Goodman v Cummings and Dms Governance Ltd (Tangerine Investment Management Ltd (in Official Liquidation) as Third Party)

• Jurisdiction: Cayman Islands
• Judge: (Mangatal, J.)
• Judgment Date: 13 September 2018
• Court: Grand Court (Cayman Islands)
• Date: 13 September 2018

GOODMAN

and

CUMMINGS and DMS GOVERNANCE LIMITED (TANGERINE INVESTMENT MANAGEMENT LIMITED (in official liquidation) as third party)

(Mangatal, J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — directors — indemnity — if independent director appointed “on the footing” of company’s articles, articles incorporated into contract of appointment — little required to satisfy court that indemnity provisions incorporated

Held, ruling as follows:

(1) The company’s articles of association were incorporated into the terms of Ms. Cummings’s appointment as a director. The following legal principles were applicable: (i) articles of association were not in themselves a contract between the company and its directors; (ii) however, if a director was appointed or employed “on the footing” of the articles (or particular provisions in the articles), their terms were embodied in and formed part of the contract between the company and the director; (iii) where a director was engaged without any separate or special terms of engagement (i.e. in the form of a separate employment or service contract), the court would more readily conclude that the articles contained terms on which the director accepted appointment; and (iv) comparatively little was required to satisfy the court that in a particular case an indemnity provision was incorporated in the contract which was made when the company appointed a director. It was common ground that Ms. Cummings served as a director until her resignation. She did not have a separatedirector’s service contract with the company. The evidence clearly established that Ms. Cummings accepted her appointment as a director of the company on the footing that the indemnity provisions in the articles would be applicable to her appointment. Email correspondence between Appleby and OBS, and in particular an email from Ms. Cummings to Appleby on December 9th, 2011, in which she stated that the quote assumed that directors were indemnified under the memorandum and articles of association, demonstrated that it was clear to all parties from the outset that the terms on which Ms. Cummings would accept appointment as a director were that she would be indemnified as a director under the articles. Appleby accepted the quote and nothing was said to suggest that Ms. Cummings’s assumption that she would be indemnified was wrong or inapplicable. On the date that she became a director Ms. Cummings would have known that it had been agreed that she would become a director entitled to indemnification. Ms. Cummings did not sign her director’s consent to act until after a copy of the indemnity provisions had been received and reviewed by those acting on her behalf at OBS. A specific query was later raised by OBS about the terms of the indemnity provisions in an email to which Ms. Cummings was a copy recipient, which further highlighted the importance of the provisions from her perspective. Ms. Cummings’s own evidence was that she accepted appointment on the basis that the indemnity provisions in the articles were applicable to her appointment, and that evidence could not be seriously challenged. Ms. Cummings was an experienced director and made her position clear from the beginning that she expected to see indemnity provisions (which were standard provisions) in the articles. The articles must have been created on or before December 19th, 2011 as otherwise the company could not have been duly incorporated on that date. There was more than ample evidence to satisfy the court that in the present case the indemnity provisions in the articles were incorporated in the contract which was made when Ms. Cummings was appointed as director. Leave to amend the draft amended statement of claim to include this point would therefore be refused (paras. 106–122).

(2) The definition of “Indemnified Person” in art. 2 of the company’s articles of association and the indemnity provisions (in arts. 149–152) extended to former directors, including Ms. Cummings. It was common ground that Ms. Cummings enjoyed protection as an “Indemnified Person” (as defined in art. 2) during her term of office in respect of her conduct while in office. If the arguments advanced on behalf of the plaintiff were correct, the result would be that a director was an “Indemnified Person” while in office and after death, but not in any intervening hiatus, for example retirement. That would be a bizarre result and was plainly not what was intended. Further, if the plaintiff’s interpretation of the articles were correct, the applicability of the indemnity provisions would turn in every case on the arbitrary touchstone of whether a civil action against a director in respect of his/her conduct while in office had been brought (and presumably concluded) before the director had leftoffice. Clear wording was required where the result that would be produced by a party’s suggested interpretation of articles of association would be odd or unreasonable. There was no such clear wording in the present case to support the meaning contended for by the plaintiff. The suggested interpretation would effectively render the indemnity provisions worthless, as a company could simply terminate a director’s appointment in order to escape the engagement of the indemnity. That would mean that no meaningful protection would be provided to a director and could turn on its head the market for Cayman funds and investment managers which depended on professionals being prepared to act as independent directors in respect of very sizeable financial undertakings in exchange for a relatively small fee on the basis that they would be fully protected against civil action save in situations in which they acted fraudulently or in wilful neglect or default of their duties or equivalent serious misconduct. The articles of association of other companies were inadmissible as an aid to interpreting the articles in the present case, although even if they were admissible all they might show was that in some cases the indemnity provisions expressly applied to both existing and former directors. It was clear that a reasonable person having all the background knowledge available to the parties would have understood the relevant provision to mean that as a director Ms. Cummings would be provided with indemnity in relation to her activities and conduct while a director, irrespective of when the indemnity was invoked. The phrase “for the time being” in the articles of association simply signified that there might be different persons occupying the position of director in the future than at the date of the articles and incorporation of the company. It did not mean that a director was only covered by an indemnity while in office and lost the right to indemnity in respect of matters done as director after leaving office. Such a construction would defy commercial common sense and reasonableness and would have arbitrary, bizarre and alarming consequences, especially for those professionals who acted as independent directors in respect of companies with sizeable financial undertakings. Leave to amend to introduce this issue would accordingly be refused (paras. 123–136).

(3) In the circumstances, Ms. Cummings was entitled to rely on art. 154 of the articles of association. It was clear that if art. 154 formed part of the contract between the company and Ms. Cummings, which the court held that it did, then any claim that Ms. Cummings might have invoking art. 154 necessarily involved a claim for indemnification “pursuant to the Articles.” The court could not see what rational basis there could be for confining art. 154 to claims for indemnification by directors who were also members of the company. If that were the intention, the provision would have stated expressly that it was unavailable to a director unless also a member of the company. Turning to the plaintiff’s alternative point that any advance of funds under art. 154 was only available to current directors (and not former directors such as Ms. Cummings), the plain purpose of art. 154 was to ensure that the company was obliged to pay theexpenses incurred by an “Indemnified Person” in defending any civil or other action on a rolling basis as the action progressed. The provision was, in this sense, consistent with and gave practical effect to the function of indemnity provisions generally, namely to ensure that an indemnified party would never be called upon to pay. This argument by the plaintiff also failed. Leave to amend to introduce this third preliminary issue would therefore also be refused (paras. 137–141).

(4) Article 154 was plainly not a “hold harmless” clause. The court accepted the defendants’ logical and persuasive argument that if that were the correct characterization of art. 154, it would render it a “singularly pointless provision” because it would add nothing to the indemnity provisions in art. 149 (which, by contrast with art. 154, actually used the words “hold harmless”) and art. 151 (which did not). It was plain that art. 154 served a different purpose, namely to ensure that “Expenses . . . shall be paid by the Company in advance of the final disposition of such action . . .” That was not the language of a “hold harmless” clause or a provision which required that a damages claim be pursued to its conclusion before any payment in respect of the indemnified person’s expenses was required. On the contrary, by its express terms the company’s payment obligation under art. 154 was predicated only on (i) relevant expenses having been incurred by the indemnified person (which they had been); and (ii) receipt of an undertaking to repay such amount as it shall ultimately be determined the indemnified person was not entitled to retain (which it had). The language used was mandatory and otherwise unconditional, with payment to be made “in advance of the final disposition of such action.” In respect of the fourth preliminary issue, Ms...