Guernsey: Guernsey Court Of Appeal Hands Down Important Judgment For Guernsey Directors

Last Updated: 29 April 2014
Article by Anthony Williams and Jeremy LeTissier

In a significant judgment for Guernsey directors, the Court of Appeal held that under Guernsey law there is now a presumption (which may be overturned by evidence to the contrary) that a director takes up office on the terms of the company's articles. Although many directors may have taken it for granted that they were taken to have accepted their appointment on the basis of the company's articles, the actual position up until the Court of Appeal's judgment was uncertain under Guernsey law. Indeed, the finding potentially differs from the position under English law where, in the event of dispute, directors must put forward some evidence that they did accept their appointment on the footing of the company's articles.

The Court of Appeal also reversed a decision of the Royal Court in relation to the date upon which a company actually provides a director with a right of indemnity and exemption from liability. This finding will be of general interest to directors and other third parties in relation to the actual date from which they take the benefit of the rights conferred upon them by the company's articles.

Advocate Anthony Williams of Appleby represented the successful Appellant in the Royal Court and the Court of Appeal.

Background

In the matter of Perpetual Media Capital Limited -v- Enevoldsen & Ors, PMCL (the Appellant) commenced proceedings against its former directors (the Directors) for breach of their directors' duties relating to film bridge finance investments made on behalf of the company. The Directors asserted, irrespective of the substantive issue as to whether they had committed breaches of their duties, that they had a complete defence to the claim on the basis that they were entitled to rely upon an indemnity and exemption from liability inserted in PMCL's articles of association upon its incorporation in October 2007 (the Indemnity and Exemption).

As many of those reading this article will be aware, section 157 of the Companies (Guernsey) Law, 2008 (the Companies Law), which came into force on 1 July 2008, renders void any provision by a company to its directors of an indemnity or exemption from liability that would otherwise attach to them in connection with any negligence, default, breach of duty or breach of trust. This applies to any provision, whether contained in the company's articles or in any other contract with the company (such as a director's express or implied service contract), though it does not prohibit the company from obtaining insurance for its directors against such liability.

Transitional regulations granted a period of grace to directors who had been provided with the benefit of such an indemnity and/or exemption prior to 1 July 2008, until 31 December 2009. During that period of grace indemnities and exemptions that would have otherwise been rendered void by section 157 of the Companies Law continued to be valid therefore allowing directors time to make other arrangements, for example seeking insurance to compensate for the loss of the indemnity/exemption, seeking increased compensation from the company to reflect the increased risk, or resigning from the relevant company.

PMCL disputed that the Directors were entitled to rely upon the Indemnity and Exemption on the basis that they were only provided with that benefit when they were appointed as Directors of PMCL in March 2009 (i.e. after 1 July 2008 when section 157 came into force, thereby rendering the Indemnity and Exemption void), which was when their implied service contract came into force together with their concomitant right to enforce its terms. PCML had effectively been a dormant company between October 2007 and March 2009, from which time it was utilised as an investment vehicle to make film bridge finance investments. PMCL asserted that the relevant breaches took place in the latter part of 2009.

The Preliminary Trial

The parties agreed that there should be a trial of a preliminary issue (which summarily deals with discrete issues of law ahead of the main trial) in respect of whether the Directors, or any of them, were entitled to rely upon the Indemnity and Exemption. The core issues were (i) how the benefit of an indemnity and exemption contained in a company's articles of association is provided to an external third party (such as a director or other agent) and (ii) when the indemnity and exemption is provided to such a third party, in this case the Directors.

The parties were agreed that a company's articles of association are a contract between the company and its members and its members between themselves. Directors and other external third parties (for example auditors) are not privy to the contract constituted by the articles of association and therefore are not, without more, entitled to directly rely upon and enforce the provisions of the articles. They must either incorporate such rights into their express service contracts or demonstrate that they were incorporated into their implied service contract with the company.

Notwithstanding this concession by the Directors, they asserted that the Indemnity and Exemption had been provided to them via the medium of the articles from the date of incorporation of PCML, and therefore were entitled to the benefit of the grace period in the Transitional Regulations up until 31 December 2009 (which covered the period in which the alleged breaches of duty took place).

The Royal Court held, applying principles of English company law, that the Directors had crossed the low evidential threshold for proving that they had accepted their appointment on the footing of PMCL's articles and therefore the Indemnity and Exemption had been incorporated into their implied service contracts with PMCL (there being no express service contracts). However, notwithstanding the Directors' concession as regards their inability to enforce PMCL's articles directly and that the benefit of the Indemnity and Exemption must be found to have been incorporated into their implied contract with the company (which PMCL contended, applying general principles of contract law, could only have arisen on the date of acceptance of their appointment in March 2009), the Royal Court held that the Indemnity and Exemption was provided to each the Directors via the medium of PMCL's articles upon the date of incorporation of PMCL in October 2007 and therefore did not run afoul of section 157 of the Companies Law. As a consequence the Royal Court held that the Directors had a complete defence to PMCL's claim.

The Court of Appeal's Findings

PMCL successfully appealed against that decision in respect of the Directors. The Court of Appeal held that:

1. That, as matter of Guernsey law, "there is a presumption, albeit rebuttable, that directors take up office on the terms in the company's articles" and that the presumption may rebutted in circumstances such as where the directors in question had a lack of experience and knowledge in relation to commercial matters, which was not an appropriate description of the Directors; and

2. Upon a proper construction of the relevant statutory provisions read in conjunction with settled principles of contract and company law, the Directors were provided with the Indemnity and Exemption on 20 March 2009 when they accepted their appointment as Directors of PMCL and the benefit of the Indemnity and Exemption, being the date upon which their implied service contract arose. Therefore the Indemnity and Exemption was void under section 157 of the Companies Law and the Directors were not entitled to rely upon it as a defence to PMCL's claim.

As noted above, section 157 of the Companies Law now renders void any provision by a company to its directors of an indemnity or exemption from liability that would otherwise attach to them in connection with any negligence, default, breach of duty or breach of trust. However the Court of Appeal's judgment has relevance in relation to other benefits (and burdens) conferred by the company on external third parties who perform services on behalf of the company. Such benefits, and the connected right to enforce them, are, as matter of contract law, likely to arise from the date of appointment of the director or other third party service provider.

More significantly, Guernsey law now provides that there is a presumption that Guernsey directors take up office on the terms in the company's articles. This presumption may be overturned by the party seeking to deny the benefit conferred upon the director. This finding appears to differ from the English position, where it could still be argued that directors must put forward some evidence that they did accept their appointment on the footing of the articles of association where the entitlement to such a benefit is disputed. The circumstances in which the presumption may be displaced are likely to involve extreme scenarios such as where the directors in question lacked commercial knowledge and/or experience. Guernsey directors would be well advised to read carefully the articles of the company they intend to sit on the board of, take appropriate advice independent of the company's lawyers, and expressly record in written form that they have read and understood the terms of the articles.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Anthony Williams
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions