The Supreme Court has confirmed that a director - or any intermeddler - may retain (or incur) fiduciary duties to a company after it has entered liquidation. In a reversal of the Court of Appeal's decision, the Supreme Court also clarified how loss should be assessed where misappropriated assets later become valueless due to subsequent events within the wrongdoer's sphere of influence.

Key facts

We previously wrote about the Court of Appeal decision in the case of Mitchell and others v Al Jaber; Al Jaber and others v JJW Ltd. In brief overview, MBI International & Partners Inc, a BVI company (MBI), entered liquidation in October 2011. By operation of BVI law, on liquidation, MBI’s sole director lost his powers, although his appointment as a director did not automatically terminate and he remained in office. Nonetheless, in 2016 the former director dishonestly transferred 891,761 shares in JJW Hotels & Resorts Holding Inc (JJW Inc) from MBI to a Guernsey group company for no consideration (the Share Transfers). The trial judge found the director acted dishonestly and not in MBI’s best interests; those findings were not appealed.

A subsequent restructuring of MBI’s wider group in 2017 effectively rendered the transferred shares valueless due to the transfer of all assets owned by JJW Inc to another group company (the Restructuring). The liquidators brought a claim against the director in 2019, alleging (among other things) a breach of his fiduciary duty to MBI in relation to the Share Transfers.

Fiduciary duty of an intermeddler post-liquidation

The central liability issue was whether the director owed and breached a fiduciary duty to MBI when his statutory powers as director had ceased upon liquidation under BVI law. The Supreme Court affirmed the Court of Appeal’s analysis that fiduciary duties can arise where a person holds themselves out as having fiduciary power over company property, even without formal authority. A person who intermeddles by purporting to exercise a director’s power thereby undertakes fiduciary obligations and can be liable for breach, regardless of whether they personally receive the property. The director’s signing of transfer instruments “for and on behalf of” MBI as director (when his powers had already ceased due to MBI’s intervening liquidation) and orchestrating registration of the share transfers was a single dishonest transaction amounting to intermeddling and breach of duty.

The Supreme Court found that equity prevented the director from using the statutory cessation of powers as a shield to avoid liability where he had held himself out as a director with authority. Where a person unlawfully purports to assume a fiduciary role and holds themselves out as such, they may be held liable as if they were duly appointed in that capacity.

Calculation of loss

At first instance, equitable compensation was awarded based on the value of the shares at the date of transfer in 2016, by reference to JJW Inc’s 2016 accounts as evidence of the value misappropriated. The High Court therefore awarded compensation of EUR 67,123,403.36.

The Court of Appeal subsequently reduced the award to nil, reasoning that the value of the shares should be calculated as at the trial date, by which time all parties agreed their value (following the Restructuring) was zero. The court found that even if the shares had not been misappropriated, it was unlikely that they would have been sold by the liquidator prior to the Restructuring, and so there was no loss. The liquidators appealed on this issue to the Supreme Court, while the director appealed the finding that he acted in breach of fiduciary duty.

Supreme Court decision

The Supreme Court confirmed that the director owed a fiduciary duty to MBI and that, by making the Share Transfers, he had acted in breach of that duty.

The Supreme Court also provided some further welcome clarity on the assessment of loss:

• In misappropriation cases, the beneficiary suffers an immediate loss of value; the court will then assess, with hindsight, whether any supervening event breaks the chain of causation or affects valuation. The burden of proof lies with the defaulting party (in this case, the director) to prove and legitimately invoke such an event.
• Not every intervening event can be relied upon by a wrongdoer. Where the fiduciary was either involved in, benefited from, or cannot offer an innocent explanation for the event, it will not generally break the chain of causation to diminish liability. A wrongdoer cannot rely on their own acts to erase earlier loss.
• The director sought to rely on the Restructuring as rendering the shares worthless. However, the evidence suggested that he was more than just a bystander to the Restructuring and stood to benefit from it as ultimate owner of the group. In those circumstances, the Restructuring could not be relied upon as a legitimate intervening event to reduce his liability.
• The Court rejected the proposition that because the shares subsequently became worthless, no loss was suffered. MBI lost value in 2016 upon the Share Transfers; the subsequent destruction of value by another group entity did not retrospectively erase MBI’s loss.

Accordingly, the Supreme Court allowed the liquidators’ appeal on loss and restored the trial judge’s award of EUR 67,123,403.36, being the value of the shares at the date of the Share Transfers.

Practical implications

The Supreme Court has affirmed that fiduciary obligations may persist or arise by intermeddling even after liquidation has stripped the directors’ formal powers. While this case concerned a BVI company, directors’ appointments are automatically terminated in English compulsory liquidations, enabling inferences to be drawn. Purporting to act as a director in relation to company assets – despite having no power to transact on behalf of a company - can therefore create liability as a fiduciary regardless of title or possession.

On quantum, the Supreme Court found that there is no strict rule which requires loss to be calculated at the date of trial. Misappropriation creates an immediate loss which, according to this decision, should be measured by the value of the asset at or around the time of the breach. Defendants cannot rely on intervening events that they either orchestrated or benefitted from to reduce their liability.