D & O disputes: in which jurisdiction will claims against directors be heard?

This article was prepared by colleague in London. For more information, you may contact:

Maxine Cupitt

CMC Cameron McKenna, LLP

Mitre House

160 Aldersgate St.

London EC1A 4DD

The issue of what jurisdiction a claim is brought in can have far reaching implications for D&O insurers; affecting the costs of the action, the chances of defending it and any amount ultimately payable by way of indemnity.

In a recent decision (Choudhary and Others v Bhattar and Others [2009] All ER (D) 163 (Feb), the English court has confirmed that the jurisdiction of any dispute involving a company registered in an EU member state which concerns the validity of decisions of organs of the company (such as the board of directors) will be governed by the jurisdiction of the EU member state in which the company has its seat.

This is because the court of the member state will be obliged to apply the EU Regulations that govern jurisdiction (and the enforcement of judgments). Those regulations provide that where a company has its seat in an EU member state, any dispute involving the validity of the company constitution, the nullity or dissolution of the company or the decisions of the organs of the company shall be determined in the courts of that member state. It does not matter that the competing jurisdiction is outside the EU. The key question is: where does the company have its seat? If this is outside the EU, then the regulations do not apply.

The seat of the company is determined according to the law of the EU member state whose courts are hearing the case. So if the case were being heard by the English court, the seat of the company would be the place it was registered.

In this particular case, the company was based in India but registered in England. The claimant directors alleged that the defendants had improperly seized control of the company. The case came before the English courts who concluded it should be heard in England, by virtue of the regulations. Whether the case was "more closely connected" to India or whether India was the "more natural forum" was irrelevant.

If this decision were to extend to all actions of directors of companies, then its application to claims against directors and officers would bring clarity to the law. Unfortunately, this is not the case. Where claims against directors and officers are concerned, the court will ask: what is the substance of the dispute? Is it the validity of the actions of the board? If so, the case may come within the regulation set out above. If not (say where individual directors have been charged with fraudulently appropriating company funds), then different sections of the regulations might apply. So if, for instance, either a derivative action or an unfair prejudice action under the Companies Act 2006 is brought, the court will look to the substance of the dispute not the identity of the parties to determine the correct regulations to apply to the dispute.