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

The Court of Appeal dismissed the appellant's appeal. The central legal issues were whether Mr Naggar was a de facto or shadow director of Hobart (Smithton) and whether transactions connected with contracts for differences fell within section 190 of the Companies Act 2006. The court applied the statutory definitions in sections 250 and 251 CA 2006 and the authorities (in particular HMRC v Holland) to test whether the defendant had assumed the status and function of a director rather than acting in another capacity.

The court upheld the judge's factual findings that Hobart was governed under a joint venture agreement, that Mr Naggar acted in other capacities (notably as a director of the holding company and as a client) and that his interventions were explicable by those roles. On the section 190 point the court rejected both the "narrow" argument (that beneficial ownership passed at the moment Hobart bought shares to hedge CFDs) and the "wide" argument (that the arrangements were such that a connected person "is to acquire" referenced shares): there was insufficient certainty at the time of the arrangements that a connected person would acquire the shares and, on the evidence, beneficial ownership did not pass in the trading day.

Background and parties: Hobart (now Smithton Limited) sued Mr Guy Naggar, a director of its former holding company Dawnay Day International Ltd (DDI), seeking to recover losses said to have arisen from transactions with clients connected to Mr Naggar. The claim alleged (i) that Mr Naggar was a de facto or shadow director of Hobart and (ii) alternatively that transactions breached section 190 Companies Act 2006, giving rise to a statutory liability to indemnify Hobart. The claim proceeded from Rose J in the High Court ([2013] EWHC 1961 (Ch)) to the Court of Appeal.

Relief sought: Damages of approximately £4 million by way of restitution/indemnity for substantial property transactions or for breaches of duties attributable to directorial status.

Issues framed:

• Whether Mr Naggar was a de facto director or a shadow director of Hobart.
• Whether arrangements for CFDs and the related hedging transactions engaged section 190 CA 2006 (both on a narrow "beneficial ownership at purchase" basis and on a wider "real prospect of acquisition" basis).

Material facts and governance: Hobart was a joint venture run under a JVA in which DDI held a majority. The JVA specified the agreed directors and reserved matters. Hobart obtained FSA permissions and never reported Mr Naggar as a Hobart director. Important decisions were often taken informally by senior figures; Hobart wrote contracts for differences referencing shares (notably F&C) and hedged those exposures by buying or arranging the acquisition of the underlying shares.

Court's reasoning on de facto/shadow directorship: The court reiterated that whether a person is a de facto or shadow director requires examination of the corporate governance structure and the capacity in which the person acted. It applied HMRC v Holland and related authorities: acts done in the ambit of duties as a director of a corporate director should be attributed to that capacity and do not automatically make the individual a de facto director of subsidiaries. The judge's "hat identification" approach was held not to be a legal error because the defendant had run a defence that he acted in other capacities; the judge’s factual findings that Mr Naggar acted as chairman of the majority shareholder and as a client (and not as a Hobart director) were open to her and were not vitiated by legal error. The judge's assessment of OPRs, meetings, and specific episodes was held to be within her fact-finding remit.

Court's reasoning on section 190: The court treated the narrow and wide bases separately. On the narrow basis, expert evidence and market practice supported the judge's finding that beneficial ownership did not pass to the connected person at the moment Hobart purchased shares during the trading day and that market rules treated the eventual counterparty as acquiring with effect from the purchase. On the wide basis, the court held that section 190 requires more than a mere possibility that a connected person may acquire referenced shares; there must be sufficient certainty at the inception of the arrangement that the asset "is to be acquired". Conditional arrangements do not equate to a test of mere possibility. The arrangements for CFDs did not create the requisite certainty that a connected person would acquire the referenced shares.

Subsidiary findings and outcome: The court expressly upheld Rose J's findings that (i) the JVA and regulatory arrangements made it unlikely Hobart would permit Mr Naggar to act as a de facto director and (ii) the evidence did not establish that the DDI-nominated directors acted simply as his nominees. The appeal was dismissed.

Appeal dismissed. The Court of Appeal upheld the trial judge's factual and legal conclusions: (1) there was no basis to treat Mr Naggar as a de facto or shadow director of Hobart as his involvement was attributable to his roles as chairman of the majority shareholder and as a client rather than as a director of Hobart; (2) section 190 CA 2006 did not apply either on the narrow basis (no beneficial ownership passed at the time of purchase) or the wide basis (no sufficient certainty at inception that connected persons "are to acquire" the referenced shares).

Appeal from the High Court (Chancery) decision of Mrs Justice Rose, [2013] EWHC 1961 (Ch). This Court of Appeal judgment is reported at [2014] EWCA Civ 939.