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

A director’s duty of reasonable care, skill and diligence under the Companies Act 2006 is assessed by reference to both the functions performed and the director’s actual knowledge, skill and experience. A trial judge need not separately articulate each limb of the statutory standard where the governing law, the director’s role and the breach are clear from the findings. Delegation permits reasonable reliance but leaves a continuing supervisory duty. A director cannot rely on ignorance caused by failing to investigate serious irregularities or on another person’s explanations where the role required inquiry. An alternative negligence claim may be determined where it was pleaded and litigated without surprise or prejudice. Causation may be inferred where the breach enabled a fraudulent business to continue and thereby caused the loss.

WCUK’s liquidators sued former director Charanpreet Dabhia and senior employee Edward Platt for losses arising from the operation of a fraudulent hedge fund business. Proudman J gave judgment against them for US$450 million and made further orders concerning salary and bonuses. The appeals challenged the findings of breach, the determination of negligence against Mr Platt despite rejection of dishonesty, the adequacy of the pleadings, causation, and the relief granted. The central issues were whether the duties had been properly applied and pleaded, and whether the breaches caused WCUK’s losses.

McCombe LJ gave the judgment of the court. The Master of the Rolls, Lord Dyson, and Moore-Bick LJ agreed.

1. Directors’ duties. Section 174 of the Companies Act 2006 requires reasonable care, skill and diligence, assessed by both the objective standard reasonably expected of a person performing the relevant functions and the director’s actual knowledge, skill and experience. A judge need not separately spell out each limb of the standard if the judge has recognised the governing law, considered the facts and explained why the duty was breached. The principles stated in Re Barings plc and others (No.5) [1999] 1 BCLC 433, and approved on appeal [2001] BCC 273, confirm that the extent of the duty depends on the director’s role and that delegation does not remove the duty of supervision.
2. Mr Dabhia. His marketing role required sufficient understanding of the fund’s strategy and transactions. He should have investigated the identity and creditworthiness of the swap counterparty, the related-party transactions, compliance with investment restrictions and the concealment of the swaps. Reliance on Mr Peterson’s plausible explanations did not answer the breach, and the findings adequately established that Mr Dabhia’s representations to investors were misleading.
3. Mr Platt. The pleadings made a distinct alternative claim in contractual and common-law negligence. His Defence expressly denied negligence and asserted that he had exercised reasonable skill and care. The claim was litigated at trial without objection or identified prejudice. The rejection of dishonesty therefore did not prevent a finding of negligence.
4. Causation. The claimant had to prove that the breaches caused the loss. The approach of constructing a hypothetical account of what would probably have happened had the duties been performed, discussed in Lexi Holdings v Luqman [2009] BCC 716, was applicable. The pleaded and proved acts and omissions showed that compliance would have stopped the fraudulent business. Causation was implicit in the judge’s findings, and the absence of an express analysis did not invalidate them.
5. Disposition. Permission to amend the grounds of appeal was granted. The agreed challenge concerning salary and bonuses was allowed. Subject to that agreed relief, both appeals were dismissed.

• High Court of Justice, Chancery Division: Proudman J ordered judgment for WCUK against the appellants for US$450 million and made declarations and directions concerning salary and bonus payments.
• Court of Appeal (Civil Division): In [2013] EWCA Civ 71, the court granted permission to amend the grounds, allowed the agreed challenge concerning salary and bonuses, and dismissed the remaining appeals.