Smithton Ltd v Naggar [2014] EWCA Civ 939

Smithton Ltd (formerly Hobart) sought damages from Mr Naggar, claiming he was a de facto or shadow director and that arrangements for contracts for differences breached section 190 of the Companies Act 2006. The Court of Appeal dismissed the appeal, finding Mr Naggar acted in his capacity as DDI director, not as Hobart's director.

Facts

Smithton Limited (formerly known as Hobart and originally incorporated as Dawnay Day Capital Markets Ltd) brought proceedings against Mr Guy Naggar, a director of its former holding company Dawnay Day International Ltd (DDI). Hobart claimed losses of approximately £4 million arising from transactions with clients introduced through Mr Naggar, many of whom were connected persons of Mr Naggar.

Hobart was incorporated on 1 October 2007 as a joint venture company, with DDI holding just over 50% of voting rights. Under the Joint Venture Agreement (JVA), specific individuals were named as directors, and Mr Naggar was expressly not appointed as a director of Hobart. The JVA contained reserved matters requiring shareholder consent and provided for DDI to supply various services to Hobart.

Hobart’s business involved writing contracts for differences (CFDs) for shares, particularly in Foreign & Colonial Asset Management Limited (F&C). When DDI collapsed in July 2008, Hobart ceased to be part of the DDI group.

Issues

De Facto/Shadow Director Issue

Whether Mr Naggar was a de facto or shadow director of Hobart, despite not being formally appointed, thereby owing fiduciary duties to the company.

Section 190 Issue

Whether the arrangements between Hobart and Mr Naggar’s connected persons for CFDs fell within section 190 of the Companies Act 2006 (substantial property transactions requiring member approval), giving rise to statutory liability.

Judgment

The Court of Appeal, comprising Lady Justice Arden, Lord Justice Elias, and Lord Justice Tomlinson, unanimously dismissed the appeal on both issues.

De Facto/Shadow Director

Lady Justice Arden, delivering the lead judgment, held that the trial judge was entitled to find that Mr Naggar was not a de facto or shadow director. The court applied the principles from HMRC v Holland [2010] 1 WLR 2793, emphasising that where a person acts in multiple capacities, the court must determine in which capacity the acts were actually done.

“So long as the relevant acts are done by the individual entirely within the ambit of the discharge of his duties and responsibilities as a director of the corporate director, it is to that capacity that his acts must be attributed.”

The court identified practical points for determining de facto directorship, including: examining the corporate governance structure; considering whether the company held the person out as a director; and assessing the cumulative effect of activities relied upon.

The judge had found that Mr Naggar’s involvement was consistent with his roles as chairman of DDI and as a major client, rather than as a director of Hobart. The JVA expressly excluded him from directorship, and Hobart never reported him to the FSA as a director.

Section 190

On the narrow basis (that Hobart acquired shares prior to identifying the purchaser), the court held that by the end of each trading day the purchaser was ascertained, and under the law of ratification, the acquisition operated from the earliest moment.

On the wider basis (that arrangements contemplated acquisition of referenced shares), the court held that section 190 requires an arrangement under which a person “acquires or is to acquire” an asset. The words “is to acquire” cannot be interpreted as “may acquire”. Since there was no certainty that CFD holders would opt to acquire the referenced shares on closing out, section 190 did not apply.

Implications

This case provides important guidance on determining de facto and shadow directorship, particularly in group company structures. It confirms that a person acting in multiple capacities will not be treated as a de facto director of a subsidiary merely because their actions could theoretically have been done by such a director. The claimant bears the burden of proving the capacity in which acts were actually performed.

The decision also clarifies the scope of section 190 of the Companies Act 2006, confirming that arrangements involving only the possibility (rather than certainty) of asset acquisition do not fall within the section’s requirements for member approval.

Verdict: Appeal dismissed. The Court of Appeal upheld the trial judge’s findings that Mr Naggar was neither a de facto nor shadow director of Hobart, and that the arrangements did not fall within section 190 of the Companies Act 2006.

Source: Smithton Ltd v Naggar [2014] EWCA Civ 939