own interpretation. This was deemed a failure of both integrity and competence, even though there was no finding of dishonesty.

The message is clear: directors must interrogate issues within their remit and respond appropriately when potential breaches arise. Regulatory oversight is not a box-ticking exercise; it demands active engagement and sound judgment.

Integrity as a standalone standard

A key takeaway from the judgment is the treatment of integrity as a distinct and objective standard. Drawing on Wingate v SRA and Newell-Austin, the Court reaffirmed that a person may lack integrity without being dishonest.

Integrity, in this context, refers to "moral soundness, rectitude and steady adherence to an ethical code." The test is objective: it focuses on whether the conduct falls short of expected ethical standards, not whether the individual knew they were doing wrong.

The Court distinguished integrity from dishonesty (which follows the test in Ivey v Genting Casinos) and emphasised that a director's knowledge of the facts is relevant, but awareness of wrongdoing is not required for a finding of lack of integrity. This empowers regulators to hold directors to high professional and ethical standards, even in the absence of deliberate misconduct.

Fit and proper person test: A holistic assessment

Under Schedule 4 of the Protection of Investors Law, the fit and proper person test is a cornerstone of Guernsey's regulatory framework. It involves a comprehensive assessment of a director's suitability to hold office, based on the following criteria:

• Competence – the ability to understand and manage the responsibilities of the role.
• Probity – honesty and integrity in personal and professional conduct.
• Integrity – moral soundness and adherence to ethical standards, even in the absence of dishonesty.
• Soundness of Judgment – the capacity to make considered and responsible decisions.

The Court of Appeal confirmed that a finding of lack of integrity alone could, in certain instances, justify a conclusion that a director is not fit and proper.

Reliance on others, whether advisers, auditors, or fellow directors, is not a shield against regulatory consequences if the director has failed to meet the objective standards.

Conclusion

The decision by the Court of Appeal provides an authoritative restatement on certain aspects of directors' duties under Guernsey's regulatory framework. The key messages which can be taken from the judgment are:

• While Boards carry collective responsibility, individual directors are accountable for their own conduct.
• Non-executive directors are subject to the same standards as executive directors.
• Integrity, competence and sound judgment are central elements to the fit and proper test.
• A lack of integrity does not require dishonesty.

For directors of regulated entities, the judgment is a reminder that regulatory accountability is personal, active and objective. For regulators, it affirms a robust legal foundation for holding directors to high standards of governance and ethical conduct.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.