Supreme Court Clarifies Approach to Quantifying Equitable Compensation and Reinstates €67m Award Against Director

In the recent decision of Mitchell v Sheikh Mohamed Bin Issa Al (No 2) the Supreme Court confirmed that a director who continues to exercise their powers after the company had been placed into liquidation can be liable for breach of fiduciary duty. The Supreme Court found that the fiduciary director could not rely on his own subsequent acts as breaking the chain of causation and overturned the Court of Appeal’s finding of no loss and reinstated the trial judge’s equitable compensation award of €67,123,403.36.

The case is a reminder that directors of a liquidated company can still incur liability after their company has been placed into liquidation. Directors should remain conscious of their duties and cannot escape liability in equity by further unexplained dealings. 

Background

The case concerned a suite of transactions between related companies beneficially owned and controlled by Sheikh Mohamed Al Jaber (the “Sheikh”).

In 2016, the Sheikh signed share transfer forms on behalf of MBI International & Partners Inc (“MBI IPI”) which transferred shares (the “891K Shares”) held in a subsidiary (“JJW Inc”) to another MBI group company (the “2016 Transfers”). The Sheikh effected the 2016 Transfers despite the fact that MBI IPI had been in liquidation since 2011 and the Sheikh ceased to have any powers as a director under BVI law thereon.

In 2017, two weeks after MBI IPI’s liquidation was registered in the United Kingdom, the 891K Shares were transferred to another company within the MBI group. Then, in a subsequent transaction, JJW Inc transferred all its assets and liabilities to another company within the MBI group (the “2017 Transfer”). While both the Court of Appeal and the Supreme Court were sceptical, MBI IPI’s liquidators accepted that the 2017 Transfer rendered the 891K Shares worthless.

Claims were brought against the Sheikh and the MBI group company which first received the 891K Shares for breach of fiduciary duty and knowing receipt. MBI IPI’s liquidators were awarded €67,123,403.36 by the High Court but were unable to establish loss in the Court of Appeal. Both parties appealed to the Supreme Court which considered whether the Sheikh acted in breach of a fiduciary duty owed to MBI IPI in effecting the 2016 Transfers, and if so, whether that breach caused any loss.

Supreme Court Judgment

The Sheikh’s principal argument on liability was that he could not be liable as a fiduciary because he was legally incapable of discharging any fiduciary duties. He had lost all powers as a director of MBI IPI under BVI insolvency laws and he could not owe fiduciary duties when he did not have fiduciary powers. 

The Supreme Court was comfortable that there was no substance to the Sheikh’s arguments. The Sheikh took it upon himself to affect the 2016 Transfers on behalf of MBI IPI even though he did not have the requisite authority. He could not hide behind statutory provisions which removed his powers as a director and be in a better position than if he were what he pretended to be. The Sheikh had both assumed and breached a fiduciary duty owed to MBI IPI.

The key issue for the Supreme Court was whether the 2016 Transfers had caused loss to MBI IPI. While the Sheikh advanced two arguments to support his case that MBI IPI had suffered no loss, this article focusses on the second argument as it was one of the main reasons that permission to appeal to the Supreme Court was granted.

The Sheikh argued that loss had to be assessed at the date of trial and, owing to the 2017 Transfers, the 891K Shares were worthless. The Supreme Court held that there was no absolute rule that loss had to be assessed at the date of trial and found that MBI IPI had suffered an immediate loss when the 891K Shares were misappropriated in breach of fiduciary duty. Having established an immediate loss, the burden was on the Sheikh to disprove the apparent causal connection between his breach of fiduciary duty and MBI IPI’s loss. 

The Supreme Court confirmed that a defendant fiduciary should not, without a clear and innocent explanation, be afforded the benefit of a supervening event where the fiduciary either participates in or increases the principal’s exposure to it. The Sheikh failed to prove, albeit did not really attempt, to explain the 2017 Transfer or establish that he was not involved in it. He simply relied on the admitted fact that it rendered the 891K Shares worthless. There was ample evidence to suggest that the Sheikh was involved in the 2017 Transfer and accordingly the Supreme Court found that the Sheikh had not discharged his burden in arguing that the chain of causation had been broken. The Supreme Court reinstated the High Court’s equitable compensation award of €67,123,403.36.

Significance of the Supreme Court’s judgment

The Supreme Court’s decision provides welcome clarification and confirms a flexible approach to quantifying equitable compensation following a breach of fiduciary duty. The Court has helpfully provided guidance on the appropriate approach to constructing counterfactuals and confirmed that fiduciaries generally cannot rely on their own acts to escape liability.

The Supreme Court’s judgment is of significance for both fiduciaries and trustees. Devonshires frequently advises clients in connection with claims following a breach of trustee or fiduciary duties. Please reach out to our Litigation & Disputes Resolution team should you have any questions or concerns on the impacts of the Supreme Court’s recent decision.

If you would like to discuss this article in more detail or any concerns you have regarding your fiduciary duties, please reach out to Andrew McCombie.