Acting Behind The Scenes: High Court Confirms Duties Of Shadow Directors

Morrison & Foerster LLP
Contact

Morrison & Foerster LLP

SUMMARY

In Standish & Ors v The Royal Bank of Scotland Plc & Anor (the “Judgment”),[1] the High Court confirmed that the duties owed by a shadow director are limited to the subject matter of their instructions.

This alert is particularly relevant for distressed companies and their shareholders, as well as banks and other investors who appoint “observers” to the boards of borrower companies.

FACTS

Bowlplex Limited (“Bowlplex”) entered financial difficulties following the 2008 downturn. They turned to their lender, RBS, for restructuring advice. RBS provided the support of its (i) global restructuring group and (ii) asset acquisition/management division (“West Register”). This lead to three steps:

1. Initial Restructure. In 2011, Bowlplex restructured its debt and relinquished 35% of its share capital to West Register. West Register appointed an observer, Mr. Sondhi.

2. Company Voluntary Agreement. In 2012, Bowlplex implemented a CVA, writing off £4.5m of RBS debt and increasing West Register’s share of Bowlplex to 60%. Mr. Sondhi appointed a turnaround specialist, Mr. Cooper, as non-executive chair. Mr. Cooper dismissed Bowlplex’s managing director.

3. Sale. In 2015, Bowlplex was sold to a third party for £22.6m, £13.6m of which went to West Register.

Following the above, shareholders of Bowlplex claimed that RBS, West Register, and Mr. Sondhi had conspired to devalue Bowlplex in order to acquire its equity. Following a 2018 strike-out application,[2] the main claim to be considered in the Judgment was that West Register and/or Mr. Sondhi attempted to achieve this purpose in contravention of their fiduciary duties as shadow directors of Bowlplex.

DECISION

The judge was satisfied that Mr. Sondhi and/or West Register were shadow directors of Bowlplex, due to their appointment of Mr. Cooper and removal of the original managing director. Yet the Court also noted that Bowlplex had entered into the restructuring steps of “its own free will”, by its registered directors and without instruction from Mr. Sondhi or West Register.

Therefore, the Court moved to examine the claim that “a shadow director…could act in breach of duty to the company even where there was no relationship between the directions or instructions said to give rise to the duty and the breach said…to constitute the unlawful means”.[3] The Court resisted this, noting established law to the effect that “duties owed by shadow directors are limited in extent” to “those matters where he gives instructions”.[4] The Court found further support for this view in cases where individuals had become shadow directors due to giving directions in respect of only certain of the company’s activities: stating that the corollary to this is that “there can be commensurable limitations on the nature and extent of the duties”. Put another way, “fiduciary duties flow from relationships”, and so when shadow directorship “is relied on as the source…it is only the acts of instruction which can form the foundation for any fiduciary duties that he may owe”.[5]

It therefore followed that without this relationship, a shadow director will not be liable for breach of duty. Turning to the facts of the present case, the judge found that there was no link between (i) Mr. Sondhi appointing Mr. Cooper as a director, and (ii) Bowlplex entering into the CVA, particularly as:

  • Mr. Cooper had not acted to facilitate RBS’ actions or the CVA; and
  • the claimants had previously pleaded that Bowlplex entered into the CVA due to commercial pressure from RBS.

The appeal was therefore dismissed.

COMMENTARY

The Judgment upholds existing principles to provide lenders and board observers with some level of certainty and comfort:

  • For example, it is clear that the ordinary application of commercial pressure will not be considered a direction capable of making a lender a shadow director, and banks therefore continue to be entitled to prefer their own interests.
  • Likewise, the appointment of a turnaround consultant will also not necessarily amount to such an instruction, even where this replaces an existing board member, and so there remains scope for lenders to get involved in corporate restructurings.
  • Instead, dissatisfied borrowers will need to show a clear link between the directions provided and the alleged duty and breach thereof.

However, the Judgment is not a panacea, leaving open a number of points:

  • For one, as noted by the judge, there remains room for debate around the nature of the relationship required to exist between the direction and the duty or breach.
  • Similarly, as mentioned above, likely due to procedural constraints, the claimants did not plead specific actions which would have linked Mr Sondhi’s directions and breach of his duty. Therefore, we do not have precise indicators as to directions or instructions which might be relevant for the purposes of a breach of duty claim against a shadow director.

These will be highly topical issues as financial institutions continue to be the subject of allegations over aggressive and even unethical market practices, and we will monitor developments as they unfold.

Christopher Lloyd, London Trainee Solicitor, contributed to the drafting of this alert.


[1] [2019] EWHC 3116 (Ch)

[2] Standish & Ors v The Royal Bank of Scotland Plc & Anor [2018] EWHC 1829 (Ch)

[3] While the claimants had initially sought to introduce further links between the shadow directorships and the breaches of duty after the Strike-Out Application, these were ultimately not brought before the court.

[4] McKillen v Misland (Cyprus) Investments Ltd & Ors [2012] EWHC 1158

[5] See further Vivendi SA v Richards [2013] EWHC 3006 and Instant Access Properties Ltd v Rosser [2018] EWHC 756.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP | Attorney Advertising

Written by:

Morrison & Foerster LLP
Contact
more
less

Morrison & Foerster LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide