City of London Group Plc & Anor v Lothbury Financial Services Ltd & Ors

A director’s fiduciary duties are owed to the company and, where insolvency is doubtful, its creditors. A consultant or employee does not become a fiduciary merely because the person is trusted or involved in the business; the nature and scope of the relationship must justify that conclusion. De facto directorship requires an assumption of the status and functions of a director. Conspiracy requires proof of actual pecuniary loss, not merely a broad allegation of damage. An account of profits requires precise identification of the gain caused by the breach and may be refused where disproportionate. Passing off requires goodwill, a misleading representation and damage.

The claimants acquired the business and residual rights of action of a financial public-relations company after it entered administration. They alleged that its former director, consultants, administrator and a related company had conspired to transfer the business, clients, assets and confidential information to the related company. Claims were brought for breach of fiduciary duty, conspiracy, conversion, money had and received, passing off, declarations, accounts, damages and injunctive relief.

The principal issues were whether the individual defendants owed the alleged fiduciary duties, whether the alleged conspiracy and unlawful conduct caused loss, whether passing off was established, and whether an account or other equitable relief was available.

1. Fiduciary duties. The claim failed against the consultants and office administrator. The consultants were independent contractors and had not assumed the status or functions of directors. The administrator’s employment was not of a kind requiring her to subordinate her interests and act solely for the company. Trust, involvement in management and alleged misconduct did not themselves create fiduciary duties.
2. Directors and de facto directors. The sole director owed duties to the company and, when insolvency arose, to its creditors. A de facto director is identified by examining all the circumstances and asking whether the person assumed the status and functions of a director or became part of the corporate governing structure. Performing management tasks below board level is insufficient.
3. Conspiracy and loss. The conspiracy claims were not made out. The necessary elements had to be properly pleaded and proved at trial. The claimants had acquired LF’s cause of action, so any loss had to be loss suffered by LF. The evidence showed that LF could not have retained the consultants’ clients and no actual pecuniary loss was established.
4. Passing off. The claimants failed to establish the necessary goodwill, deception or damage. Clients who followed the consultants knew that LF was in administration and that LFS was separate. LFS’s continued use of its own corporate name was not passing off.
5. Accounts and other claims. The conversion and money-had-and-received claims also failed. An account requires precise identification of what was acquired through the breach and a reasonable relationship between the profits sought and the breach proved. The proposed wide-ranging inquiry would in any event have been disproportionate.
6. The claim was dismissed.