Unfair Prejudice & Drag Along

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My analysis on Court of Appeal decision in Re Charterhouse Capital Limited; Arbuthnott v Bonnyman [2015] EWCA Civ 536 :

http://www.luptonfawcett.com/blog/unfair-prejudice-and-drag-along/

Minority Shareholder wins Quasi Partnership claim

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Read my piece in the link below on

  • A succesful claim establishing unfair prejudice by a petition under s. 994 of the Companies Act 2006
  • The latest Practice Direction on unfair prejudice claims, introducing Automatic Directions

http://www.luptonfawcett.com/blog/unfair-prejudice-minority-shareholders-win/

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Single typo costs Companies House £8m

Companies House liable for mistakenly saying Company had been wound up

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Background

Companies House has been held responsible for the financial collapse of Taylor & Sons Ltd, of Cardiff, a 124 year old engineering company. On 20 February 2009, Companies House mistakenly recorded on the register that a winding up order had been made against it. But there was a typo; it was an entirely unconnected company with a very similar name, “Taylor & Son Ltd” that had been wound up. After 3 days the error had been corrected. By then it was too late.

Companies House had sold the records to credit reference agencies. Customers and suppliers wouldn’t trade with the blameless and solvent Taylor & Sons Ltd; they lost business, income and credit. Within two months the business, which employed 250 people collapsed and it was forced in to Administration.

 

Negligent Misstatement

 The Co-Owner and managing director of Taylor & Sons Ltd, Philip Sebrey took proceedings against Companies House, an executive agency of the Department of Business, Innovation and Skills. His claim was based on the law of negligence, which has been developing continuously since the leading 1963 Case of Hedley Byrne v Heller[i], extending the law of negligence. Where a careless statement is made which causes economic loss, the victim can claim damages. That now includes cases involving the careless exercise of statutory powers.

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Decision

After a 4 year battle, the claim for compensation succeeded. Sebry v Companies House [2015] EWHC 115[ii]. Although damages have not yet been decided, the claim is for approximately £8m.

The Judge, Mr Justice Edis said that the long standing 3 stage test in Caparo[iii] applied:

  • Forseeability: this was “obvious”
  • Proximity: the duty was owed to one individual company whose identity was readily discoverable. To say that it was also owed to every other company on the Register is only to say for example that a hospital owes a duty to each patient which it treats, and may come to owe duties to many thousands of people in the course of a year. Whilst true, this is not a reason for denying that the hospital ever owes any duty. Very large organisations such as hospitals who impact on the wellbeing of a very large number of people owe a very large number of duties to a very large number of people. The class is limited and its members ascertainable at the stage when treatment is given
  •  Whether it is fair, just and reasonable to impose a duty: The Judge could find no proper ground on which to conclude that it would not be fair, just and reasonable to impose a duty to avoid foreseeable harm to a sufficiently proximate victim.

Conclusion

“…..the Registrar owes a duty of care when entering a winding up order on the Register to take reasonable care to ensure that the Order is not registered against the wrong company. That duty is owed to any Company which is not in liquidation but which is wrongly recorded on the Register as having been wound up by order of the court. The duty extends to taking reasonable care to enter the Order on the record of the Company named in the Order, and not any other company. It does not extend to checking information supplied by third parties. It extends only to entering that information accurately on the Register….”

Ultimately, Edis J could see no legal principle or policy excusing Companies House for its negligence. Where there is a legal wrong, there ought to be a remedy. If Companies House had escaped liability, Mr Sebrey would have had no redress. The previous understanding of the law has been applied, and moderately extended under the doctrine of “incrementalism”.

For liability to be established, a claimant has to prove that it suffered losses directly as a result of reliance on a negligent misstatement. An executive agency carrying out a statutory function was not immune. However, the liability in these particular circumstances did not extend to other, less proximate or easily identifiable parties, including lenders and employees.

 

[i] [1963] 2AC 465

[ii] http://www.bailii.org/ew/cases/EWHC/QB/2015/115.html

[iii] Caparo Industries v Dickman [1990] 2 AC 605

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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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Court of Appeal upholds power of English Court to commit a foreign director for contempt

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The Court of Appeal has unanimously upheld the High Court’s decision that the Managing Director of the Claimant (domiciled and resident in Saudi Arabia) could be served with committal proceedings for contempt of cour

BACKGROUND

In the lower court, the Claimant companies obtained a ‘without notice’ injunction against the Defendants. This was cancelled when the judge at first instance found that the Claimant companies were in breach of their obligations to give full disclosure. They had also misled the court and broken an undertaking to preserve evidence. Consequently one of the Defendants asked the court to punish the Claimant companies for contempt of court. Additionally, the Defendant made an application for committal (imprisonment) of  the Claimants’ Managing Director. This was on the basis that he was also in contempt of court , although he was not personally bringing the case in his name. The judge ordered service of the application for contempt on the director out of the jurisdiction.

