Friday, 31 August 2012

Jersey: the construction of the articles of association and the meaning of 'profits of that year'

Last week the Jersey Court of Appeal delivered its judgment in Trilogy Management Ltd. v YT Charitable Foundation (International) Ltd. and others [2012] JCA 152 (an appeal from a decision of the Royal Court delivered in May this year and reported at [2012] JRC 093). The case concerned the following provision (article 96) in a Jersey company's articles of association: “…the Directors shall, in any financial year in which profits of that year are available for dividend, recommend to the Company a dividend of not less than 75% of such profits”.

The dispute between the parties in the Court of Appeal concerned the meaning of "profits of that year" under article 96 in relation to the 12 months ending 31 December 2005. In its decision the Royal Court held that a gain on the revaluation of investments of over $220 million shown in the accounts for the year to 2005 was, for the purposes of article 96, to be regarded as profits of the year even though the income statement recorded a loss for the year. The Court of Appeal disagreed, holding that "profits of that year" should be interpreted as "profits of that year as ascertained by the generally accepted accounting principle applied by the company in the preparation of its accounts from time to time" (paras. [52] and [69], per Nugee JA delivering the court's opinion). Where those principles produced a loss, as they did for the 12 months to 31 December 2005, then the conclusion was that the mandatory dividend provision in article 96 did not apply.

In the course of its judgment the court considered principles of contract construction (including the recent Supreme Court decision Rainy Sky SA & Orsd v Kookmin Bank [2011] UKSC 50) and noted that in the case of articles of association there were limits on what evidence was admissible: "... the Memorandum and Articles of a company, once registered, constitute a statutory contract the terms of which are available to any member of the public, and as such cannot be affected by extrinsic matters known only to certain persons" (para. [41]). With reference to these principles, the court held that there was nothing in the admissible background or commercial consequences which would cause it to change its view as to the meaning of "profits of that year".

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