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16 April 2015
In Arnold v Belize Telemedia Ltd the Belize Court of Appeal confirmed that indemnities given by a Belizean company to its directors deprived the company of a cause of action to pursue a claim against former directors for decisions taken during their term as company directors.
The government compulsorily acquired Belize Telemedia Limited in August 2009. The directors of the then privately held company were deposed by legislative instrument and replaced by a government-appointed board. In 2011 the government-appointed board decided that certain decisions made by the previous board of directors had caused the company to suffer loss and damage. Specifically, it was alleged that decisions of the former directors to make advances to a related company to write off certain related-party debts, make a distribution of shares in specie and pay dividends without making tax deductions had caused loss to Telemedia.
Telemedia therefore instituted a claim against the former directors seeking to recover the alleged losses. The former directors strongly denied that the decisions were made wrongfully, in bad faith or negligently.
Telemedia's articles of association contained the following provision:
"Subject to the provisions of and to the extent permitted by statutes, every director or other officer or auditor of the Company shall be indemnified out of the assets of the Company against all liabilities incurred by him in the actual or purported execution or discharge of his duties or the exercise or purported exercise of his powers or otherwise in relation to or in connection with his duties, powers or office but:
1. This indemnity shall not apply to any liability to the extent that it is recovered from any other person; and
2. The indemnity is subject to such officer or auditor taking all reasonable steps to effect such recovery, to the extent that the indemnity shall not apply where an alternative right of recovery is available and capable of being enforced."
This is a near absolute indemnity affording comprehensive protection to Telemedia's directors and former directors. The directors also had the benefit of a further indemnity provided in a deed, signed by the directors, which stated that they were indemnified against:
"all costs, charges, losses, expenses and liabilities incurred by him in the execution and discharge of his duties or in relation thereto including any liability incurred by him in defending any proceedings, civil or criminal, provided that nothing in this clause 2 shall require the Company to indemnify the individual against any liability to the extent that such liability would exceed the Company's powers under its articles of association or be void, illegal or unenforceable against the Company under any applicable law."
Before the case was tried the directors applied to the trial court to dismiss the claim. The evidence supporting the former directors' application was that they were aware of the indemnity in the articles of association and that they had actually signed the deeds when they became directors. Their contention was that they had agreed to serve as directors "on the footing of the articles". Consequently, there was an implied term in their appointment that they would be indemnified against liabilities which a director may suffer as a result of decisions taken while serving as a director. The question for the court was whether the directors enjoyed the benefit of the indemnities and were thereby absolved.
The court refused to strike out the claim. It held, among other things, that the former directors had not filed a defence and were in breach of the Supreme Court (Civil Procedure Rules), which required that a defence had to be filed before making an application to strike out a claim. It further found that a claim can be struck out only in "plain and obvious cases" and that the supporting evidence did not meet the test. The court also concluded that it was possible to construe the indemnity to be applicable only where a director himself or herself caused the loss or damage. It also stated that the directors were obliged to assist Telemedia in recovering damages against non-director defendants and the directors were therefore required to be parties to the claim. The former directors appealed to the Court of Appeal.
Unlike other acts governing companies in other parts of the Commonwealth, the Belize Companies Act has no provision prohibiting companies from issuing blanket indemnities to its directors, officers or auditors. The appeal was therefore resolved primarily on contractual principles.
The Court of Appeal noted that there was no contention by Telemedia that the indemnities were illegal. Further, the evidence was that the former directors expressly relied on the indemnities when they accepted appointments. The court therefore considered the interpretation of the indemnities.
When a person accepts an appointment as a director of a Belizean company which has an indemnity clause in its articles of association (eg, Article 112 of Telemedia's articles of association), it is likely that a court will conclude that the director took office "on the footing of the Articles". The director will be protected against liability arising from decisions taken in the capacity of director. The Court of Appeal concluded that Telemedia's former directors had the benefit of both indemnities. Further, the court confirmed that no cause of action vested in Telemedia and therefore struck out the claim.(1) Based on this decision, the court did not have to consider the issue of whether the former directors had to file a defence before applying to strikeout the claim.
In the absence of reform of the Companies Act, Belize continues to recognise blanket indemnities given by a company to directors as legal.
For further information on this topic please contact Eamon Courtenay at Courtenay Coye LLP by telephone (+1 345 814 2013) or email (firstname.lastname@example.org). The Courtenay Coye LLP website can be accessed at www.courtenaycoye.com.
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