Introduction 

The law imposes duties on those who exercise power or  control which affects third parties.  Shadow directors  however, have proved something of an anomaly. Until  relatively recently a shadow director could exercise power  and control over the affairs of a company, without having  the same duties and responsibilities as de jure or de facto  directors i .  In the recent English case of Vivendi SA v  Richards and Bloch ii , Newey J questioned the established  view and concluded that shadow directors do in fact owe  fiduciary duties to the company, at least to some degree.   This article looks at that decision and considers its  implications.

Vivendi – the facts

Mr Stephen Bloch was the sole director of Centenary  Holdings III Limited (“the Company”) before its  liquidation.   Mr Murray Richards had entered into a  consultancy agreement with the Company whereby he  agreed to faithfully serve the Company and to use his best  endeavours to promote its interest (“the Consultancy  Agreement”).  

Between March 2004 and February 2005 the Company  made nine payments to third parties, which totalled more  than £10 million (“the Payments”).  This included  £600,000 to Mr Richards under the Consultancy  Agreement and £5.3 million by way of dividend.  Vivendi  alleged that Mr Bloch breached his duties as a director of  the Company in causing the Company to make the  Payments.  Vivendi also alleged that Mr Richards was  responsible; both as a “shadow director” and for dishonestly assisting Mr Bloch’s alleged breach of  duty.

The Company went into liquidation in 2005.  Vivendi  brought the claim pursuant to an assignment from the  Company’s liquidators.  The proceedings were issued in  May 2011.  This was more than six years after the last  payments were made.  Vivendi accepted that the claim was  statute barred except to the extent that they could  establish dishonesty, pursuant to section 21 (1) of the  Limitation Act 1980.  

Two of the principal issues were (1) whether Mr Richards  was a “shadow director”, and if so (2) whether he owed any  duties to the Company.  

Was Mr Richards a shadow director? 

Newey J approached this question by reminding himself of  the legal principles.  A shadow director is the creation of  statute.  Sections 251 of the Companies Act 2006 (Section  132 of the Companies (Guernsey Law, 2008 contains the  identical definition) provides that a shadow director is “a  person in accordance with whose directions or instructions  the directors of the company are accustomed to act”:  However, a person is not to be considered a shadow  director “by reason only that the directors act on the advice  given by him in a professional capacity”.

The Court of Appeal considered the statutory definition in  the leading case of Secretary of State for Trade and Industry  v. Deveralliii.  Morritt LJ said that the purpose of the  legislation is to identify those with real influence in the  corporate affairs of the company.  Whether any particular  communication from the alleged shadow director whether  by words or conduct, is to be classified as a direction or  instruction must be objectively ascertained by the court in  light of all the evidence.  He went on to say that the use of  epithets may be misleading:

“Thus to describe the board as the cat’s paw, puppet or  dancer to the tune of the shadow director implies a  degree of control both of quality and extent over the  corporate field in excess of what the statutory definition  requires.  What is needed is that the board is accustomed  to act on the directions or instructions of the shadow  director….Further in my view it is not necessary to the  recognition of a shadow director that he should lurk in the  shadows, though frequently he may, for example, in the  case of a person resident abroad who owns all the shares  in a company but chooses to operate it through a local  board of directors….Lurking in the shadows may occur but  is not an essential ingredient to the recognition of a  shadow director”. 

Newey J applied these principles and concluded that  despite Mr Richards’ denial, he was a shadow director for  a number of reasons: 

  1. Mr Richards had prepared the business plan on behalf  of the Company.
  2. Mr Richards was intimately involved in the running of  the Company.
  3. Mr Richards was the one engaging in meaningful  dialogue with advisers and the same could not be said  of Mr Bloch.
  4. Mr Richards found the projects in which the Company  invested.
  5. Mr Bloch lacked property experience, in contrast to  Mr Richards.
  6. Mr Bloch said in his witness statement that “I would  be his legman” for the Company.  The Judge  concluded that “legman” accurately encapsulated Mr  Bloch’s role…..he was not his own man: he acted on  instructions from Mr Richards.  He gave effect to Mr  Richards’ decisions.   There are two aspects of this reasoning which are of note.   First, the Judge makes no mention of the Consultancy  Agreement.  The Consultancy

Agreement provided that Mr Richards was, in effect, to act  as a professional advisor in matters of corporate and  property investment and development to the Company.  On  one view, it could be said that Mr Richard’s role was that of  a professional advisor and it was hardly surprising that he  prepared a business plan and be engaged in dialogue with  advisors or indeed found the projects for the Company.   Secondly, there is very little direct evidence of actual  instruction or direction to Mr Bloch.  The Judge’s approach  was clearly to imply such instruction or direction from the  course of conduct between the parties and by reference to  Mr Bloch’s description that he was the “legman” for Mr  Richards.

As a shadow director did Mr Richards owe fiduciary  duties iv to the Company?

The question whether a shadow director owes fiduciary  duties has troubled academics and the courts for some  time.  However, the accepted view prior to Vivendi  (although it was not without criticism v ) was that a shadow  director did not owe fiduciary duties unless he/she dealt  directly with a company’s assets.  In the English case of Ultraframe UK Ltd v. Fielding vi , Lewison J concluded that:

“1289  The indirect influence exerted by a paradigm shadow  director who does not deal directly with or claim the right to  deal directly with the company’s assets will not usually, in  my judgment, be enough to impose fiduciary duties upon  him; although he will of course be subject to those statutory  duties and disabilities that the Companies Act creates.  The  case is the stronger where the shadow director has been  acting throughout in furtherance of his own, rather than the  company’s, interests.  However, on the facts of a particular case, the activities of a shadow director  may go beyond the mere exertion of indirect influence.”  

