High Court judgment shines light on shadow directors
19 Apr 2018
The High Court has handed down judgment in a complex case involving the role of the former directors and their professional advisers in a company called Instant Access Properties Ltd (IAP), which has shed light on the issues of what fiduciary duties are owed by shadow directors
19 Apr 2018
Between 2003 and going into liquidation in 2008, IAP received substantial sums by way of commission in relation to sales of residential properties acquired by members of IAP, principally as investments. IAP shared the commission paid by the developers with two other companies, Leadenhall Group Ltd and Darrencrest Corporation Ltd.
The court stated that the essential case put forward by IAP and its liquidators was that the arrangements made by IAP with Leadenhall and Darrencrest amounted to a fraud on IAP. It is said that, in effect, IAP gave away for the benefit of Leadenhall and Darrencrest, and for no consideration, commission to which IAP alone was entitled. It was claimed that this fraud on IAP was committed by Maria Gifford, an accountant who ran a small practice and who was a de jure director of IAP and by James Moore and Bradley Rosser who are said to have been de facto or shadow directors of IAP.
The judgment stated: ‘Accordingly, the case is that these "directors" broke whatever fiduciary duties they owed to IAP by giving away its assets to Leadenhall and Darrencrest, in which Mr Moore and Mr Rosser in particular had interests.’ [Instant Access Properties Ltd (in liquidation) vs Rosser & Ors,  EWHC 756 (Ch)].
The High Court was asked to consider the issue of what fiduciary duties are owed by shadow directors (ie, those in accordance with whose instructions the lawfully appointed directors are accustomed to act).
The judge held that it might not be helpful to attempt to define the duties of a ‘typical shadow director’. Rather he said the question was particularly fact sensitive and it is usually helpful to ask whether the individual has expressly or impliedly (from the circumstances) undertaken or assumed a position of trust and confidence or whether there is a legitimate expectation that he will not use his position in a way adverse to the interests of the other.
He went on to say that it is open to a court to hold that a person owed some of the usual fiduciary duties, but not all of them, or to hold that the specific fiduciary duty owed is a qualified form of the general fiduciary duty. This means that the court is not confined to an all or nothing response to the question.
On the facts of this case, the judge held that neither Rosser nor Moore (whom he found to have been shadow directors for certain purposes) were in breach of any fiduciary duty they might have owed to the company, neither was dishonest or fraudulent, and that whatever fiduciary duty might be imposed on them, it would not place upon them a liability to account for profits when a de jure director in the same position would have been relieved from such a liability.
The judge also concluded Gifford did not cause or permit IAP to enter into an agreement for no or no adequate consideration or to divert monies to which IAP was entitled for no or adequate consideration. It followed that Gifford was not in breach of any of the duties which, as a de jure director, she admittedly owed to IAP.
The judgment stated: ‘ My overall conclusion is that it has not been established that Mrs Gifford failed to exercise independent judgment on and after 6 November 2003 in relation to the agreement with Leadenhall. In any case, even if she did in some way break her duty in this respect, the claimants have not established that IAP suffered any loss as a result.’
Lance Ashworth QC of Serle Court, who acted for the defendant said: ‘This judgment shows that there can be no blanket rules for the duties owed by shadow directors (as the law now stands before in the exercise of the powers conferred by section 89 of the Small Business, Enterprise and Employment Act 2015, the Secretary of State makes regulations which define the duties of a shadow director).
‘Whether a particular shadow director owes fiduciary duties and the extent of those duties will be highly fact sensitive.’
Report by Pat Sweet