In a helpful judgment the Jersey Court of Appeal has upheld the decision of the Royal Court in Pirrwitz v AI Airports International Limited and PI Power International Limited [2013] JRC 017. The case raised questions regarding the remuneration of directors and in particular the scope of provisions in articles of association under which directors may be remunerated. An important point highlighted by the decision is that directors have no entitlement to remuneration out of company funds unless this is set out in the company's articles of association or approved by the company's members (the members being  the shareholders in the case of a company having shares).

This Briefing considers the decision in relation to issues raised regarding the remuneration  of directors. The judgment is also important in clarifying the duty of a director under Article 74(1)(a) of the Companies (Jersey) Law 1991 to "act honestly and in good faith with a view to the best interests of the company". That aspect of the case is considered in a separate Briefing.

Facts

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. Under his written terms of service he was entitled to certain payments in the event of his being removed from office or resigning on three months' notice. These exit payments were €600,000 and €700,000 respectively. The directors were expected by the hedge fund investors, who 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 employees. Relations between the directors and the hedge fund investors became increasingly strained. Mr Pirrwitz was in due course removed by the investors as a director of both companies. As a result, he claimed the two lump sum payments. The companies resisted. They argued that the agreements were invalid and unenforceable because (a) neither company's articles of association contained power to agree to exit payments of this nature; (b) the terms of the payments had not in  fact been authorised by either board; and (c) 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 gave judgment in favour of Mr Pirrwitz.

The companies appealed. Christopher Nugee QC, sitting with the Hon. Michael Beloff QC and Robert Logan Martin QC, gave the Court of Appeal's judgment dismissing the appeal.

The Court of Appeal's decision regarding the power of the board to agree remuneration of directors

The articles of both companies were materially identical and contained separate powers of remuneration for non-executive and executive directors.

Upholding the approach of the Royal Court, the Court of Appeal considered firstly a specific power of the board, set out in the articles, whereby they could agree that "extra remuneration by way of salary, commission or otherwise" could be paid to any director "who does not hold executive office" but who nevertheless serves on a committee of the board or who otherwise performs special services outside the scope of a director's ordinary duties.

Assuming Mr Pirrwitz could be classed as a non-executive director, the Court of Appeal held that the exit payments fell within this provision. Mr Pirrwitz had indeed served on committees of the board. He had also performed special services outside the scope of a director's ordinary duties. Moreover, the exit payments were a form of "remuneration": referring to Currencies Direct Ltd v Ellis  [2002] EWCA Civ 779 and Guinness v Saunders [1990] 2 AC 663, the Court of Appeal noted that remuneration includes any form of consideration in return for services and can in particular include a one-off lump sum payment at the end of a director's term and indeed payments generally for services which have already been rendered.

If, on the other hand, Mr Pirrwitz was an executive director, the board still had the requisite power under a separate provision in the companies' articles of association. This provision enabled the board to arrange  for a director to be employed by the company, or to provide services outside the scope of ordinary duties, and this "on such terms, including without limitation terms as to remuneration, as the board determines".

It was therefore unnecessary to decide whether Mr Pirrwitz was in fact an executive or non-executive director. The board had power to agree the exit payments either way.

Nor was it necessary to decide whether a power to remunerate directors was implicit within the general power to manage the business of the company which was set  out in standard terms as Article 123 of their articles of association. The general principle is that directors, being fiduciaries, are not entitled to remuneration out of the company's funds, unless authorised by the articles: Guinness plc v Saunders. Article 123 merely conferred on the board the power to manage the company's business, without express reference to the remuneration of directors. The Court considered that there was "some force" in the submission that what was needed was not just a power to manage the business of the company but a specific release of a director's fiduciary obligations. It was, however, unnecessary to decide the point; it was thus left open whether Article 123 would have alone sufficed. The Court doubted whether the point was significant in practice, given that articles of commercial companies usually, if not always, contain express provisions authorising directors to be remunerated.

Whether the agreement for the exit payments was authorised in fact by the board

The Court noted that the scope for a court of appeal to interfere with a conclusion of fact reached by the trial court is limited: only the latter will have had the advantage of observing the witnesses. Thus a decision of the trial court based on the trustworthiness of witnesses cannot be interfered with unless the appellate court is convinced that it is wrong, nor can the appellate court ignore facts which the  trial court has found on its impression of the credibility of witnesses: Pell Frischmann v Bow Valley Iran Ltd [2008] JCA 146, [2008] JLR 311; Powell v. Streatham Manor Nursing Home [1953] A.C. 243 (England and Wales). This was particularly so under the Jersey legal system, where facts in a civil case (and criminal cases if there is no jury) are found by two or more Jurats sitting together with a judge of law and fact: Jones, Jones and Bedell Cristin Trustees Limited v. Plane [2006] JLR 438.

These principles made it impossible to overturn a finding of fact by the Royal Court 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 Mr Pirrwitz's service contracts on behalf of the companies.

Comment

An important point made in this decision is that directors, being fiduciaries, have no prima facie right to be remunerated out of company funds. A right of remuneration requires either clear authority under the company's articles of association or the approval of the company's members.

The Court of Appeal left open the question whether a general power, in standard terms, authorising the board to manage the company's business included a power to agree to a director's remuneration. It seems doubtful that it could, especially where the remuneration of directors is dealt with more specifically under other provisions in the articles.

Many Jersey companies have articles which either consist of the Standard Table articles (set out in the Companies (Standard Table) (Jersey) Order 1992) or track the relevant provision regarding remuneration of directors. Article 73 of the Standard Table deals with the ordinary remuneration of non-executive directors. (Article 75 deals separately with the remuneration of executive directors and remuneration for special services).

Article 73 of the Standard Table provides:

"73 Remuneration of directors

The directors shall be entitled to such remuneration as the company may by ordinary resolution determine..."

Clearly, under this provision any remuneration paid out of company funds to a non-executive director for services which are within the ordinary scope of a position on the board should be determined in the envisaged manner, that is to say, by ordinary resolution of the members of the company. Whilst an informal agreement between all the members might have the same result (under the principle in Re Duomatic Ltd [1969] 2 Ch. 365) this would be very much a fall-back position and dependent on establishing such an agreement on the precise facts.

The point is illustrated by the recent Scottish case of Tayplan Ltd (in administration) v Smith [2012] B.C.C. 523. The relevant provision of the company's articles was in the same form as Article 73 of the Jersey Standard Table. The Court of Session held that, since the members had neither passed a resolution approving the remuneration nor informally agreed to it under the Duomatic principle, the directors were not entitled to remuneration, even on the basis of quantum meruit (fair reward for services rendered under an implied contract).