The director appealed to the Court of Appeal. He argued that the Court had no power to make any order against him because he was outside the territorial jurisdiction.

CASE

Dar Al Arkan Real Estate Development Co & Anor V Al Refai & Ors [2014] EWCA Civ 715

http://www.bailii.org/ew/cases/EWCA/Civ/2014/715.html

 

COMMITTAL

Under CPR r81.4 a committal order can be made against the director of a company which is in breach of a judgment, order or undertaking.

The Court of Appeal accepted that the legislative intention behind the provision must include dealing with contempt of its orders by companies with foreign directors. Although CPR r81.4 does not specifically state that it is effective out of the jurisdiction, if this was not the case, the power of the English courts to ensure compliance with its orders would be

significantly weakened”.

The Court of Appeal distinguished the position where it had previously been decided that the English courts did not have jurisdiction to order the examination of a foreign director of a debtor company under CPR r71. The rationale was the nature of committal proceedings is very different from the power of the court under Part 71 to obtain information from judgment debtors.

The Court of Appeal upheld the Judge’s exercise of discretion to allow service out of the jurisdiction of the Notice of Committal. This was because the application constituted a “Claim Form” under the definition in CPR r6 as it commenced “proceedings”.

The Court of Appeal also referred to Article 22(5) of Regulation 44/2001 of the Brussels I Regulation. This states that, in proceedings concerned with the enforcement of judgments, the courts of the Member State in which the judgment has been or is to be enforced shall have exclusive jurisdiction,

regardless of domicile”.

The trial judge held that this Article did not apply because the director was not domiciled in a European Union Member State.

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The judge said that he was bound by the Court of Appeal’s decision in Choudhary & Ors v Bhatter & Ors [2009] EWCA Civ 1176. The Court of Appeal however indicated that, in view of ECJ decisions, there was a “compelling” argument that Choudhary was incorrectly decided and that the English courts did have jurisdiction under the Article, no matter where the defendant is domiciled.

As such, there was no reason not to extend the jurisdictional rule to parties and directors domiciled outside of the EU. Their non-domiciliary status is irrelevant and does not limit the Court’s powers to enforce its orders.

COMMENT

It would have been damaging for compliance with  the Overriding Objectives to deal with cases justly, and unfair if there was a weakened regime  for directors resident abroad, or directors of foreign companies.

The decision shows that the court is prepared to extend the reach of sanctions where this is in the public interest. Ultimately this could result in committal for contempt of court, even for a foreign director,  where there is continued disobedience of a court order.

 

Service of a Claim Form on a Director

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Key issues for company directors from the recent case Key Homes Bradford Ltd and others v Patel [2014] All ER (D) 69:
A recent High Court decision provides a warning to company directors who move abroad without updating their address for service on the register of directors.
The claimants served the claim form on the defendant (a former director of the claimants) by delivering it to two addresses in England, which he had listed on the register of directors. The defendant disputed service on the basis that he was no longer resident in the United Kingdom at the date of service and neither address was his usual or last known residence. The court held that the defendant had been validly served with the claim form at the address listed on the register.

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This decision makes it clear that directors who choose to move abroad without updating their address for service on the register will leave themselves open to be served with proceedings in England, if an English address is still listed.
Section 1140 Companies Act 2006.
This permits a document to be served on a company director by leaving it at or sending it by post to the person’s registered address. This applies whatever the purpose of the document in question. The registered address is the relevant address in the register of directors available for public inspection.
The case is a ground-breaking decision of considerable practical importance. There had been no prior cases considering the application of the section. The High Court decided that section 1140 allows a claimant to serve a company director with proceedings at the director’s registered address in the UK without seeking the court’s permission and regardless of whether (a) the proceedings concern that company or (b) the director resides outside the jurisdiction.
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This means claimants will be entitled to serve on the English address listed on the register and avoid the need to obtain permission to serve outside the jurisdiction. Conversely, any directors moving abroad should check the register so that they are aware of what address is listed. Directors who choose to move abroad without updating their address for service on the register, leave themselves open to be served with proceedings in England, if an English address is still listed by them
Defective Service.
This reminds me of a case where solicitors on the other side made an incorrect assumption that I was acting for both the first defendant (limited company) and second defendant (individual director, sued personally). It was clear however that I only had instructions to accept service on behalf of the limited company. I had to send back the proceedings meant for the Director. The claimants’ attempts at service on him failed, and they were out of time. They were unable to reinstate the proceedings against the director in this multi-million pound claim and the action against him was struck out. The claimants’ solicitors ultimately had to pay costs on that service dispute exceeding £20,000.
J Paul Sykes LLB LLM
First Published February 2014