Hawkes v Cuddy & Ors

A nominee director owes duties to the company on whose board the director serves. The director must exercise independent judgment in that company’s interests and need not prefer the appointing shareholder’s interests. A contractual duty to consult the appointor gives no right of veto.

For unfair-prejudice relief, the conduct must concern the company’s affairs, prejudice members in that capacity and be unfair. Another company’s affairs may qualify where business realities show control or intervention in the first company’s internal affairs. Ordinary arm’s-length dealings do not suffice.

Breakdown of trust combined with deadlock and an inability to conduct business as contemplated may justify relief. The remedy must cure the established prejudice, remain proportionate and account for practical effects on joint venturers and creditors.

Two rugby supporters formed Neath Rugby Limited as an equal-shareholding quasi-partnership to acquire and operate Neath RFC. One managed the club, while the other served as Neath’s nominee director of the regional side, Neath-Swansea Ospreys Limited. Their interests and relationship diverged, producing a petition and cross-petition under the unfair-prejudice jurisdiction.

The petitioner alleged, among other matters, failures to advance Neath’s interests within the Ospreys, misuse of confidential information, failures to consult, unlawful participation in Neath’s management and deadlock. The cross-petitioner relied principally on the breakdown of trust and the resulting inability to manage the corporate relationship.

The central questions were which activities constituted the affairs of Neath, what duties the nominee director owed, whether unfair prejudice or qualifying deadlock was established, and what proportionate relief would preserve the viable businesses and their regional joint venture.

1. Petition and cross-petition allowed to a limited extent. Lewison J held that some allegations of unfair prejudice were established and that limited deadlock made the cross-petition well founded. A compulsory share purchase, winding up or demerger would, however, be disproportionate. The court adopted in principle the restructuring proposed jointly by the Cuddy interests and Swansea, with the precise order to be settled after hearing counsel.

2. A nominee director must exercise independent judgment in what the director considers to be the interests of the company served. The Ospreys were therefore entitled to Mr Cuddy’s independent judgment. He was not required to prefer Neath’s interests where those interests conflicted with the Ospreys’ interests. His separate duty to consult Mr Hawkes required consideration of the latter’s views but conferred no veto.

3. The affairs of one company may, as a fact-sensitive matter, constitute the affairs of another. Business realities must be considered. Control and intervention in internal management are important, whereas decisions made in an arm’s-length relationship ordinarily remain the affairs of the company making them. Decisions about match venues, players, litigation and the stadium arrangements were affairs of the Ospreys, not Neath.

4. Mr Cuddy nevertheless conducted Neath’s affairs unfairly when he used confidential financial information obtained internally for the benefit of the Ospreys in hostile trade-mark litigation. The premature disclosure prejudiced Neath’s members. He also breached his obligation to consult by failing to disclose the absence of the anticipated cap on stadium liabilities and by failing to keep Mr Hawkes informed about discussions with the Welsh Rugby Union.

5. Breakdown of trust alone does not create a no-fault exit under section 994 of the Companies Act 2006. Breakdown combined with deadlock and resulting inability to conduct the company’s business as contemplated may justify relief. Here day-to-day business continued, but deadlock existed over Neath’s nominee on the Ospreys’ board.

6. Relief had to cure the established prejudice prospectively and remain proportionate. Enlarging the boards gave Mr Hawkes effective control of Neath and representation within the Ospreys while preserving Mr Cuddy’s regional role, Neath’s principal asset, the equal joint venture with Swansea and the Regional Operating Agreement. No declaration concerning section 216 of the Insolvency Act 1986 served a useful purpose.

• High Court: At an earlier interlocutory hearing, HH Judge Havelock-Allen QC found that Mr Cuddy had participated in Neath’s management contrary to section 216 of the Insolvency Act 1986 and made declarations reflecting that finding.
• Court of Appeal: The declarations were set aside because they pre-empted an abuse-of-process defence and were unnecessary for case management. The underlying findings remained undisturbed.
• High Court, present proceedings: Lewison J determined the substantive petition and cross-petition, finding each well founded only to a limited extent.