Fiduciary status, causation and equitable compensation

Factual background

Sheikh Mohamed Bin Issa Al Jaber (the Sheikh) was a director and the sole shareholder of a company incorporated in the British Virgin Islands (BVI), MBI International & Partners Inc (the Company). The Sheikh dishonestly transferred 891,761 shares which the Company owned in another BVI company, JJW Hotels & Resorts Holding Inc (JJW Inc), after the Company had entered into liquidation. The shares were transferred for no consideration to a company registered in Guernsey, JJW Ltd (JJW Guernsey), of which the Sheikh was a director. The liquidators of the Company (the Liquidators) alleged that, by making the dishonest transfer of the shares in JJW Inc, the Sheikh acted in breach of his fiduciary duties owed to the Company although, under BVI company law (as set out to the right), the winding up had removed his powers as a director of the Company. The Liquidators also argued that the Company had a remedy against the Sheikh in equitable compensation for loss suffered as a result of the transfer of those shares. ISSUE Whether a person who purports to exercise a director’s power in relation to a company that has entered liquidation becomes subject to fiduciary duties to the company and is accountable for their breach in equitable compensation.

Issue

The central issue was fiduciary status, causation and equitable compensation.

Procedural history and reasoning

Joanna Smith J Proceedings were commenced pursuant to s 212 Insolvency Act 1986. The trial judge found on the question of liability that: (i) the 2016 Share Transfers were void; (ii) the Sheikh owed a duty of fiduciary stewardship during the winding up and had acted in breach of that duty by signing the share transfer forms and putting the 2016 Share Transfers into effect; and (iii) JJW Guernsey was the knowing recipient of the 891,761 shares. On the question of remedy, the trial judge held that the Liquidators were entitled to equitable compensation on a substitutive basis and that loss to the Company was the value of the 891,761 shares which had been transferred from its ownership by the 2016 Share Transfers, that value being assessed using hindsight and common-sense. COURT OF APPEAL Newey, Arnold and Snowden LJJ The Sheikh argued that the trial judge had erred: (i) in finding that he had been in breach of fiduciary duty by effecting the 2016 Share Transfers; and (ii) in making the order for equitable compensation.

The Sheikh argued against the order for equitable compensation on two grounds: (i) the 2017 Asset and Liability Transfer had denuded the 891,761 shares of any value; and (ii) the Company had suffered no loss as the 891,761 shares were subject to an unpaid vendor’s lien which exceeded the sum ordered as equitable compensation. The Court of Appeal allowed the appeal only on the ground that the Liquidators had failed to establish any loss. The court found that the Company would not have been any better off if the 2016 Share Transfers had not taken place and, therefore, had not suffered any loss from the Sheikh’s breach of fiduciary duty. However, the court held that the Sheikh had “intermeddled with the property of the Company and was liable as a fiduciary” and upheld the trial judge’s finding that the March 2009 Transfers did not give rise to an unpaid vendor’s lien.

This transfer is the context for Issue 2. 2016 Share Transfers Purported to give effect to a transaction which predated the winding up of the Company, transferred the 891,761 shares from the Company to JJW Guernsey. This transfer is the context for Issue 1. 2017 Asset and Liability Transfer JJW Inc’s assets and liabilities were transferred to JJW UK. This transfer is the context for Issue 3. SUPREME COURT ISSUE 1 - APPEAL DISMISSED The Supreme Court held that the Sheikh was in breach of fiduciary duty in making the 2016 Share Transfers. The Sheikh was held to be under a fiduciary duty, despite the fact that he did not possess a power to transact on the Company’s behalf. The Supreme Court recognised that fiduciary duties can arise ad hoc and that it is not necessary that a person who has taken upon himself a fiduciary power to deal with property has title to or possession of that property before he can come under a fiduciary duty.

Decision and key points

The Supreme Court held that a person purporting to exercise a director’s powers can owe fiduciary duties and addressed the valuation date and causation principles governing equitable compensation.

1. When calculating an award of equitable compensation, the appropriate date to use to assess the value of what has been misappropriated is an open question which requires consideration of what is just and equitable.
2. The burden lies on a defaulting fiduciary to prove that a later event broke the chain of causation between their breach of fiduciary duty and the beneficiary’s loss.
3. A person can be under a fiduciary duty even in the absence of a director’s powers.

Why this decision matters

The Supreme Court addressed fiduciary status, causation and the assessment of equitable compensation in a single commercial setting. The decision assists both claimants and defendants in analysing whether a relationship is fiduciary and what loss is recoverable.

Particularly relevant to: Companies, investors, fiduciaries, directors and commercial fraud teams.

Related practice areas

Company and shareholder disputes · Civil fraud and asset recovery

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