First Names (Jersey) Ltd & Anor v IFG Group Plc

The first Claimant (“FN Jersey”) is a company incorporated in Jersey. Its business includes the provision of corporate and trust management services.

The clients of FN Jersey included Ignition Romanian Land Fund # 1 Limited (“Ignition”), also incorporated in Jersey. As a closed-end Jersey fund Ignition invested in land in Romania.

In the course of its business FN Jersey offered, as one of the services it provided to Ignition, to provide individuals to serve as directors of Ignition. This type of arrangement is common within the sector. It can have, I fear, implications for the nature of the governance that is brought to a company but here is not the place to debate that.

In the result, three employees of FN Jersey were duly appointed directors of Ignition. They served as directors of Ignition because that was required of them as employees of FN Jersey.

Their employment contracts contemplated that this was one of the things they would do for clients of FN Jersey. The typical arrangement in the sector would see FN Jersey remunerated by Ignition for a range of services and the services for which it received payment would include the work undertaken by the directors.

In time Ignition entered summary liquidation in Jersey. Its liquidator issued a claim against the three directors, alleging that they acted in breach of duty to Ignition in connection with an investment in Romania. FN Jersey takes the view that it is obliged to indemnify the three directors in connection with that claim. Consistently it is funding their defence of that claim. There is no question that the three directors acted in good faith towards FN Jersey.

The Defendant (“IFG”) disagrees with the view taken by FN Jersey. IFG has a potential economic interest in the matter because it sold the parent of FN Jersey to the Second Claimant (“FN Group”) and gave various indemnities to FN Jersey and FN Group and others under the relevant share purchase agreement (“the SPA”). I say potential economic interest because IFG’s position in these present proceedings before the Commercial Court is that those indemnities do not engage, or that their terms have not been complied with.

The liquidator’s case concerns events that pre-date the SPA. The SPA was dated 29 March 2012 and the sale under its terms completed on 4 July 2012. The consideration involved was of the order of £70 million.

This claim is brought under the Shorter Trials Scheme.

It is agreed that the question whether FN Jersey is obliged to indemnify the three directors is a question of Jersey law.

I had the privilege of reading and hearing the expert evidence of two advocates of the Royal Court, Advocate David Wilson of Oben Law and Advocate Vicky Milner of Callington Chambers. I am grateful to them both for the assistance given. It was very clear that both sought to give their best independent expert opinion, in keeping with their duties as Advocates and their duties to this Court. Their independence was demonstrated by the fact that they were both prepared to revise views on further reflection. I hope they will allow me to record that their professionalism and courtesy when commenting on each other’s opinion, in a session of the trial where evidence was given concurrently was exemplary.

In the result, the experts shared the opinion that an indemnity would be implied into the contracts of employment of the three directors with FN Jersey if that was necessary to ensure that those contracts were not futile, inefficacious or absurd.

I have no hesitation in concluding that that test is met. I respectfully regard as absurd the proposition that FN Jersey, having contracted to provide directors to Ignition, instructed its employees to serve as directors for Ignition, and arranged to charge Ignition for the work of those employees as directors, did not have an obligation to indemnify those employees in relation to the work undertaken, always assuming good faith towards FN Jersey. There is neither difficulty nor complexity in identifying the terms of the necessary implied indemnity: simply, an employee of FN Jersey required to serve as director of a client company and acting in good faith would be indemnified against costs, losses and liabilities incurred in the course of that directorship.

I accept the factual evidence of Mr Declan Kenny and of Ms Elaine Higgins, each of whom held senior positions with FN Group, and with IFG prior to the SPA, that without an indemnity FN Jersey would have no business. This illustrates how inefficacious or commercially unworkable the contracts of employment of the three directors would be without the implied indemnity. The evidence of Mr Kenny and Mrs Higgins is also amply sufficient to support the proposition that this is a case where there was a shared understanding in the sector that employees required by their employer to become directors of client companies would be indemnified.

The three directors had written employment contracts with FN Jersey. Mr Nicholas Craig for IFG argued that those contracts are not unworkable without an indemnity, and that an indemnity could have been included expressly in those contracts or bargained for at the point when FN Jersey required the individuals to take the directorships. I do not accept the first point for reasons just given. The remaining points are not wrong, but they do not meet the basis on which the indemnity is to be implied in the present case.

