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When can directors rely on indemnities in the Articles?

28 September 2018

In a hearing of four Preliminary Issues in the Cayman Islands (‘Cayman’) Grand Court (‘Court’) it was decided that a former director of Tangerine Asset Management Ltd (‘TAM’) was able to rely on indemnity provisions in TAM’s Articles of Association (‘Articles’). The terms of indemnity also covered her legal costs in defending the current claim, brought by an assignee of the rights of TAM, that the director breached her common law duties and/or her fiduciary duties to the company, which is now in liquidation. Here we look at the lessons for directors on the ability to rely on indemnities in the Articles of the company to which they are appointed. In a later piece we will consider the Court’s finding that she did not have to wait until the end of the case to have her legal fees paid but was entitled to have them paid as they were incurred.

What are the main 'take-aways' for directors?

The case establishes that past directors can rely on indemnities in a company’s Articles but to be sure they can do so they should make it clear when accepting their appointment that they will be doing so as a term of their service. The Judge also clearly rejected the idea that the wording of the indemnities meant that they only applied to those currently employed by the company as defying commercial common sense and reasonableness.

What is the background?

A director (‘X’) was employed by a management services company (‘DMS’) to be a non-executive director of TAM. DMS had a contract with TAM but X did not have a direct contract with TAM. X wanted to rely on indemnities in TAM’s articles of association ('Articles').

Did she say she would rely on those indemnities?

Before accepting her appointment, X had made it clear to TAM that she expected to rely on the indemnities in the Articles. It was argued that because Articles are a form of contract between a company and its shareholders and X was not a party to that contract she could not rely on those indemnities. The Court found that it was clear that X had accepted the appointment as director of TAM on the basis that the indemnities in the Articles would apply and so they had been incorporated into her terms of service.

How could the indemnities apply?

The Articles of a company form a contract between the company and its shareholders, but not between the company and its directors. However, where the company appoints or employs a director ‘on the footing’ of the Articles then the Court found that terms in the Articles are embodied in and form part of that contract for service as a director. The Court found this will be the case where, as here, the director does not have a separate written contract of employment or service contract with the company and where the terms to be incorporated into the basis of appointment are indemnities in the Articles ‘comparatively little’ will be needed in order to to show that they were incorporated.

Was there any specific reference to the indemnities?

From the outset X had made it clear that the quote for her services as a director was conditional on the Articles containing indemnity provisions. She did not sign her director's consent to act until the indemnities in the Articles had been received and reviewed by those who represented her. In an email she wrote that she "…assumes that the director(s) will be indemnified under the Memorandum and Articles of Association of the Company (ies)". The Court considered this clearly established X had accepted her appointment as a director of TAM on the footing that the indemnity provisions in the Articles would apply to her appointment.

Did it matter that she was no longer a director?

No. The Court considered that it would be an odd or unreasonable interpretation of the indemnity to say that it only applied to those currently employed by the company. It would mean that the company could avoid any liability provided by an indemnity simply by giving notice to terminate the appointment to an indemnified person, thereby defeating the object of the clause. The relevant indemnity protected heirs and executors of the director, and the Court considered that it would not make sense that the indemnity applied during employment and after death but not between leaving the company’s employment and death. The wording that the indemnity applied to those ‘… for the time being acting in relation to any of the affairs of the company’ only signified is that there may be different persons occupying the relevant positions over time. There was no need to extend the indemnity to ‘'former directors’ - the term would just spell out something that was already obvious. 

Does the director have to be a shareholder?

The Court found there was no rational basis to confine the indemnity to only those directors who were shareholders adding that “If this were the intention, the provision would have stated expressly that it was unavailable to a director unless also a member…” .

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