Formalize your arrangements, don't rely on a love affair

by Hogan Lovells

Hogan Lovells

The question of how willing the court is to impose fiduciary duties on a person informally involved in a company has, to an extent, been answered by the case of Karla Otto Ltd v Bulent Eren Bayram (24 February 2017). Such persons can be regarded as fiduciaries, de facto directors and/or shadow directors on account of their involvement in the day to day running of a company. This makes them vulnerable to liability for breaches of fiduciary duties and those prescribed by the Companies Ordinance.

The case

The plaintiff is an English company (the "Company"), which forms part of the Karla Otto Group ("the Group"), as named after its founder Ms Karla Otto. Ms Otto became romantically involved with the first defendant, Mr Bayram, from July 2007 until July 2010. During and after this period, Mr Bayram assumed certain responsibilities in the Group, but was never formally appointed either as a director, shareholder or employee. One such responsibility was his position as the sole administrator of the Company's UK multi-currency bank account.

An investigation commenced by the Company in March 2011 revealed that Mr Bayram had misappropriated EUR 1.8 million from the Group's bank accounts, which had ended up in the accounts controlled by him. Of this sum, EUR 200,000 had been transferred from the Company's account to an account in the name of a Hong Kong company, the second defendant. The Company alleged that by virtue of the responsibilities and duties assumed by Mr Bayram in the Company's affairs, he had effectively become a shadow director and/or a de facto director and a fiduciary. Mr Bayram had breached his fiduciary duties by diverting the sum of EUR 200,000 to establish the Hong Kong company, who was also liable under dishonest assistance, unjust enrichment and a constructive trust.

After considering UK cases including HMRC v Holland [2010] 1 WLR 2793, Re Hydrodam (Corby) Ltd [1994] BCC 161 and Reading v AG [1951] AC 507 and without the benefit of submissions and evidence from the defendants, the trial judge held that the Mr Bayram was acting in the role of a de facto director and had entered into a fiduciary relationship with the Company. Mr Bayram had assumed control of the Company's bank account on the understanding that he would use funds for the benefit of the Company or for purposes authorised by the Company.

By using such funds to establish the Hong Kong company, unbeknown to the Company, Mr Bayram had breached his fiduciary duty and was liable to account for any profits. It was also held that the Hong Kong company was liable to account to the Company for any assets in its possession, which it knew to be traceable to the breach of trust.

As a company, the knowledge of the Hong Kong company is that of its director, Mr Bayram. The trial judge therefore established the required knowledge on the part of the Hong Kong company, and declared that both Mr Bayram and the Hong Kong company held the sum of EUR 200,000 on trust for the Company and this sum was to be paid back to the Company.

Take the necessary precautions

The case serves as an important reminder to individuals to ensure that they are clear on their position in a company.

It is clear that fiduciary duties can be imposed on an individual, regardless of what they consider their position to be in a corporate organization. If appointments are not formalized, individuals will lose the benefit of any relevant insurance. If individuals are unsure as to where they stand, they should at least be aware of what their duties could be if they are held to be a fiduciary and/or a de facto director. This would help avoid inadvertently committing a breach of these duties and being held liable accordingly.

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.

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