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SUPREME COURT DECISION

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Directors & Trustees’ Limitation Defence Fails

The Supreme Court ruled on 28 February that on an inter-company transaction, Directors & Trustees can’t rely on a standard six-year limitation defence.[i] The claim by company Liquidators against its Directors for alleged breach of statutory and fiduciary duties was originally struck out on a summary judgment application, as being past the standard six years deadline.

  • The Supreme Court’s decision rejecting that and other lines of defence has wider implications including for Directors, Trustees and D&O Indemnity insurers regarding the way that transfer of company assets are dealt with.

Background

The decision was based on preliminary points of law of general importance, and the Defendants maintain their defence to the allegations as a whole.

This case concerned a claim by a company, Burnden Holdings which went in to administration in October 2008 and liquidation in 2009.The claim was against some of its former Directors for breach of fiduciary and statutory duty under the Companies Act 2006, including allegations that the directors failed to:

  • act in accordance with the company’s constitution and use their powers for the purpose for which they are conferred (s171);
  • exercise independent judgment (s173);
  • avoid conflicts of interest and conflicts of duty (s175);
  • declare interest in proposed transaction or arrangement (s177).

The Liquidator alleged that a distribution “in specie” (in its current form without converting it to cash) of the Claimant company’s shareholding in a subsidiary company on 12 October 2007 was unlawful and in breach of duty. The Directors were previously majority shareholders. The Liquidator contended that the claimant company did not have sufficient accumulated realised profits to make the distribution.

The claim against the Directors was issued on 15 October 2013. It was agreed between the parties that the proceedings were issued more than six years after the date of the distribution in specie on 12 October 2007. The Directors’ application for summary judgment striking out the claim was confined to the question of limitation.

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Issues

  • The Liquidator relied upon s.21(1)(b) of the Limitation Act 1980, (LA 1980), which provides that no standard six years or other period of limitation applied to an action by a beneficiary under a trust to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee. The Liquidator argued that this included a transfer to a company directly or indirectly controlled by the trustee. As such, no period of limitation applied to the present claim.
  • The Liquidator also claimed that questions relating to the availability of a postponed limitation period, such that those proceedings had been commenced in time, under LA 1980, s 32, on the basis that the breach of duty was deliberately concealed, could not be determined on an application for summary judgment.
  • The Liquidator’s case was that the Company’s claim was analogous to an action by a beneficiary under a trust where a beneficiary can recover trust property or trust proceeds from a trustee which has been converted to the trustees’ benefit. These types of claim can’t be barred for being “out of time”.

Decision

  1. The Supreme Court unanimously agreed, dismissing the appeal, finding that section 21(1)(b) applies to trustees who are company directors, to be treated as being in possession of the trust property from the outset.  For the purposes of section 21, the Defendant Directors are regarded as trustees, because they are entrusted with the stewardship of the company’s property and owe fiduciary duties to the company in respect of that stewardship.
  2. The company is regarded as the beneficiary of the trust under section 21. Contrary to the Defendants’ submissions, section 21(1)(b) does not become inapplicable merely because the misappropriated property has remained legally and beneficially owned by corporate vehicles, rather than having become vested in law or in equity in the defaulting directors.
  3. Section 21 is primarily aimed at express trustees and is applicable to company directors by a process of analogy. An express trustee might or might not from time to time be in possession or receipt of the trust property. By contrast, in the context of company property, directors are to be treated as being in possession of the trust property from the outset. It is precisely because, under the typical constitution of an English company, the directors are the fiduciary stewards of the company’s property, that they are trustees within the meaning of section 21.
  4. If their misappropriation of the company’s property amounts to a conversion of it to their own use, they will necessarily have previously received it, by virtue of being the fiduciary stewards of it as directors.
  5. On the assumed facts of the present case, the Defendants converted the company’s shareholding in the subsidiary when they procured or participated in its subsequent unlawful distribution. By the time of that conversion the defendants had previously received the property because, as directors of the Claimant, they had been its fiduciary stewards from the outset.
  6. Regarding the LA 1980, s 32 argument, in-depth analysis of the issue would take the court into a minefield of difficulties. It was not necessary to decide this point because of a recent amendment to the claim pleading fraud, and because of the court’s decision about the meaning of section 21, meaning the issue is unsuitable for summary judgment.

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Comment

  • Where a company claims against a Director that the director has wrongfully or in breach of their fiduciary duties transferred the company’s property for their own benefit, no limitation defence will apply.
  • When considering limitation issues, it is important to assess whether LA 1980, s 21(1)(b) regarding a beneficiary’s claim against a trustee applies. If it does, then there will be no limitation period for the purposes of the claim, and the claim can’t be struck out for delay.
  • The effect of LA 1980, s 21(1)(b) can’t be avoided simply by using a corporate vehicle to receive the assets involved. The section includes a transfer to a company directly or indirectly controlled by the trustee.
  • Directors of a company are treated as having previously received all of the company’s assets, where they benefit from the transaction complained of and the assets are treated as having been converted to their benefit.
  • Regarding D&O’s indemnity insurance, this will be impacted where there is now no time limitation on claiming against directors regarding disposal of company assets.
  • On disposing of company assets, additional due diligence is required, ensuring that there is no breach of Directors’ statutory or fiduciary duties, to protect against future scrutiny from creditors seeking to reverse disposals, claw back company property or claim damages.

[i] Burnden Holdings (UK) Ltd v Fielding & ors [2018] UKSC 14.

