Self-evident truths for Cayman fund directors

One of the “self-evident truths” of the Cayman funds industry is the practice, outlawed in many other common law jurisdictions, of indemnification of directors from the assets of the company. One litigant recently attempted, and failed, to attack the indemnity afforded to a professional director on what were somewhat speculative grounds. However, the judgment serves as a useful reminder that directors’ indemnities are not “inalienable rights” but must always be incorporated into the contract between the director and the company in order for directors to rely on them.

Ms Cummings was a professional independent director, and former director of Tangerine Investment Management Limited (In Official Liquidation) (Tangerine), a company incorporated in the Cayman Islands. Mr Goodman was assigned the cause of action against Ms Cummings by Tangerine’s liquidators. Mr Goodman alleged that Ms Cummings had breached the fiduciary and common law duties that she owed, qua director, to Tangerine. Ms Cummings denied such breaches and further argued that she was entitled to rely upon the various indemnification provisions contained within Tangerine’s articles of association. Mr Goodman argued that the indemnification provisions in Tangerine’s articles were not incorporated into Ms Cummings’ appointment as a director of Tangerine, and in any event that she was not to be considered an “indemnified person” pursuant to Tangerine’s articles, as she was a former director of Tangerine.

With respect to the first issue, Justice Mangatal held that the following legal principles applied: (i) articles of association are not, in themselves, a contract between the company and its directors; (ii) however, if a director is appointed or employed on the footing of the articles (or certain provisions within them), their terms are embodied in and form part of the contract between the director and the company; (iii) where a director is engaged without any separate or special terms of engagement, the Court will more readily conclude that the articles contain terms upon which the director accepts appointment; and (iv) comparatively little is required to satisfy the Court that an indemnity provision is incorporated in the contract made when the company appoints a director. Justice Mangatal found that the evidence in this case pointed clearly to Ms Cummings only accepting the appointment on the basis of satisfactory indemnification, and therefore concluded that the indemnification provisions in the articles were incorporated into Ms Cummings’ appointment.

On the second issue, Justice Mangatal asked what a reasonable person, having all the background knowledge known to the parties would have understood the indemnity provision to mean, applied a previous decision of the Judicial Committee of the Privy Council, and held that when interpreting a contract where the result that would be produced by one party’s suggested interpretation of the articles would be odd or unreasonable, clear wording is required to persuade the Court that the odd or unreasonable result was intended. Justice Mangatal was not persuaded by Mr Goodman’s argument, and ultimately rejected it on the basis that his proposed interpretation of the indemnification clause would lead to a bizarre result, whereby Ms Cummings would be indemnified whilst a director, and after her death (as a result of the definition of “Indemnified Person” in the Articles including a director’s executors, administrators, personal representatives or successors or assigns), but not in the intervening period.

It is clear from Justice Mangatal’s judgment that the Cayman Court is willing to give directors the full benefit of any indemnification provisions contained in the articles but not without first carefully examining the evidence as to the incorporation and construction of those provisions.