Weavering Capital (UK) Ltd & Anor v Peterson & Ors

A transaction is a sham where the parties intend to give third parties the appearance of legal rights and obligations different from those they actually intend to create. Directors of a small financial business cannot avoid liability by relying on a confined allocation of functions where they possess relevant knowledge and have approved the underlying strategy. The statutory transaction-at-undervalue provisions apply where a company transfers property without consideration, unless the statutory good-faith and benefit conditions are satisfied. Dishonesty is assessed objectively by reference to the defendant’s actual knowledge, but negligence may arise independently from a failure to exercise proper care, skill and diligence. A misleading impression may arise from documents which are literally accurate in parts when the documents are considered as a whole.

The claimant company was in liquidation and its liquidators sought relief under the Insolvency Act 1986 against directors, employees and recipients of company property. The claims arose from the management of a hedge fund whose reported value was supported by purported over-the-counter swaps with a related company controlled by the chief executive.

The liquidators alleged fraud, sham transactions, breach of directors’ duties, negligence, dishonest assistance, transactions at an undervalue, transactions defrauding creditors, knowing receipt and recovery of loans and benefits. The court also determined contribution and counterclaims. The central issues were whether the swaps were genuine, whether the defendants had breached their duties, and whether payments made before insolvency were recoverable.

1. Swaps and misrepresentations. The swaps were never intended to be enforceable instruments. They were used to manipulate the fund’s reported net asset value and were therefore shams within the principle stated in Snook v London & West Riding Investments [1967] 2 QB 86. The offering memorandum, due-diligence questionnaires and marketing materials, viewed as a whole, gave investors a materially misleading impression about the portfolio, liquidity, counterparty and risk.
2. Directors’ duties. A director’s standard is assessed by reference to the functions performed, the knowledge, skill and experience reasonably expected of a person in that role, and the director’s actual knowledge, skill and experience. A director cannot avoid liability merely by relying on a limited area of responsibility where the director knew relevant facts, participated in the company’s control system and approved the strategy. Mrs Peterson and Mr Dabhia were liable for breach of duty and negligence.
3. Mr Platt. Dishonest assistance requires a fiduciary breach, causal loss, assistance and dishonesty. Applying Royal Brunei Airlines v Tan [1995] AC 378, as clarified by Twinsectra v Yardley [2002] 2 AC 164 and Barlow Clowes v Eurotrust [2006] 1 WLR 1476, Mr Platt was not dishonest. He was nevertheless negligent and owed fiduciary duties arising from his position of responsibility.
4. Company property. The £4m employee retention payment was a transaction at an undervalue. The requirements of Insolvency Act 1986, sections 238 and 240, were satisfied and the statutory defence was not established. Most personal transfers made during the collapse were transactions defrauding creditors under section 423, but the additional £85,000 claim was not proved.
5. Outcome. The claim succeeded against the relevant defendants, subject to the exceptions that the fraud claim against Mr Platt and the additional £85,000 claim failed. Mr Peterson’s counterclaim and Mrs Peterson’s contribution claim were dismissed. The defendants were liable to account for profits or restore recoverable property as determined by the judgment.

This was a first-instance decision. The judgment records separate proceedings in the Grand Court of the Cayman Islands against other directors of the fund, but does not describe an appeal from an English decision.