Vivendi SA v Richards

The court held that nine payments totalling over £10 million made by Centenary Holdings III Limited (CH3) between March 2004 and February 2005 were not made in the interests of CH3 or its creditors and that the defendants had acted in breach of fiduciary duty. The judgment applies principles on shadow directorship and the duty of good faith (loyalty), finds that a shadow director can owe fiduciary duties in respect of directions given to the company’s de jure directors, and treats the defendants’ conduct as dishonest such that Limitation Act 1980 s.21(1) applies. The court refused relief under section 1157 Companies Act 2006 (former equivalent) and ordered that the claims succeed against both defendants.

Background and parties. CH3, a Vivendi subsidiary which held onerous leases (notably the Ark), was transferred to companies ultimately beneficially owned by Mr Richards in January 2004. CH3 thereafter made a series of payments and loans and went into liquidation in mid-2005. Vivendi, by assignment from CH3's liquidators (and with CH3 as an additional claimant), sued Mr Murray Richards and Mr Stephen Bloch alleging breaches of directors' duties and dishonest assistance.

Nature of the claim and relief sought. Vivendi sought to recover sums paid out by CH3 (payments to P4 Consulting, a dividend, and various loans and investments) on the basis that Mr Bloch (as de jure director) and Mr Richards (as shadow director and dishonest assister) caused CH3 to make payments in breach of fiduciary duties. Because proceedings were brought more than six years after the payments, Vivendi relied upon Limitation Act 1980 s.21(1) requiring a finding of dishonesty to defeat the limitation defence.

Issues framed by the court. The court considered: (i) the civil standard of proof; (ii) whether Mr Richards was a shadow director; (iii) whether a shadow director can owe fiduciary duties and, if so, their scope; (iv) the content of the duty of good faith (including treatment of creditors' interests where insolvency or near-insolvency is present); (v) the law on dishonest assistance; and (vi) limitation issues under the Limitation Act 1980.

Reasoning and findings.

• Standard of proof: ordinary civil standard, but allegations of dishonesty treated as inherently improbable and required cogent evidence.
• Shadow director: on the facts Mr Richards was a person in accordance with whose directions Mr Bloch was accustomed to act; the documentary record and conduct supported that finding.
• Fiduciary duties of shadow directors: the court rejected a narrow reading of Ultraframe and held that shadow directors will commonly owe fiduciary duties, in particular the duty of good faith, in respect of the directions they give to de jure directors; the Consultancy Agreement gave an additional, express undertaking by Mr Richards to promote CH3’s interests.
• Duty of good faith and creditors' interests: where a company is insolvent or in a fragile financial position the directors must have regard to creditors’ interests; CH3’s precarious finances made creditors’ interests relevant.
• Payments examined: the court analysed each challenged payment against contemporaneous forecasts, adviser reports and conduct, concluding that the dividend, the consultancy payment and the subsequent loans/investments were not made in CH3’s or creditors’ interests but to extract funds for the benefit of Mr Richards or associated companies.
• Dishonesty and limitation: the conduct was held to be dishonest by objective standards; accordingly s.21(1)(a) of the Limitation Act 1980 applied and the claims were not time-barred. The defendants were found liable for breach of fiduciary duty; Mr Richards was found to have procured the breaches and to have dishonestly assisted.
• Relief from liability under section 1157 Companies Act 2006 was refused because the statutory conditions (acting honestly and reasonably) were not satisfied.

Conclusion. The claimant’s claims succeeded against both defendants and the court invited the parties to agree an order reflecting those conclusions or to return on relief issues.

The claim succeeds as against both Mr Richards and Mr Bloch. The judge found that (i) Mr Richards was a shadow director who owed fiduciary duties, including the duty of good faith, in respect of the directions he gave; (ii) both defendants caused CH3 to make payments that were not in the interests of CH3 or its creditors and therefore breached their duties; (iii) their conduct was dishonest so that Limitation Act 1980 s.21(1) applied; and (iv) relief from liability was not available.