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

This appeal concerned director and senior employee liability arising from losses caused by sham over-the-counter transactions in a hedge fund managed by Weavering Capital (UK) Ltd (WCUK). The Court of Appeal reviewed findings that the First Appellant (a director responsible for marketing) breached duties under section 174 Companies Act 2006 by failing to acquire and maintain sufficient understanding of the fund’s counterparties and by participating in misleading representations to investors. The Court upheld the trial judge’s rejection of a dishonest assistance fraud claim against the Second Appellant (the assistant investment manager), but affirmed the finding that he was negligent in performing his duties. The judge’s treatment of delegation and supervisory duties (drawing on Re Barings) and the requirement for directors to exercise reasonable care, skill and diligence (s.174) were applied.

Although the respondents agreed to allow the appeal in respect of the order relating to salary and bonuses, the Court of Appeal dismissed both appeals on the merits. The Court held that the trial judge had implicitly, and sufficiently, found causation — that had the appellants complied with their duties the Macro’s sham business would have been stopped and the losses avoided — and that there was no procedural unfairness in finding negligence against the Second Appellant where negligence had been pleaded and defended.

Background and parties: WCUK (in liquidation) and its liquidators sued a number of defendants, including Mr Dabhia (director with marketing responsibility) and Mr Platt (assistant investment manager), after the collapse of a Cayman Islands hedge fund (the Macro) which was managed by WCUK. The Macro’s reported assets included large OTC swaps with a related and essentially worthless company controlled by the fund’s principal, Mr Peterson. The liquidators sought indemnity/compensation for losses exceeding US$530,000,000 and declarations and accounts in respect of salary and bonuses.

Procedural posture: The appeal lay from Proudman J’s High Court (Chancery Division) judgment and order of 30 May 2012 (HC09C01915), which had entered judgment for WCUK for US$450,000,000 against the appellants and others, declared salary and bonuses were received in breach of fiduciary duties and ordered accounts. The respondents did not contest an allowed element of the appeal concerning salary and bonuses; the remainder was resisted.

Nature of the claim and relief sought: The liquidators alleged breaches of fiduciary duty by directors, breach of contract and negligence by the appellants, and fraudulent dishonest assistance by the Second Appellant. Remedies sought included damages/indemnity for losses, declarations that remuneration was received in breach of duty, and accounts.

Issues before the court: (i) Whether the appellants breached fiduciary and/or contractual duties and/or were negligent; (ii) whether there was dishonest assistance in fraud by the Second Appellant; (iii) causation — whether any breach caused the losses claimed; (iv) whether it was procedurally unfair to find negligence where the primary trial focus had been alleged dishonesty; and (v) whether the judge erred in applying the appropriate standards for directors’ duties and delegation/supervision.

Court’s reasoning and conclusions: The Court of Appeal held that the trial judge correctly applied the law on directors’ duties (including s.174 Companies Act 2006) and on delegation and supervisory responsibilities (following Re Barings). The judge had been entitled to find that Mr Dabhia should have probed the identity and creditworthiness of the swaps’ counterparty, that he participated in misrepresentations and thus breached his duties, and that these breaches contributed to the ongoing sham conduct. As to Mr Platt, the judge was entitled to reject dishonest assistance and to find him non-fraudulent but negligent: he had been over-promoted, had uncritically followed Mr Peterson, and had carried out acts (defective valuations, documentation and reports, one forged signature) which enabled the sham to continue. The Court found no procedural unfairness in the negligence finding because negligence had been pleaded and defended and the defendant had not shown evidential prejudice. While the trial judgment did not set out an express step-by-step causation analysis, the Court held that causation was implicit in the judge’s findings: had the appellants complied with duties the Macro’s sham trading would have ceased and losses avoided. Permission to amend appeal grounds was allowed; nevertheless both appeals were dismissed (save for the conceded element concerning salary and bonuses).

Appeal dismissed. The Court affirmed Proudman J’s findings that the First Appellant breached his duties as a director by failing to acquire and apply sufficient knowledge of the fund’s OTC counterparties and by participating in misleading investor communications, and that the Second Appellant was not dishonest but was negligent in performing his fund management duties. The judge had applied the law on directors’ duties (including s.174 Companies Act 2006) and on delegation and supervision, and her findings implicitly satisfied causation; there was no procedural unfairness in the negligence finding where negligence had been pleaded and defended. An appeal element concerning salary and bonuses was agreed to be allowed by the respondents, but the substantive appeals were otherwise dismissed.

Appeal from the High Court of Justice, Chancery Division (Proudman J), HC09C01915 (order of 30 May 2012); judgment on appeal delivered by the Court of Appeal (Civil Division) [2013] EWCA Civ 71 (15 February 2013).