Smithton Ltd v Naggar

A person is a de facto director only if, viewed objectively and in the light of the company’s governance, that person has assumed the status and functions of a director. The inquiry is one of fact and degree. It requires consideration of the person’s actual acts, their cumulative effect and the capacity in which they were done. Mere consultation or the giving of approval will not normally suffice.

A shadow director requires evidence that the directors were accustomed to act on that person’s directions or instructions. For Companies Act 2006 section 190, an arrangement must provide that the director or connected person is to acquire the relevant asset. A possibility that the person may later elect to acquire it is insufficient.

Smithton Ltd, formerly Dawnay Day Capital Markets Ltd and referred to in the judgment as Hobart, sought approximately £4 million from Mr Naggar. It alleged that he was its de facto or shadow director, or alternatively that arrangements connected with contracts for differences infringed Companies Act 2006 section 190.

Rose J dismissed both claims in the High Court: [2013] EWHC 1961 (Ch). She found that Mr Naggar had acted as chairman of Hobart’s majority shareholder or in other capacities, rather than as a Hobart director. She also held that the CFD arrangements did not involve a substantial property transaction within section 190.

The appeal raised whether those findings should be set aside and whether the arrangements were ones under which Mr Naggar or connected persons acquired, or were to acquire, the referenced shares.

1. Appeal dismissed unanimously. Arden LJ gave the judgment, with which Elias and Tomlinson LJJ agreed.

2. The court applied the approach in HMRC v Holland [2010] 1 WLR 2793. A de facto directorship depends on whether the person became part of the company’s corporate governance system and assumed the status and function of a director. The inquiry is objective and fact-sensitive. Where the person has other legitimate capacities, the claimant must prove the capacity in which the acts were actually done; the court does not make an artificial attribution of the acts to one role.

   Although it will normally be important to identify the company’s governance structure, there was no material legal error here. Mr Naggar had defended the claim on the basis of capacity. The joint venture agreement, the agreed board composition, the regulatory position, and the absence of any holding out as a director supported the judge’s conclusion that he acted as a major client and chairman of the majority shareholder. Her factual assessment was open to her and disclosed no basis for appellate intervention.

3. The shadow-director claim also failed. There was no evidence that a majority of Hobart’s directors were accustomed to act on Mr Naggar’s directions or instructions.

4. On the narrow section 190 case, Hobart did not acquire the shares merely because the ultimate purchaser was identified later in the trading day. The identified CFD provider’s ratification operated retrospectively, and the judge’s unchallenged finding was that Hobart acquired no interest under the market rules.

5. On the wider case, section 190 requires an arrangement under which the connected person is to acquire the asset. It does not extend to an arrangement under which that person may later choose to acquire it. The possibility that a CFD holder might take physical delivery of referenced shares on closing out was therefore insufficient. Re Duckwari plc [1999] Ch 253 was distinguishable because the relevant contractual right in that litigation was itself a substantial non-cash asset.

• Court of Appeal (Civil Division): dismissed Smithton’s appeal in [2014] EWCA Civ 939.
• High Court (Chancery Division): Rose J dismissed the claims that Mr Naggar was a de facto or shadow director and that the CFD arrangements contravened section 190: [2013] EWHC 1961 (Ch).