Calling Time: English High Court Declares Limitation Period on Claims against Directors of Jersey Companies

Yesterday, the Chancery Division of the English High Court in O’Keef & Anor v Caner & Ors [2017] EWHC 1105 (Ch) held, as a matter of fact, that the appropriate prescription period for a claim against directors of a Jersey company for breach of their duties under Article 74 Companies (Jersey) Law 1991 was 10 years from the date of breach.

Background

The Claimants were joint liquidators of two Jersey companies. Between 2007 and 2008 €34m was withdrawn from the companies’ bank accounts and paid to the companies’ UBO, who was also a director of both. Those payments were not made in good faith or for a legitimate or commercial purpose and could not be properly treated as distributions.  The joint liquidators brought claims against certain professional directors of the companies who allowed the payments to be made when the companies were effectively insolvent.

The duties relied on were those set out in Article 74(1) Companies (Jersey) Law 1991:

A director, in exercising the director’s powers and discharging 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 issue of what prescription period applies to a breach of the duties in Article 74 has been a running source of controversy in the Jersey authorities for over 10 years since the decisions of In Re Northwind Yachts Ltd 2005 JLR 137 and Alhamrani v Alhamrani 2007 JLR 44.

The Issue

As a preliminary issue the defendant directors contended that the claims were prescribed under Jersey law because the limitation period for such claims was 3 years (claims against directors being analogous to claims in tort or a breach of trust, for which the period is 3 years). The liquidators contended that the applicable prescription period was 10 years, being the default period applicable to actions personnelle mobiliére (personal actions) in Jersey law.

The Arguments

The competing arguments for the appropriate prescription period were analysed by looking at the different nature of the duties contained in Article 74, those that were fiduciary in character (Art 74(1)(a)) and those which could broadly be described as a duty of care and skill (but which were not fiduciary in character – (Art 74(1)(b)).

The competing possible prescription periods were:

  1. Three years based on tort because either:
    1. as directors’ duties in Jersey law were statutory, breach of them must ipso facto constitute the tort of breach of statutory duty to which Article 2 Law Reform (Miscellaneous Provisions) (Jersey) Law 1961 applied directly; or
    2. Article 2 Law Reform (Miscellaneous Provisions) (Jersey) Law 1961 applied to breaches of both Article 74(1)(a) and (b) directly or by analogy; or
    3. the statutory three year period applicable to breach of trust claims under Article 57 Trusts (Jersey) Law 1984 was applicable either directly or by analogy with a breach of a directors’ fiduciary duty.

In default of either of those arguments succeeding, a period of ten years was applicable because no other period could be applied directly or by analogy.

Direct or analogous application of tortious prescription period

In Jersey law, torts are prescribed three years from the date of loss by reason of Article 2 Law Reform (Miscellaneous Provisions) (Jersey) Law 1961.

Whether the prescription period in 1961 Law applies directly to Article 74(1)(b) turns on the duty therein being tortious in nature.  In a section of the judgment from paragraph 87-113 (which the author confesses he finds somewhat opaque) the court resolved that the duty in Article 74(1)(b) was not tortious but was in fact a species of equitable duty which in Jersey law would be categorised as a species of duty arising from quasi-contract (see Pothier’s Traite des Obligations (1761), paras 113-115) and therefore fell to be analysed as an  action personnelle mobiliére and thereby prescribed after 10 years not 3.

While the case of an analogy to be drawn between Article 74(1)(b) and a tortious claim for negligence was superficially attractive, there was a serious conceptual difficulty seeking to shoehorn Article 74(1)(a) within what Jersey law would regard as a tortious claim.  Article 74(1)(a) is a statutory expression of a fiduciary duty, which is concerned with concepts of honesty and loyalty not competence.  There is a significant substantive difference between fiduciary and tortious duties including the nature of the actions and the remedies flowing from their respective breaches.  There was simply no basis to assert that a breach of fiduciary duty was a tort.