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Paul Sykes is Levi Solicitors LLP Head of Disputes Management department. For further information regarding directors’ duties, company and trust disputes, contact jpsykes@levisolicitors.co.uk

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

 

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Are you a Shadow or de facto director?

Latest Court of Appeal Guidance

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The Court of Appeal has provided guidance for deciding whether someone is a Shadow or de facto director: Smithton Ltd (formerly Hobart Capital Markets Ltd) v Naggar[i]

Under the Companies Act 2006, all duties owed by a director can apply to former directors, de facto directors and “shadow directors”. It is axiomatic that creditors or liquidators will look for someone to sue when a company collapses. Given the various extensions in directors’ duties and liabilities, and widening of the class of persons covered, questions arise e.g. regarding the majority shareholder’s vulnerability, and that of other parties including directors of companies that are directors of a subsidiary.

TERMS

  • De jure Director: A director at Law, registered at Companies House
  • De facto Director: A director in Fact, although not formally appointed, but who behaves as and is taken by the company and other directors to behave as a director
  • Shadow Director: “in accordance with whose directions or instructions the Board is accustomed to act”, not being a professional adviser retained to advise “real influence over the majority of board members”; [ii]

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Group Directors, Private funders and possibly venture capitalists could fall in to the trap of becoming “shadow directors”. What would happen to them on insolvency? This is tempered by such funders commonly requiring a directorship. Following Deverell,[iii] per Morritt J., a “nod and a wink” can amount to an “instruction”. A management consultant,[iv] a parent company,[v] and a “stakeholder”[vi] have all been held to be shadow directors. A bank could be a shadow director for example.

BACKGROUND

The Court of Appeal has upheld the decision of trial judge Rose J that the Defendant Guy Naggar, was not a de facto director or shadow director of Smithton Ltd, (formerly Hobart Capital Markets Ltd). Mr Naggar was a director of Hobart’s former holding company Dawnay Day, which operated under a joint venture agreement. Hobart entered into numerous transactions with clients introduced by Mr Naggar. Following the collapse of Dawnay Day, Hobart suffered losses around £4 million. Hobart sued Mr Naggar, seeking to recoup its losses claimingng an indemnity from him, contending that while he was not a duly appointed director of Hobart, he was a de facto or shadow director of Hobart and had acted in breach of his duties owed to Hobart.

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DECISION

  • The evidence suggested that Mr Nagar was acting as chairman of Dawnay Day, Hobart’s parent company.
  • There was nothing that went beyond the involvement normally expected of someone combining the roles of major client and chairman of the majority shareholder.
  • There was no evidence that Hobart’s board were accustomed to complying with Mr Naggar’s instructions.
  • There was no basis for setting aside the judge’s conclusion that Mr Naggar had been involved with Hobart’s affairs other than in his capacity as a director of Dawnay Day or some other capacity than that of director of Hobart.
  • The judgment of Arden LJ (Elias, Tomlinson LJJ concurring) included points of general principle, applying and reaffirming the leading case of Revenue and Customs Commissioners v Holland[vii]

GENERAL PRINCIPLES

  1. There is no one definitive test whether a person was a de facto director, the question is whether he was part of the corporate governance system of the company and whether he assumed the status and function of a director so as to make himself responsible as if he were a director.
  2. Someone could be a de facto director even where there was no invalid appointment. The question was whether he had assumed responsibility to act as a director, and in what capacity he was acting.
  3. The court had to examine what the director actually did and not any job title.
  4. The court would need to consider the corporate governance structure of the company so as to decide in relation to the company’s business whether the individual’s acts were directorial in nature.
  5. The court should look at the cumulative effect of the activities relied on and should look at all the circumstances in the round.
  6. Whether an individual acted as a director is decided objectively and irrespective of their motivation or belief. A defendant did not avoid liability if he showed that he in good faith thought he was not acting as a director.
  7. Even a single directorial act could lead to liability in an exceptional case
  8. It was also important to look at the acts in their context. Relevant factors included whether
  • the company considered him to be a director and held him out as such
  • third parties considered that he was a director
  • a person was consulted about directorial decisions or his approval did not in general make him a director because he was not making the decision
    1. Acts outside the period when he was said to have been a de facto director might throw light on whether he was a de facto director in the relevant period.
    2. An individual can be both a shadow director and a de facto director at the same time, and there can be overlap.
    3. A de facto or shadow director’s role doesn’t have to cover all the company’s activities.
    4. Whether a person was a de facto or shadow director is a question of fact and degree.

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CONCLUSION

  • Where someone is a director of a holding company which is its subsidiary’s corporate director, provided that what that individual does is wholly within the ambit of his duties and responsibilities as a director of the corporate director/holding company, his acts would not make him a de facto director of that subsidiary (as in the instant case).
  • Groups of companies, directors (and those who may fall within the definition of de facto or shadow director of a holding company) should consider whether the directors of the parent company are an integral part of the subsidiary’s corporate governance and would be exposed to being deemed either de facto or shadow directors, or both.
  • This case helpfully applies the general principles and puts them in context.

 

[i] [2014] EWCA Civ 939

[ii] 251(1) of the Companies Act 2006

[iii] Deverell [2001] Ch. 340 CA (Civ Div

[iv] Tasiban Ltd (No.3), Re [1991] B.C.C. 435; [1991] B.C.L.C. 792 Ch D.

[v] Hydrodam (Corby) Ltd, Re [1994] B.C.C. 161; [1994] 2 B.C.L.C. 180 Ch D

[vi] Deverell [2001] Ch. 340 CA (Civ Div).

[vii] [2010] 1 WLR 2793

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