Smithton Limited (Formerly Hobart Capital Markets Ltd) v Guy Naggar & Others

The claimant (formerly Dawnay Day Capital Markets Ltd, later Hobart) sued Mr Naggar personally for losses arising when two Connected Companies (Insureprofit Ltd and Mariona Ltd) defaulted on margin calls under open-ended contracts for difference (CfDs). The court analysed three heads of liability: breach of directors' duties as a de facto or shadow director (Companies Act 2006 sections 250 and 251 and related duties in ss.172, 173, 174, 175 and 177), an alleged breach of section 190 CA 2006 (substantial property transactions requiring shareholder approval), and negligent misrepresentation.

The judge found that Mr Naggar was neither a de facto nor a shadow director of Hobart after it was incorporated: his involvement was explicable by his legitimate roles as chairman of the majority shareholder (DDI), a large client or controller of Connected Companies, and a group "hat"-holder during the incubation period. The joint venture agreement, FCA authorisation processes and the governance evidence weighed against imposing fiduciary duties. The section 190 claim failed both on the "narrow" allegation that proprietary interests transferred back and forth during the trading day and on the "wide" allegation that the CfD arrangements constituted an arrangement under which Mr Naggar was to acquire the underlying shares. Finally the negligent misrepresentation claim failed for want of reliable evidence of the alleged representations or of a duty to update Hobart about subsequent group liquidity problems. The claim was dismissed.

Background and parties: Hobart (formerly Dawnay Day Capital Markets Ltd) claimed losses after Insureprofit and Mariona defaulted on margin calls on CfDs, causing Hobart to sell large hedging positions at depressed prices. The connected companies were insolvent and the claim was brought against Mr Guy Naggar, who had long-standing roles in the Dawnay Day group (chairman of DDI and connected-person owner of some client companies).

Nature of the claim: Hobart advanced three causes of action: (i) breach of directors' duties by Mr Naggar as a de facto or shadow director (relying on CA 2006 duties including ss.172, 173, 174 and the avoidance of conflicts), (ii) breach of section 190 CA 2006 (unapproved substantial non-cash transactions) on a narrow (day trading mechanism) and wide (plans to acquire F&C physical shares) basis, and (iii) negligent misrepresentation (alleged assurances about the financial health of the Dawnay Day group and implied representations by continuing to deal at given margin terms).

Issues framed by the court:

• Whether Mr Naggar occupied the position of director (de facto) or was a shadow director of Hobart (ss.250–251 CA 2006) having regard to the governance of Hobart, the JV Agreement, the role of DDI-nominated directors and the incidents relied upon.
• Whether the mechanism by which CfDs were created on the trading day involved a transfer of non-cash assets so as to attract s.190 CA 2006, or whether the overall arrangements showed an intention that Mr Naggar or connected companies would acquire the shares.
• Whether any express or implied negligent misrepresentations were made or caused by Mr Naggar on which Hobart reasonably relied and which caused loss.

Court's reasoning and conclusions: The court emphasised "hat identification": conduct must be assessed in the capacity in which the person acted (chairman, client, group controller), not simply whether they exerted influence. The JV Agreement, FCA authorisation records (controlled functions not showing Naggar), and the fact Hobart was incubated within DDBL before incorporation undercut the submission that Naggar assumed fiduciary office after incorporation. Specific incidents relied on (receipt of Open Position Reports, occasional comments, requests for margin information, and instructions to brokers) were either explicable by his roles as major client and chairman or were isolated, one-off events. The court accepted the FCA/BIPRU practice that brokers may hold positions provisionally during a trading day and concluded no transfer of proprietary interest occurred that would trigger s.190; the wider allegation that the CfDs were an arrangement by which Naggar would acquire the shares was insufficiently certain at inception. On misrepresentation, the court found no reliable evidence of the alleged express assurances and rejected the imposition of a continuing personal duty to update Hobart. All three heads failed and the claim was dismissed.

Procedural posture: First instance Chancery hearing, long trial; third-party contribution claims fell away as primary claim dismissed.

The claim is dismissed. The court held that Mr Naggar was neither a de facto nor a shadow director of Hobart; that the section 190 CA 2006 allegations failed both on the narrow (no proprietary transfers during the trading day) and wide (no certain arrangement that Naggar would acquire the shares) bases; and that there was no actionable negligent misrepresentation. The rationale rested on governance evidence (JV Agreement and FCA authorisations), the "hat identification" analysis, the commercial practice governing CfD execution and FCA/BIPRU tolerances, and the absence of reliable contemporaneous evidence of the alleged representations.