The presence of insurance arranged by FN Jersey and required by the Jersey Financial Services Commission was also referenced, though the subject was not fully evidenced and developed at trial. On the material before me it did not provide an answer to the case for implying an indemnity. The interests of clients rather than those of the employee may underlie requirements for insurance. If anything the presence of insurance arranged by the employer reinforces the obviousness of the point that employers in this sector and not their employees will ultimately shoulder the consequences where employees are required by their employers to take directorships in client companies.

In the circumstances it is no surprise to find that the Articles of Association of FN Jersey, although not a contract between the three employees and their employer, as Mr Andrew Blake for FN Jersey and FN Group properly accepts, provide as follows:

“27 (1) Every Secretary agent servant and employee of [FN Jersey] shall be indemnified by [FN Jersey] against and it shall be the duty of the Directors out of the funds of [FN Jersey] to pay the costs charges losses liabilities damages and expenses which any such person may incur in the course of the discharge by him of his duties as Secretary agent servant or employee of [FN Jersey] as the case may be provided that this indemnity shall not be applicable in circumstances where any such person has incurred such costs charges losses liabilities damages and expenses through his own fraud wilful misconduct or gross negligence.”

It was argued for IFG that this provision in the Articles was concerned only with vicarious liability. I do not accept that it is so limited, on its terms. It was argued that an indemnity would not make sense where an employee of FN Jersey performing his or her duty to Ignition as a director of Ignition did something that was adverse to the interests of FN Jersey as his or her employee. But the example simply shows what FN Jersey must be taken to have accepted as a consequence of requiring its employee to become a director of a client company. Far from the indemnity not making sense, the example shows it to be the more obviously necessary.

It is also no surprise to find that, on the evidence of Mr Kenny which I accept, it is the policy of FN Jersey to indemnify those it requires to be directors of client companies. Mr Craig argues that a policy does not equal a legal obligation, but in my assessment the policy reflects the legal obligation.

I should add that there was some discussion of Article 77(1) of the Companies (Jersey) Law 1991, which provides:

“Subject to paragraphs (2) and (3), any provision, whether contained in the articles of, or in a contract with, a company, or otherwise, whereby the company or any of its subsidiaries or any other person, for some benefit conferred or detriment suffered directly or indirectly by the company agrees to exempt any person from, or indemnify any person against, any liability which by law would otherwise attach to the person by reason of the fact that the person is or was an officer of the company shall be void.”

The Article does not in my judgment assist or apply to the context in hand. We are not here concerned with indemnifying against a liability which the law would attach to the three directors by reason of the fact that they were officers of FN Jersey. The discussion also engaged Article 77(2)(b) and (d) but I need not go into those provisions.

The next issue is whether IFG is in turn obliged under the SPA to indemnify FN Jersey or FN Group. In the case of FN Group, the indemnity sought is in respect of diminution in the value of its interest in FN Jersey to the extent that FN Jersey itself is not indemnified by IFG.

Clause 8 of the SPA is in these terms, so far as material:

“8.1

Subject to clause 8.2, the Seller undertakes with effect from Completion, on demand, to indemnify, and to keep indemnified the Buyer and each member of the Buyer’s Group against all losses and liabilities (including reasonable legal and other professional fees and costs) which may be suffered or incurred by any of them and which arise directly or indirectly in connection with or in relation to the following matters (to the extent that they relate to or are connected with or arise in respect of Client Business): any litigation, arbitration or other dispute resolution process, or administrative or criminal proceedings or any investigation or enquiry by any Authority arising from facts, matters or circumstances existing prior to Completion.

8.2

The Buyer shall use and shall procure each member of the Buyer’s Group uses its reasonable endeavours to mitigate its loss in respect to any claim pursuant to clause 8.1 or clause 8.4 and any claim pursuant to clause 8.1 or clause 8.4 shall be subject to the relevant provisions of Schedule 5.

…”

By clause 1.2 of the SPA a number of terms were given meanings “unless otherwise specified or the context otherwise requires”. In particular, by clause 1.2.15:

“… references to “indemnity” and “indemnifying” any person against any liability or circumstance include indemnifying it and keeping it harmless from all actions, claims, demands and proceedings from time to time made against that person and all losses, damages, payments, costs and expenses (including reasonable legal costs and expenses) made, suffered or incurred by that person as a consequence of or which would not have arisen but for that liability or circumstance;”

Indemnity Claim unless the liability of the Seller in respect of that claim is in excess of £500,000 (provided that claims arising out of the same or related subject matter shall be aggregated and treated as a single claim for this purpose)