Hawke v Cuddy

The Court of Appeal dismissed Mr Hawkes' substantive challenges to Lewison J's judgment on the two legal issues for which permission to appeal had been granted. The court held that a director nominated by a shareholder to the board of another company (a "nominee director") does not, by virtue of nomination alone, owe the nominator a fiduciary duty that detracts from his overriding duty to act in the best interests of the company of which he is a director. The court also held that only limited categories of conduct by a director of the regional company amounted to conduct of the affairs of the shareholder company for the purposes of section 994 (formerly section 459), and that most of the contested Ospreys decisions were acts in the interests of Ospreys rather than Neath.

The judge's relief was upheld as a discretionary, proportionate remedy: Lewison J had been entitled to decline the drastic step of depriving the Cuddys of their share in Neath or removing Mr Cuddy from Ospreys and instead to fashion a remedy preserving the joint venture while giving Neath improved consultation and board representation. The Court of Appeal agreed that limited unfairly prejudicial conduct had been established (use of Neath's confidential information; failures to consult about StadCo variation and WRU discussions) but that these did not justify more severe relief.

Background and parties: Neath Rugby Ltd (Neath) had two equal shareholders: the appellant Mr Geraint Hawkes and the respondent Mr Michael Cuddy (share registered in Mrs Cuddy). Neath owned one half of Neath-Swansea Ospreys Ltd (Ospreys). Mr Hawkes ran Neath day-to-day; Mr Cuddy acted as the Neath-nominated director of Ospreys (often via his wife as registered nominee). Relations between the parties broke down and Mr Hawkes petitioned under section 459 of the Companies Act 1985 (now section 994 Companies Act 2006) alleging unfairly prejudicial conduct; Mr Cuddy cross-petitioned under the same section.

Procedural history: The trial was before Lewison J who found some allegations well-founded and granted relief. There were earlier interlocutory rulings by HH Judge Havelock-Allan QC (including findings about contravention of section 216 Insolvency Act 1986) and a Court of Appeal decision on interlocutory appeal. Lewison J gave permission to appeal to two legal questions: (i) the duties of a nominee director to the company and to his appointor; and (ii) what counts as "the affairs" of Neath for sections 994/995 purposes. Costs orders were also challenged.

Nature of the claim / relief sought: The petition sought relief for unfairly prejudicial conduct by the Cuddys, including orders to protect Neath's position, and potentially to force sale of the Cuddy share or remove Mr Cuddy as Neath's nominee on Ospreys. The cross-petition sought relief in respect of deadlock and breakdown of trust.

Issues framed:

• Whether a nominee director owes any additional enforceable duty to his nominator beyond the usual duties owed to the company of which he is a director;
• Whether acts of a director of Ospreys were conduct of the affairs of Neath for the purposes of the unfair prejudice jurisdiction;
• Whether the judge's remedy and costs orders were appropriate in light of the findings.

Court's reasoning: The Court of Appeal held that nomination alone does not create a separate enforceable duty to the nominator; any such duty must arise from employment, office or a separate agreement. A nominee may properly take his nominator's interests into account but must exercise independent judgment for the benefit of the company he serves. The shareholders' agreement (clause 8) and the board role of Ospreys directors reinforced that duty. The phrase "affairs of a company" should be construed liberally, but not so liberally as to treat ordinary board decisions of Ospreys as automatically the affairs of Neath; only specific acts (for example, misuse of Neath's confidential information, objection to Neath's choice of solicitors in trademark litigation, and failures to consult about StadCo/WRU matters) were held to be conduct of Neath's affairs and in some respects unfairly prejudicial. The court emphasised that unfairness requires more than deadlock: deadlock alone does not satisfy section 994.

Disposition and costs: The appeal on the substantive points was dismissed. The Court of Appeal upheld the judge's remedies as within discretion but found error in parts of his costs allocation. The court varied costs orders so that there would be no order for costs of the petition up to 23 July 2007 (each side to bear their own costs for that period except for certain interlocutory orders) and directed that Mr Cuddy should pay Mr Hawkes' costs of the cross-petition. The court granted limited permission to appeal on the costs points.

The Court of Appeal dismissed Mr Hawkes' substantive appeal on the legal issues permitted (the duties of a nominee director and what constitutes the affairs of Neath) and endorsed Lewison J's factual findings and remedial exercise as within judicial discretion. The court concluded nomination alone creates no separate fiduciary duty to the appointor; a nominee must exercise independent judgment for the benefit of the company he serves. It accepted that limited unfairly prejudicial conduct had occurred (misuse of Neath's confidential information; failures to consult) but that these did not justify depriving the Cuddys of their share or removing Mr Cuddy from Ospreys. The judge's discretionary remedy was therefore upheld, but the Court varied certain costs orders, removing the order that the Cuddys pay 50% of Mr Hawkes' costs up to 23 July 2007 and ordering that Mr Cuddy pay Mr Hawkes' costs of the cross-petition.

Appeal from the Chancery Division (Lewison J) [2007] EWHC 2999 (Ch) (and related hearing [2008] EWHC 210 (Ch)); earlier interlocutory rulings by HH Judge Havelock-Allan QC ([2007] EWHC 1789 (Ch)) and an interlocutory appeal considered by Chadwick LJ (17 October 2007). This judgment is the Court of Appeal decision: [2009] EWCA Civ 291.