Hawkes v Cuddy & Ors

A director nominated by a shareholder owes no duty to the nominator merely because of the nomination. When acting as a director, the director must exercise independent judgment in what the director genuinely considers to be the company’s best interests. Any separate contractual or fiduciary duty cannot detract from that overriding duty.

For relief under section 994 of the Companies Act 2006, breakdown of trust, loss of confidence or deadlock does not alone establish unfair prejudice. The petitioner must show relevant unfair conduct and prejudice.

Once a petition is well founded, section 996 confers a wide remedial discretion. The court may consider the interests of creditors and other affected persons and is not confined to the precise relief requested by the petitioner.

Two equal shareholders established Neath Rugby Ltd, which owned half of Neath-Swansea Ospreys Ltd. Under their informal agreement, Mr Hawkes managed Neath and Mr Cuddy served as Neath’s nominee on Osprey’s board. After their relationship broke down, each brought an unfair-prejudice petition concerning the management of Neath.

Lewison J held that each petition was partly well founded and regulated the future governance of Neath and Osprey. His principal judgments were [2007] EWHC 2999 (Ch) and [2008] EWHC 210 (Ch).

Mr Hawkes appealed concerning a nominee director’s duties, the meaning of a company’s affairs under section 994 of the Companies Act 2006, the remedy and costs. Both sides also challenged costs orders. The central questions were whether nomination imposed a duty to advance the nominator’s interests, whether conduct concerning Osprey formed part of Neath’s affairs, and whether deadlock alone could support the cross-petition.

1. Appeal on the substantive issues dismissed. A director’s nomination by a shareholder does not, without more, create a duty owed to the nominator. Duties may arise from employment, office or a separate agreement, but they cannot detract from the director’s duty to the company. A nominee director may take the nominator’s interests into account only while acting in what the director genuinely considers to be the company’s best interests. Those fiduciary duties operate whenever the director acts as an officer or in relation to the company’s assets or affairs, not merely at formal board meetings.

2. The evidence did not establish that the two Osprey directors had general authority to act as agents of its shareholders. Nor was there shareholder consent to dilute their fiduciary duties. Mr Cuddy’s effective additional obligation was therefore to consult Mr Hawkes so that he could make informed decisions about Osprey’s interests. It did not give Mr Hawkes a veto.

3. The affairs of a company are construed liberally for section 994 of the Companies Act 2006 and may include matters capable of coming before its board. However, the commercial connection between Neath and Osprey did not make all Osprey affairs Neath affairs. Conduct undertaken for Osprey in the genuine discharge of Mr Cuddy’s duty to that company could not, without more, be unfairly prejudicial to Mr Hawkes. The judge was entitled to find limited unfair prejudice arising from misuse of Neath’s confidential information and failures to consult, while rejecting the more serious allegations.

4. The judge’s remedial order was within the wide discretion conferred by section 996. The court could consider its effect on Osprey, Swansea and other affected interests. Section 996 permits such order as the court thinks fit; it does not confine the court to the precise remedy sought. The trial judge’s governance solution was proportionate to the limited unfair prejudice proved.

5. Cross-petition held unfounded. Breakdown of trust and confidence, disagreement or deadlock does not, without more, satisfy sections 994 and 996. Unfair conduct and relevant prejudice remain necessary. Re Guidezone Ltd [2000] 2 BCLC 321 should no longer be followed insofar as it treated conduct insufficiently unfair for section 994 as capable of supporting just-and-equitable winding up.

6. Permission to appeal was granted on limited costs issues. The costs order on the petition up to 23 July 2007 was varied to no order for costs, apart from the preserved order relating to the earlier hearing. Mr Cuddy was ordered to pay Mr Hawkes’s costs of the cross-petition. Blackburne J and Moore-Bick LJ agreed with Stanley Burnton LJ.

1. Court of Appeal (Civil Division): By [2009] EWCA Civ 291, unanimously dismissed the substantive appeal, held the cross-petition unfounded, and varied the costs orders in part.

2. High Court, Chancery Division: Lewison J held the petition and cross-petition partly well founded and imposed a governance remedy in [2007] EWHC 2999 (Ch). He determined costs in [2008] EWHC 210 (Ch).

3. Earlier High Court and Court of Appeal proceedings: HH Judge Havelock-Allan QC determined summary-judgment and strike-out applications in [2007] EWHC 1789 (Ch). A prior Court of Appeal decision set aside declarations concerning section 216 of the Insolvency Act 1986 as premature, while preserving relevant factual findings for trial; its citation is not stated in the judgment.