Mr Pirrwitz was a director of two Jersey companies – AI Airports International Limited and PI Power International Limited – which held substantial investments in the airport and power sectors, respectively. Under his written terms of services, he was entitled to certain payments in the event of his being removed from office or resigning on three months' notice. The exit payments were €600,000 and €700,000, respectively.
The directors were expected by the hedge fund investors that had procured their appointment to realise the companies' investments and return cash to shareholders as soon as possible. The role was difficult and the board was unsupported by any employees. Relations between the directors and the hedge fund investors became increasingly strained. In due course, Pirrwitz was removed by the investors as a director of both companies. As a result, he claimed two lump-sum payments.
The companies denied the claim. They argued that the agreements were invalid and unenforceable because:
- neither company's articles of association contained the power to agree exit payments of this nature;
- the terms of the payments had not been authorised by the board; and
- the agreements to make the exit payments had not been in the best interests of the companies, and were therefore unenforceable.
The Royal Court rejected the companies' defence on each of these points and ruled in favour of Pirrwitz. The companies appealed.
Dismissing the appeal, the Court of Appeal held as follows.(1)
Power to agree exit payments
Upholding the approach of the Royal Court, the Court of Appeal concluded that the board had the power to agree the exit payments regardless of whether Pirrwitz was an executive or non-executive director. The court further noted that exit payments were a form of remuneration, and that remuneration can include a one-off lump-sum payment at the end of a director's term. The general principle is that directors, being fiduciaries, are not entitled to remuneration out of the company's funds unless authorised by the articles of association. In the case at hand, the Court of Appeal concluded that the articles of both companies were materially identical and contained separate powers of remuneration for non-executive and executive directors.
Authorisation of agreements for exit payments
The Court of Appeal stated that it would be impossible for an appellate court to overturn a finding of fact by a trial court that had had the advantage of seeing witnesses and whose decision was based on the trustworthiness of such witnesses. This was particularly so under the Jersey legal system where jurats act as judges of fact. The Court of Appeal therefore maintained the Royal Court's decision that there had been a consensus at the relevant board meetings to authorise the chairman not only to determine the amount of the exit payments, but also to sign Pirrwitz's service contracts on behalf of the companies.
Best interests of companies
Article 74(1) of the Companies (Jersey) Law 1991 states that the duty of a director is as follows:
"(1) a director, in exercising the director's duties shall - (a) act honestly and in good faith with a view to the best interests of the company; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances."
The Royal Court had found, on the facts, that the payments could properly be considered to be in the best interests of the companies on the grounds that they secured the loyalty and independence of the relevant directors. The Court of Appeal agreed with the Royal Court's conclusion, but went on to consider the specific terms of Article 74(1)(a). On its plain wording, the court stated, a director was not in breach of this article if he or she acted in a way that he or she considers in good faith to be in the company's best interests. The exercise of power by the directors, properly motivated in accordance with Article 74(1)(a), could not amount to a breach of duty under Article 74(1)(a) merely because a court later concluded that the directors' acts were not, in its view, in the best interests of the company. It followed that the directors could not be said to be in breach of Article 74(1)(a).
The court said that it was trite law that any power must be exercised for the purpose for which it is given and not for some foreign or ulterior purpose. In the case at hand, securing the loyalty and independence of the directors was undoubtedly a proper purpose of the power of the board to fix remuneration.
This case is particularly useful when considering the duties of directors as the Court of Appeal clarified the duty of a director under Article 74(1)(a) of the Companies (Jersey) Law. It is also useful when considering the remuneration of directors, and in particular the scope of provisions in articles of association under which directors may be remunerated.
For further information on this topic please contact Raulin Amy at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected]). The Ogier website can be accessed at www.ogier.com.
Endnotes
(1) Al Airports International Ltd v Pirrwitz [2013] JCA 177.
