Privy Council clarifies directors' powers and indemnity requirements in company receivership cases.

Citation: [2023] UKPC 42
Judgment on

Introduction

In the matter of Keith Arjoon and 2 others v Maria Daniel (Receiver) from the Republic of Trinidad and Tobago, the Privy Council was tasked with addressing several key legal issues that pertained to proceedings brought against a company receiver by the company directors. This appeal required the Council to consider whether a company under receivership, through its directors, could initiate legal proceedings without providing an indemnity against costs and whether the directors themselves had standing to pursue such claims for alleged breaches of duty by the receiver.

Key Facts

The claimants, being the directors of KPG Co Ltd (“the Company”), which was under receivership, sought to restrain the receiver’s proposed asset sales. The receiver challenged this by requesting the discharge of the injunction, striking out the Company as a claimant for failing to offer indemnity for costs, and the dismissal of the directors’ claims on the grounds of lack of standing.

The High Court found in favor of the receiver, but this decision was reversed by the Court of Appeal. The receiver then appealed to the Privy Council, raising core issues around the necessity of an indemnity and the directors’ standing to make claims on behalf of the company.

Directors’ Authority to Commence Proceedings

The Privy Council recognized the well-established principle that directors might retain the authority to commence legal action in the name of a company in receivership against the receiver or debenture holders, under specific circumstances. This principle, originating from the Newhart Developments case, acknowledges the directors’ residual power to authorize claims to seek remedies for legal wrongs purportedly committed by receivers or debenture holders.

Requirement for an Indemnity

The courts previously held that directors must offer an indemnity against costs when initiating proceedings in the name of a company under receivership, so that the company’s charged assets are not put at risk. The principle aims to safeguard the debenture holder’s interest from being diminished by litigation costs. However, this indemnity’s requirement has not been seen as a pre-condition for initiating proceedings.

Directors’ Standing in Making Claims

Another focal point is the directors’ standing to bring forth claims against the receiver. The directors’ capacity to initiate proceedings is differentiated from any personal claims they might have, with the principle that only the company itself, to which the receiver owes applicable duties, may seek remedies for any breaches.

Outcomes

The Privy Council allowed the appeal, emphasizing that:

  1. While the requirement for indemnity is not necessarily a precondition for commencing proceedings, it is essential where there is a real risk of asset depletion. The directors should offer or secure an indemnity concerning any costs orders against the company to protect the debenture holder’s interests.

  2. Directors lack standing to claim for breaches of duty by the receiver if the claims concern losses suffered by the company and not personally by the directors. Directors’ actions are acceptable only when they prosecute claims that benefit the company and not in their own personal capacity.

Accordingly, the claims of both the Company and the directors were struck out, and the interim injunction restraining the sale of the Company’s assets was discharged.

Conclusion

The Privy Council’s analysis in Keith Arjoon and 2 others v Maria Daniel reaffirms crucial legal concepts regarding the conduct and powers of directors in companies under receivership. Significantly, it holds firm the need for directors to indemnify company assets against potential litigation costs when they initiate proceedings to challenge the actions of a receiver. Simultaneously, it delineates the boundaries of their locus standi, clarifying that directors may facilitate actions for the company’s interest but cannot usurp the company’s role in seeking redress for its losses. The nuanced clarification of these principles by the Privy Council underscores the delicate balance between the company’s interests, the directors’ powers, and receivers’ duties within corporate insolvency practice.