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.
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.