The scope and extent of a director's duty is of particular interest to officeholders of companies and their D&O insurers.
A recent Court of Appeal decision, Mitchell v Al Jaber, has considered the scope of these duties in a post liquidation scenario. The decision, although pertaining to a BVI registered company, applied English law to the issues considered and has clarified (1) the role and duty of directors after liquidation of a company and (2) the principles upon which a court can award equitable compensation for breach of fiduciary duties.
This decision is of particular relevance in this ongoing period of economic uncertainty. According to Insolvency Service statistics, 2023 saw the highest number of company insolvencies since 1960. Following the collapse of a company, an insolvency practitioner has a duty to investigate the reasons for the corporate failure, this includes investigating the role of the directors
This recent decision examines how a director can be personally liable for certain corporate transactions even after the powers to carry out those transactions have ceased.
Background
MBI International & Partners Inc (in liquidation) ("MBI") was a company incorporated in 2004 in the British Virgin Islands ("BVI"). MBI was part of a wider group of companies operating in the commercial property, finance and hospitality sectors. It was incorporated with one sole shareholder and director, Sheikh Mohammed Al Jaber (the "Director").
By 2009, MBI had acquired a significant minority shareholding in another related company, JJW Hotels & Resorts Holding Inc ("JJW Inc"). In 2010, the Director signed instruments purporting to transfer MBI's shares in JJW Inc to another group company, JJW Limited ("JJWG"). However, the share transfer was not properly executed.
Liquidation of MBI
In October 2011, MBI became the subject of a winding-up order in the BVI due to debts of EUR 10.6 million owed to multiple creditors. Consequently liquidators were appointed.
The Director made several attempts to terminate the liquidation of MBI but the application was ultimately dismissed by the Eastern Caribbean Court of Appeal on 14 January 2015.
On 8 March 2016, the Director executed the 2010 share transfer, moving the shares from JJW Inc into JJWG (the "Transfer").
High Court decision
In May 2019, the liquidators of MBI initiated a claim against the Director. The crux of the claim was that the Director had acted in breach of his fiduciary duties in effecting the Transfer after liquidators were appointed and against the best interests of MBI. The liquidators sought that the Director should pay compensation to MBI for loss of its shares in JJW.
The Director’s position was that beneficial ownership of the shares had already passed to JJWG, in 2010, prior to MBI entering liquidation.
The High Court found that the Transfer had not been effected in 2010. It was found that:
"The Sheikh signed the Share Transfer Forms in 2016 and that he did not act honestly, or in good faith, in doing so and in causing the transfer of the 891K Shares (or purported transfer) to JJW Guernsey on 8 March 2016, pursuant to the February 2016 Resolution. Further he did not act in the best interests of the Company."
The Judge found that the Director had acted in breach of duty by transferring shares from JJW Inc to JJWG and, as a result, the judge ordered the Director and JJWG to pay EUR 67m to MBI liquidators by way of equitable compensation.
Court of Appeal
The Director consequently appealed the decision arguing that he had not breached any duty to MBI and, even if there had been a breach, the judge should not have ordered him to pay compensation.
The Court of Appeal upheld the decision of the first instance court but for different reasons. Whilst it was found that the Director had been in breach of his fiduciary duty to MBI, this was due to him being an "intermeddler". Effectively the Court held that the Director was misusing company assets after ceasing to be a director and therefore intermeddling.
The Court of Appeal quoted the case of Measures Ltd v Measures [1910] 2 Ch 248 that a director's powers cease once a winding-up order is made. However, under BVI law, a director's powers and duties mostly cease but are not entirely terminated even once liquidators are appointed. The Court of Appeal considered the case of Revenue and Customs Commissioners v Holland, In re Paycheck Services 3 Ltd [2010] UKSC 51, [2010] 1 WLR 2793 where a de facto director was found liable for misfeasance.
The Court of Appeal found that the Director, in presenting himself as a Director and signing off on effecting the Transfer, had held himself out as having a position that would normally have an associated fiduciary duty.
With regards to compensation, the Court of Appeal found that there was not enough evidence to indicate that, but for the Transfer, the shares would have been sold when they were valuable and, therefore, it found that no compensation was owed by the Director.
Comments
The Court of Appeal's decision helps to clarify the duties of a director subsequent to liquidation. Whilst the fact pattern of this case is unusual, this could also raise concerns for D&O Insurers where the scope of liability of directors can now cover actions taken by directors subsequent to liquidation.
This is especially relevant in a climate where company insolvencies are continuing to rise. Insurers will need to consider whether they will want to carve out actions taken by directors subsequent to liquidation or, indeed, those acting in a de facto capacity.
Officeholders and their insurers will need to watch the developments in this area carefully.
