Smithton Ltd v Naggar

A person is not a de facto or shadow director merely because he exercises substantial influence over a company. The court must examine what the person actually did, identify the capacity in which he acted, and consider all relevant circumstances. Influence arising from a person’s role as shareholder, chairman of a holding company or major customer does not, without more, establish directorship. A substantial property transaction requires an arrangement under which the relevant director acquires, or is to acquire, the asset. A possible future acquisition is insufficient. The mechanics of a riskless-principal transaction do not necessarily involve a transfer of a proprietary interest. Continued contractual dealings do not, without more, amount to a personal representation that a company will meet future liabilities.

Smithton, formerly Hobart Capital Markets Ltd, claimed losses arising from the collapse of two companies that had defaulted on margin calls under contracts for difference referencing F&C Asset Management Ltd shares. It sought to hold Guy Naggar personally liable on three bases: breach of duties as a de facto or shadow director, breach of Companies Act 2006, section 190, and negligent misrepresentation.

The central issues were whether Mr Naggar had assumed the role of director, whether the creation and intended closing of the contracts for difference constituted a substantial property transaction, and whether he had made actionable representations concerning the financial position of the relevant companies.

1. Directorship. The court applied the guidance in HMRC v Holland [2010] UKSC 51 and the related authorities. There is no single decisive test for de facto directorship. The court must examine the company’s governance structure, the person’s actual functions, and all relevant circumstances. Holding out as a director is a factor, but not an essential requirement. The capacity in which conduct occurred is critical. Conduct attributable to a person’s role as chairman of the majority shareholder, major customer or group participant does not become directorial conduct merely because it involves influence or access to information.
2. Mr Naggar’s receipt and discussion of open-position reports, involvement in significant expenditure, communications with employees and instructions concerning the contracts for difference were explicable by those other capacities. The evidence did not show that he formed part of Hobart’s corporate governing structure or that the board was accustomed to act on his instructions. He was therefore neither a de facto nor a shadow director.
3. Section 190. The temporary allocation of market risk while shares were acquired during the trading day did not require a proprietary interest to pass from Hobart to Mr Naggar or a connected company and back again. The arrangements were not therefore substantial property transactions on the narrow basis. On the wider basis, the evidence showed only that the shares might later be acquired. Section 190 requires an arrangement under which the asset is, or is to be, acquired; a contingent possibility dependent on future negotiations was insufficient.
4. Misrepresentation. No sufficiently precise representation was made at the June 2008 meeting, and there was no evidence that any statement was conveyed by the DDI-appointed directors as a conduit for Mr Naggar. Continued dealings and the opening of client accounts did not create a personal representation or continuing duty to warn of later financial difficulties.
5. All three limbs of the claim failed. The claim was dismissed, and the third-party proceedings consequently fell away.

First-instance decision. The judgment does not state any prior appellate history.