“1290 For example, in the present case it is common  ground that Mr Fielding became the sole signatory on  Seaquest's bank account. It is, in my judgment,  indisputable that as sole signatory on that account he  was not entitled to draw on the account for his personal  benefit. By voluntarily becoming the sole signatory on  that account, he took it upon himself to assume control  of an asset belonging to another. That voluntary  assumption must, in my judgment, carry with it a duty  to use the asset for the benefit of the person to whom it  belongs. That duty is properly called a fiduciary duty.  However, it is important to recognise that this fact  alone does not mean that wider fiduciary duties are  imposed upon him. In the case of Northstar, for  example, Ms Patey was a signatory on the bank  account. She was only a book-keeper. It is plain that she  could not have applied Northstar’s money for her own  benefit, and hence had fiduciary duties as regards the  money under her control; but that does not mean that  she owed the full range of directors' fiduciary duties to  Northstar.”

In Vivendi Newey J concluded that Ultraframe  understates the extent to which shadow directors owe  fiduciary duties.  In particular, he considered that a  shadow director will normally owe the duty of good  faith when giving directions or instructions and that a  shadow director can reasonably be expected to act in  the company’s interests rather than his own when  giving directions and instructions.  On this basis Mr  Richards was subject to the duty of good faith in  relation to the directions and instructions he gave Mr  Bloch.    

Comment

The decision in Vivendi has been welcomed by various  commentators vii as imposing liability on all those with real  influence in the corporate governance of a company and  fitting with the gradual merging of de facto and shadow  director concepts. 

However, the judgment does raise a number of questions.   First, why should a shadow director who simply exerts  influence be subject to the same duties as a shadow  director who actually controls the board and is effectively  able to exercise power?   This is the distinction made by  Lewison J in Ultraframe.  

Take for example a case where A agrees with B’s director C,  to lend B some money.  A becomes interested in the  performance of B to ensure the safe return of his money.  A  develops a close relationship with C.  A gives directions and  instructions to C regarding B.  C is anxious not to upset A  and therefore C acts upon the directions of A over a period  of time.  A’s motivation throughout is to see the return of  his money.  C’s motivation is to keep an investor on side.   On one view A may be a “shadow director” and owes B  fiduciary duties.  Is this really right?  Why should A put B’s  interests above his own when he has entered a commercial  relationship at arm’s length?  Has A really assumed  responsibility for the conduct (or at least in part) of B?  

The problem partly lies in the broad statutory definition of  shadow director as explained by Morritt LJ in Deverall.   It  will be recalled that the case of Deverall concerned  disqualification of director proceedings and there is clearly  a good public policy argument for the broad definition in  that context viii .  Should that same wide definition apply in a  different context when quasi penal consequences are not in  play? The answer may be that a shadow director owes  fiduciary duties only where he has power and control of the  affairs of the company.  This perhaps represents a middle  ground between Ultraframe and Vivendi. 

Secondly, it is not clear from the judgment the extent of a  shadow director’s duties.  In other words does a shadow  director owe duties beyond that of a fiduciary?  So for  example, if a shadow director knows that a de jure director  intends to make a payment to a third party at a time when  the company is insolvent does he have a duty to act to prevent what might be a preference even though he  neither gave an instruction or direction to the de jure  director in respect of the payment?  It is suggested that a  shadow director will owe ordinary duties of care at the very  least.  As Professor Birks observed, a fiduciary duty cannot  exist at all without the lower level duties of care ix .  The  reason for this is that the purpose of a fiduciary duty is to  ensure that the fiduciary takes care in carrying out his  duties x

Thirdly, how does the decision in Vivendi sit with the rule  that “a person occupying a fiduciary position will be absolved from liability for what would otherwise be a  breach of duty by obtaining fully informed consent” either  of the company or the person creating the fiduciary  position: Australian Securities and Investments Commission  v Citigroup Global Markets Australia Property Ltd xi .   Typically the person who creates the fiduciary position will  not be the company but rather the de jure director(s).  On  the face of it a shadow director will have a defence to a  claim that he/she is in breach of fiduciary duty if he can  establish that he had the informed consent of the de jure  directors.  In Vivendi this point was not advanced by Mr  Richards, who represented himself at trial.    

Fourthly, can a shadow director be subject to the  misfeasance procedure in section 212 of the Insolvency Act  1986 (Section 422 of the Companies (Guernsey) Law 2008).   That section provides a summary procedure in relation to  breach of duty against delinquent “officers”.  In Re  Paycheck Services 3 Limited xii Lord Hope and Lord Collins  stated that shadow directors were not “officers” and were  not expressly included.  Yet this appears at odds with  Vivendi, the thrust of which is to align the liabilities of de  jure, de factor and shadow directors.

Conclusions

The decision in Vivendi is undoubtedly welcome.  It clarifies  that those who exercise power and control (and indeed  influence) over a company and its affairs owe fiduciary  duties to a company.  However, the extent of those duties  and when they arise are still questions that remain to be answered.  Vivendi is unlikely to be the last word on the  subject.