Court implies indemnity into contracts of

employment for directors of a corporate service provider

 

20 February2018

 

For corporate service providers the trend is increasingly towards using corporate rather than individual directors, however this is not always possible due to regulatory constraints. If a corporate service provider supplies one of its own employees to act as a director of a client entity, what are the obligations of the provider to its employee, if that individual incurs a liability arising from that appointment? This difficult question is an issue recently considered by the English High Court (Commercial Division) in the case of First Names (Jersey) Ltd & Anor v IFG Group plc.

The background to this case revolved around a Jersey based corporate services provider which provided three of its employees to act as directors of a fund. Following the summary liquidation of the fund, the liquidator issued a claim against the three directors. The corporate service provider took the approach that it was obliged to indemnify the directors in connection with that claim, in spite of the fact that there was no wording to that effect in any of the directors’ employment contracts. IFG Group plc who would have in turn been liable to the corporate service provider if they did indemnify the directors under the terms of a separate indemnity, opposed this approach.

The English Judge therefore had to consider, with the benefit of expert evidence of two Jersey Advocates, whether an indemnity should be implied into the contracts of employment of the directors on the grounds of necessity.  Despite arguments being made against this position, the Court held that the contracts would be unworkable without an indemnity and in essence the corporate service provider would not have a business unless it stood behind its employees, therefore an indemnity would be implied. The Court did consider the general prohibition against indemnities for directors from the company to which they are appointed under Article 77 of the Companies (Jersey) Law 1991, but concluded this did not extend to an indemnity offered by a corporate service providers to its own employees in respect of liabilities arising from their directorships of a third party. Whilst this decision considered the position under Jersey law, the outcome would likely be the same under Guernsey law given that the general prohibition against indemnities for directors under Section 157 of the Companies (Guernsey) Law, 2008 is drawn in broadly similar terms to its Jersey equivalent. 

This decision is a useful reminder to corporate service providers of the issues which can arise from individual appointments. The starting point should always be to ensure there is adequate insurance in place which is expressed to be for the benefit of employees who accept individual appointments.  Similarly, it is also worth reflecting on standard contracts of employment to consider the impact of this decision.  Whilst in this case the employer stood by the directors and was the one arguing for the indemnity, there may be other instances where for example costs are incurred that aren’t covered by the insurance, where individuals seek to rely upon this indemnity. As such consideration should be given to including specific indemnity agreements setting out the limits and any exclusions for those employees of corporate service providers who do accept individual appointments to ensure that there is certainty for all. 

In addition consideration should be given to the terms of any articles of association of the provider, which may already include an indemnity for liabilities incurred by its officers or employees in the course of their duties that could extend to liabilities incurred in acting as a director for a third party. It is worth noting in this regard that following on from successful appeal before the Court of Appeal brought by Appleby in the case of Perpetual Media Capital Limited -v- Enevoldsen & Ors, PMCL as a matter of 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.

 


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