In Mitchell and others v Al Jaber; Al Jaber and others v JJW Ltd [2024] EWCA Civ 423 the Court of Appeal has confirmed that a director remained subject to a continuing fiduciary duty post liquidation when purporting to transfer assets owned by that company, on the basis he was an “intermeddler”. While the case concerned a BVI company, the court’s decision was based on English-law authorities and therefore has wider significance.
Facts
A BVI-incorporated company (MBI) had a sole shareholder who was also a director (the Director), with the company forming part of a wider corporate group that operated in the hospitality and hotel sector. A winding up order was made against MBI by the BVI court in October 2011. In contrast with the position under English law, director appointments do not automatically terminate under BVI law upon a winding up order being made; directors remain in office, albeit they largely cease to have any powers or duties.
From March 2009, MBI held 11.2 per cent of the total issued share capital in another group undertaking, JJW Inc (the Shares). In March 2016, the Director – in his capacity as the sole director of JJW Inc – caused another group company (JJW Guernsey) to be entered into the share register of JJW Inc as the registered holder of the Shares. The Director claimed that the transfer of the Shares from MBI to JJW Guernsey had actually occurred in July 2010 (i.e. pre-liquidation) but that the instruments of transfer had not been dated and the transfer not formally completed. The Director’s position was that beneficial ownership of the Shares had already passed to JJW Guernsey prior to MBI entering liquidation, and crucially, at the point at which he retained all of his powers as a director of MBI in order to effect the transfer.
A subsequent restructuring of MBI’s wider group in 2017 effectively rendered the Shares valueless due to the transfer of all assets owned by JJW Inc to another group company (the Restructuring). Just prior to the Restructuring, the English court had granted an order recognising MBI’s liquidation as a foreign main proceeding pursuant to the UNCITRAL Model Law on Cross Border Insolvency (as set out in schedule 1 of the Cross Border Insolvency Regulations 2006) and recognising the liquidators (the “Liquidators”) as MBI’s foreign representatives.
The Liquidators brought a claim against the Director in 2019 alleging (among other things) a breach of his fiduciary duty to MBI in relation to the purported transfer of the Shares.
High Court decision
At first instance, the High Court found that the Shares had not been transferred in 2010, as the Director asserted and held that the Director had committed a breach of the fiduciary duties he owed MBI by causing the Shares to be transferred in 2016, thereby depriving MBI of the value of the Shares. Equitable compensation of EUR 67,123,403 was awarded against the Director and JJW Guernsey (as a knowing recipient of the Shares) on a joint and several basis. The judge arrived at the compensation figure by reference to the accounts for JJW Inc as at 31 December 2016. The Director and JJW Guernsey were granted permission to appeal.
Court of Appeal decision
The Court of Appeal upheld the High’s Court’s decision and agreed that the Director had committed a breach of duty in causing the transfer of the Shares in 2016. The Director’s liability arose not by virtue of his continuing office as director of MBI post liquidation, but rather as an “intermeddler”.
The court considered the established English law authorities relating to intermeddling; effectively, a party is found to be subject to a fiduciary duty in circumstances where they have held themselves out as having the powers that a fiduciary in that position would ordinarily have. In this case, the Director had caused MBI to transfer the Shares at a time when he did not have the requisite authority or power to do so (given that his powers as a director would have largely ceased at the point MBI entered liquidation in 2011). However, the Director had asserted that the transfer had actually taken place in 2010 (pre-liquidation) and it was on that basis that the transfer of the Shares had been registered. The Director should therefore not be able to escape liability for his breach of duty in causing the Shares to be transferred in 2016 simply because he did not (and could not) in fact possess the power to implement the transfer at that time.
The Director further asserted that he could not be liable for breach of duty as an intermeddler on the basis that he had not personally received the Shares, but rather had caused MBI to transfer them to another group company. However, the court confirmed that company property can be the subject of intermeddling without ever being in the hands of the intermeddler. Company property is not vested in the directors but is under their stewardship and control, and therefore equitable principles are applied by analogy to trusts where directors improperly deal with company property.
Equitable compensation
The Court of Appeal disagreed with the High Court in relation to the award of equitable compensation, allowing the Director’s appeal on this issue. While all parties agreed that the Restructuring had rendered the Shares valueless, the Liquidators considered that the valuation of the Shares (and therefore the loss for which MBI should be compensated) should be considered at an earlier date i.e. prior to the implementation of the Restructuring.
The court considered that the critical question in this regard was whether the Liquidators could sustain the High Court’s decision that, absent the transfer of the Shares by the Director in breach of his fiduciary duty, they would have otherwise been sold when they were still valuable (i.e. prior to the Restructuring). The Court of Appeal did not consider there was sufficient evidence to support this position, holding that the available evidence in fact suggested the Shares were unlikely to have been sold prior to this point. Accordingly, the court held that MBI should not be awarded compensation on the basis that it had suffered no loss as a consequence of the Director’s breach.
David Steinberg, co-head of the restructuring and insolvency department at Stevens & Bolton LLP, comments that:
While the decision in this case concerns a BVI company, the principles it confirms have broader application – not least because the decision was based on English law authorities. The Court of Appeal’s decision makes clear that the Director’s liability in this case arose as an “intermeddler”, and not as a consequence of his continuing appointment as a director (which, under BVI law, had not automatically terminated upon the winding up order being made). By analogy, directors of English companies – whose appointments would automatically terminate upon a winding up order being made – would similarly be held liable for a breach of duty in circumstances where they caused company property to be transferred post-liquidation. The decision also serves as a useful reminder that establishing a breach of duty alone is insufficient for the award of compensation; robust evidence of the loss arising as a consequence of any breach must also be clearly demonstrated.
David Steinberg
Louise Corcoran