Summary

Although a shadow director might be liable for breach of fiduciary duty to the company, he would not be liable for any loss arising from breach of that duty where a de jure director, on the same facts, would have been relieved of duty under the Companies Act 1985 s.727 or the Companies Act 2006 s.1157

Facts

A company in liquidation (P) brought a claim against the defendants on the basis that they had perpetrated a fraud through commission-sharing arrangements with other companies.

The first defendant (R), who had interests in the other companies, was said to be a de facto or shadow director of P because of his involvement in such activities as recruitment, financial reporting and instructing P's professional advisers. Article 85 of P's articles of association permitted a director to be a party to a transaction with P without liability to account for benefits received, provided that any material interests were disclosed. P claimed that R had fraudulently entered into contracts, causing P to give away some of its commission for no or no adequate consideration. P went into liquidation on 21 December 2008. The instant proceedings were brought on 18 December 2014 under the Insolvency Act 1986 s.213, which allowed the court to order a contribution to the assets of a company by persons who had knowingly participated in that company's fraudulent trading. If s.213 applied, the six-year period would begin to run from the date of liquidation. P also brought a claim against R for breach of fiduciary duty, maintaining that he was liable to account for profits made as a result of that breach, and a negligence claim against its advisers.

R submitted that, if he had been in breach of fiduciary duty, his actions had been ratified at a shareholders' meeting.

Held

De jure, de facto and shadow directors: breach of fiduciary duty - In the Companies Act 1985 s.741(1) and the Companies Act 2006 s.250, "director" included any person occupying the position of a director, regardless of how they were described. That was generally taken to mean that a de facto director was a "director" of the company and, in the case of the 2006 Act, was a director for the purposes of the duties under s.171 to s.177. Whether a person was a de facto or shadow director was not subject to any clear legal test, but depended on the specific facts of each case and the activities of the individual in question. A de facto director owed the same duties as a de jure director. R was a shadow director in relation to at least some of P's activities. However, there was an obvious difficulty in establishing that a shadow director owed a fiduciary duty and was in breach of it, and was thus liable for any resulting loss, where a de jure director would not be liable on the same facts because they would be relieved from duty under s.727 of the 1985 Act or s.1157 of the 2006 Act. In the instant case, P had not made out its claim that the commission payments were made for no or no adequate consideration; therefore, R was not in breach of duty in that regard. If he had been a de jure director, he would have been obliged to avoid a conflict between his duty to P and his interests in the others companies, but he would also have had the benefit of art.85 (see paras 214-217, paras 249, 253-254, 271, 277-278, 345, 352, 355-357 of judgment).

Ratification - Before a director could rely on ratification by the shareholders in relation to something which would otherwise be a breach of fiduciary duty, they had to show that the shareholders had full knowledge of the relevant facts so as to be able to make an informed decision. In the instant case, the shareholders had been told that the arrangements in issue were on an arm's length basis. Therefore, if R had been in breach of fiduciary duty, it would have been held that they did not have sufficient information on which to ratify (paras 375, 377).

Negligence - The advisers did not owe any duty to P to assess the commercial value of the consideration provided by the recipients of the commission-sharing arrangements, since their retainer did not cover such advice (para.391).

Section 213 - P's business had not been carried on with fraudulent intent and there was no basis for a declaration that any of the defendants were liable to make a contribution to its assets. Although one of P's directors had created false documents, there had been no resulting loss to P or any third party, Morphitis v Bernasconi [2003] EWCA Civ 289 applied (para.415).

Limitations - Had P established a breach of fiduciary duty by R, it would not have been a fraudulent breach of trust within the Limitation Act 1980 s.21(1)(a) and the resulting claim would not have fallen within s.21(1)(b), First Subsea Ltd (formerly BSW Ltd) v Balltec Ltd [2017] EWCA Civ 186 followed. Nor would the action have been one based on fraud, within s.32(1)(a), or deliberate concealment, within s.32(1)(b). Accordingly, the claim would have been statute-barred (para.418).

Claim dismissed