Vivendi SA Centenary Holdings Iii Ltd v Richards & Ors

A shadow director will ordinarily owe fiduciary duties in relation to the directions or instructions given to the de jure directors. Those duties normally include a duty to act in good faith in the company’s interests rather than the shadow director’s separate interests.

A director’s duty of good faith is subjective. The question is whether the director honestly believed that the relevant act was in the company’s interests. Where insolvency, doubtful solvency or a real and non-remote risk of prejudice to creditors arises, their interests must be considered.

Deliberately extracting an insolvent company’s assets to defeat creditors may constitute both a dishonest breach of duty and dishonest assistance. Section 21(1)(a) of the Limitation Act 1980 then prevents the ordinary limitation period from barring claims against the fiduciary and a dishonest assistant.

CH3 held onerous property leases, including leases of the Ark in Hammersmith, but had no trading income. After CH3 left the Vivendi group, Mr Bloch became its sole director and Mr Richards, its ultimate beneficial owner’s controlling figure, provided consultancy services.

Between March 2004 and February 2005, CH3 made nine payments exceeding £10 million. These comprised consultancy fees, a dividend, loans and investments in companies connected with Mr Richards or projects introduced by him. CH3 entered liquidation in 2005.

Vivendi acquired relevant causes of action from CH3’s liquidators, and CH3 was joined as a claimant. The claim alleged that Mr Bloch procured the payments in breach of his duty of good faith; that Mr Richards was a shadow director owing and breaching the same duty; and that Mr Richards dishonestly assisted Mr Bloch. Because proceedings began more than six years after the payments, the central additional issue was whether dishonesty engaged section 21(1)(a) of the Limitation Act 1980.

1. The claim succeeded against both defendants. Mr Bloch was accustomed to act in accordance with Mr Richards’ directions or instructions. Mr Richards was therefore a shadow director within the statutory definition. Mr Bloch was not a mere cipher, but he implemented Mr Richards’ decisions rather than exercising independent control.

2. A shadow director will typically owe fiduciary duties concerning the directions or instructions given to de jure directors. By directing the exercise of powers held for the company’s benefit, the shadow director assumes responsibility for the company’s affairs to that extent. The court declined to adopt the narrower approach in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch). Mr Richards’ express undertaking under the consultancy agreement faithfully to serve and promote CH3’s interests provided an additional basis for the duty.

3. The duty of good faith required Mr Bloch and Mr Richards honestly to act in what they considered to be CH3’s interests. CH3 had substantial liabilities, no income and a finite life unless liabilities were reduced or income obtained. Its creditors’ interests therefore had to be considered. The duty arose even though strict insolvency was not the sole threshold.

4. Neither defendant believed that any of the nine payments served CH3’s or its creditors’ interests. The consultancy payment and dividend removed substantial cash without a credible business justification. The remaining loans and investments exposed scarce funds to unacceptable risks when CH3’s inability to meet future liabilities was apparent. The defendants intended to extract CH3’s remaining cash before its failure and to thwart its landlords.

5. Both defendants dishonestly breached their fiduciary duties. Mr Richards also procured and dishonestly assisted Mr Bloch’s breaches. Their conduct was contrary to the ordinary standards of honest commercial behaviour, assessed by reference to the facts they knew.

6. Section 21(1)(a) of the Limitation Act 1980 applied because the breaches involved dishonesty. The ordinary six-year limitation period therefore did not bar the claims against either the fiduciaries or the dishonest assistant. It was unnecessary to determine the alternative case under section 21(1)(b).

7. The specific defences concerning earlier advice, the validity of a separate dividend, settlement negotiations, notice of assignment and standing failed. Relief under section 1157 of the Companies Act 2006 was refused because neither defendant had acted honestly and reasonably. The parties were invited to agree an order reflecting the judgment.

These were first-instance proceedings. In earlier proceedings commenced by CH3 in 2009 concerning its £77.7 million loan to C6, Vivendi and Mr Constant settled CH3’s claims for £47 million. CH3 assigned relevant causes of action to Vivendi. Those proceedings concluded by consent orders dated 6 January 2011, and the present proceedings were issued on 16 May 2011.