The court rejected the submission that simply by virtue of the statutory codification of the duties in Article 74, that made breach of those duties, ipso facto a breach of statutory duty that was capable of being brought (and prescribed) as a private tortious action. Clearly not every actionable breach of duty contained in a statute was actionable as a tort.  A breach of the statutory duties of trustees in Article 21-23 Trusts (Jersey) Law 1984 or sections 1, 5 and 22 Trustee Act 2000 sound as breaches of trust, not as actions in tort (although it is acknowledged that some of those duties are tortious, rather than fiduciary in nature – but not by nature of their codification in statute). Likewise, the UK’s statutory codification of directors duties in Part 10 Companies Act 2006 does not make those duties tortious. Statutory codification has changed their basis not their nature or the way they are to be interpreted or applied. Directors duties are not tortious in nature simply because they are contained in a statute.

Having been convinced that the applicable period to an Article 74(1)(b) claim was 10 years, the court was not convinced there was a proper basis to consider whether the three year period under the 1961 Law should be applied by analogy.  In Jersey law an action for breach of a contractual duty of care is prescribed in accordance with the prescription period applicable to contract, notwithstanding that a breach of a contractual duty of care and skill is, in substance, no different to a tortious breach.

Direct or analogous application of period applicable to breaches of trust

The court held that Article 57(2) Trusts (Jersey) Law 1984 had no direct application to actions for breach of director’s duty. Neither was the court convinced that Article 57(2) could appropriately be applied by analogy.

The directors of a company are not by virtue of their office trustees of the company’s property. The company is legally and beneficially he owner of its own property. Article 1 and 2 Trusts (Jersey) Law 1984 define the office of trustee strictly so as to preclude the direct application of Article 57 to directors (affirming Birt DB in Northwind Yachts at para 30).  That is not to say that a direct may not become a constructive trustee (and subject to Article 57 by virtue of being a constructive trustee) of the company’s property coming into his hands (see Article 33 Trusts (Jersey) Law 1984).

Notwithstanding that directors and trustees owed substantially similar duties, the court held that Article 57 Trusts (Jersey) Law 1984 could not be applied by analogy to directors.  It was not necessarily wrong in principle to look to Article 57 as analogous but that in order to neatly shoehorn directors into Article 57 would involve closing one’s eyes to parts of the interlocking, self contained prescription regime applicable to trustees.  Looking closely at Article 57 reveals that the three year starting point at which the statutory three year period begins differed depending on a number of situations, to which there was no easy analogy with the position as between a company and its directors.  Put another way, Article 57 is too specifically tailored to the position of trustees to make it easily analogous to the duties of a director to his company.

Conclusions

The English High Court has therefore held that an action for breach of either limb of Article 74(1) Companies (Jersey) Law 1991 is 10 years.

Comments

The decision in Caner is a finding of an English court and is not binding in Jersey as statement of Jersey law. However it is the first time that the issue of prescription against Jersey directors has been dealt with in any comprehensive way and were the issue to come before the Jersey court, the decision is likely to be persuasive.

The conclusion that the prescription period applicable to the tort of negligence does not apply directly or by analogy with Article 74(1)(b) on the basis that the duty is not tortious but quasi-contractual is likely to be a source of controversy.  The working assumption of many practitioners is that Article 74(1)(b) is concerned with a director’s reasonable care and skill, i.e. negligence.  Negligence, in Jersey law, is a tort. There is no meaningful distinction in Jersey law between an equitable and customary law duty of care in the same way as exists in England. Indeed, the decision acknowledges that even in England the content of an equitable duty of care and common law duty and the remedies flowing from breach of those duties are practically identical.

The 10 years prescription period is subject to the Jersey doctrines of empêchement de fait, with the potential to extend the applicable prescription period longer than 10 years where there is an practical impediment to being able to commence a claim.

There is a widespread perception that a ten year prescription period for breaches of directors’ duty is too long for an island where financial services is the dominant sector of the economy.  I would not be surprised if the States of Jersey resolved any further controversy by bringing forward a statutory prescription regime for claims against company directors claims when the Companies (Jersey) Law 1991 is next amended.

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