In Standish & Ors v The Royal Bank of Scotland Plc & Anor (the “Judgment”), the High Court confirmed that the duties owed by a shadow director are limited to the subject matter of their instructions.
This alert is particularly relevant for distressed companies and their shareholders, as well as banks and other investors who appoint “observers” to the boards of borrower companies.
Bowlplex Limited (“Bowlplex”) entered financial difficulties following the 2008 downturn. They turned to their lender, RBS, for restructuring advice. RBS provided the support of its (i) global restructuring group and (ii) asset acquisition/management division (“West Register”). This lead to three steps:
1. Initial Restructure. In 2011, Bowlplex restructured its debt and relinquished 35% of its share capital to West Register. West Register appointed an observer, Mr. Sondhi.
2. Company Voluntary Agreement. In 2012, Bowlplex implemented a CVA, writing off £4.5m of RBS debt and increasing West Register’s share of Bowlplex to 60%. Mr. Sondhi appointed a turnaround specialist, Mr. Cooper, as non-executive chair. Mr. Cooper dismissed Bowlplex’s managing director.
3. Sale. In 2015, Bowlplex was sold to a third party for £22.6m, £13.6m of which went to West Register.
Following the above, shareholders of Bowlplex claimed that RBS, West Register, and Mr. Sondhi had conspired to devalue Bowlplex in order to acquire its equity. Following a 2018 strike-out application, the main claim to be considered in the Judgment was that West Register and/or Mr. Sondhi attempted to achieve this purpose in contravention of their fiduciary duties as shadow directors of Bowlplex.
The judge was satisfied that Mr. Sondhi and/or West Register were shadow directors of Bowlplex, due to their appointment of Mr. Cooper and removal of the original managing director. Yet the Court also noted that Bowlplex had entered into the restructuring steps of “its own free will”, by its registered directors and without instruction from Mr. Sondhi or West Register.
Therefore, the Court moved to examine the claim that “a shadow director…could act in breach of duty to the company even where there was no relationship between the directions or instructions said to give rise to the duty and the breach said…to constitute the unlawful means”. The Court resisted this, noting established law to the effect that “duties owed by shadow directors are limited in extent” to “those matters where he gives instructions”. The Court found further support for this view in cases where individuals had become shadow directors due to giving directions in respect of only certain of the company’s activities: stating that the corollary to this is that “there can be commensurable limitations on the nature and extent of the duties”. Put another way, “fiduciary duties flow from relationships”, and so when shadow directorship “is relied on as the source…it is only the acts of instruction which can form the foundation for any fiduciary duties that he may owe”.
It therefore followed that without this relationship, a shadow director will not be liable for breach of duty. Turning to the facts of the present case, the judge found that there was no link between (i) Mr. Sondhi appointing Mr. Cooper as a director, and (ii) Bowlplex entering into the CVA, particularly as:
The appeal was therefore dismissed.
The Judgment upholds existing principles to provide lenders and board observers with some level of certainty and comfort:
However, the Judgment is not a panacea, leaving open a number of points:
These will be highly topical issues as financial institutions continue to be the subject of allegations over aggressive and even unethical market practices, and we will monitor developments as they unfold.
Christopher Lloyd, London Trainee Solicitor, contributed to the drafting of this alert.
 While the claimants had initially sought to introduce further links between the shadow directorships and the breaches of duty after the Strike-Out Application, these were ultimately not brought before the court.