High Noon for ‘Duel’ Directors’

Issue 33 of Aurigny’s En Voyage  magazine contains our article on the perils & pitfalls of dual directorships of Guernsey companies.

During the 18th Century the Royal Court of Guernsey presided over a number of trials arising from duels contested in the Islands.  One of the most (in)famous duels during that period was between Robert Porret Le Marchant (a future Bailiff), and Thomas Saumarez (later General Sir and the brother of Admiral James Saumarez).  Notably, at a “popular” spot for holding duels in Cambridge Park, Saint Peter Port, a stone plaque commemorates the last known duel to take place in the Islands in 1795.

A series of decisions of the Royal Court and the Guernsey Court of Appeal have shown that “duels” continue to take place in Guernsey, at least in the context of two-director Guernsey companies.

In Harlequin Chemicals Ltd v Urban, the Royal Court considered a provision in a company’s articles of association which stated “The office of a director shall be… vacated… if he is requested to resign by written notice signed by all his co-directors…”.

In that case, one of the company’s two directors, in order to control the board, provided a written notice to his fellow co-director requesting he resign, thereby purportedly removing that director from the board and allowing the remaining director to appoint a favoured nominee.

Applying the interpretation provisions contained in the company’s articles and principles of contractual interpretation, the Court held that the article in question could only properly operate if there are “directors” capable of giving notice; in other words, a majority of the board. The Court noted that the article not only uses the plural but also stresses “all” co-directors.  The Court held that one director could not expel the other by simply getting in first with a notice to resign and that it would be “extraordinary” for such an article to operate in two-director companies.

A materially identical company article was also examined by the Royal Court in Midland Resources Holding Ltd v Prodefin Trading Ltd. Whilst the Court did not have the benefit of the judgment in Harlequin as such was not published at the time, the Court reached the same interpretation with similar reasoning. Applying principles set down by the United Kingdom Supreme Court in Arnold v Britton and after construing the article objectively, the Court found that it would be inconceivable that two 50 per cent shareholders would have intended that if there were only two directors, one representing each shareholder, one director could remove the other thus depriving the shareholder of any representation of the board simply by “firing first”.

On appeal, the Guernsey Court of Appeal affirmed the Royal Court’s interpretation in Midland and approved the decision in Harlequin.  The Court of Appeal rejected any alternative interpretation of the article and declared that the matter was put beyond any doubt by a consideration of commercial common sense (being one of the principles laid down in Arnold). The Judges of Appeal agreed with the Court’s findings in Harlequin that it would be extraordinary that commercial parties could have been taken to agree that one director should be able to expel the other by simply getting in first with the request to resign, describing it as a “gunshot at noon” and “undesirable”.

The article in question is widely used in Guernsey and in other jurisdictions. Whilst duelling has been prohibited in Guernsey under various laws since the late 18th century (at least as between Guernsey men and women), it is apparent from these judgments that the Guernsey courts wish to ensure that prohibition is maintained in the context of two-director companies. 

The Disputes & Risk Team at Babbé LLP advised and appeared for the successful parties in Harlequin before the Royal Court and for a successful respondent in Midland  before the Court of Appeal.

 

 

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