De facto director – breach of fiduciary duty – defendant involved in plaintiff-company’s affairs and had control over its bank account – unauthorised incorporation of company in Hong Kong using plaintiff’s funds – defendant liable as de facto director of plaintiff but not as shadow director – power of court to order defendant to resign as director of Hong Kong company under s. 728, 729 of Companies Ordinance (Cap. 622)
X was the founder of a group of companies (the “Group”) which included P, an English company. X had been in a personal relationship with D1 since July 2007 and from this time D1 played an increasingly important role in the Group’s affairs, with X’s agreement. D2 was a Hong Kong company which was incorporated by D1 and of which D1 was the sole shareholder and director. From February 2009, D1 became the sole administrator of a multi-currency bank account of P in the United Kingdom. After the relationship between X and D1 ended in July 2010, D1 continued to be involved in Group’s affairs. P contended that D1 misappropriated about €1.8 million from the Group’s bank accounts which ended up in accounts controlled by D1; that €200,000 was transferred from P’s account to a bank account in Hong Kong in D2’s name in December 2010 and January 2011. X claimed that she had not authorised D1 to establish any company in Hong Kong and did not know about D2’s existence until investigations started in March 2011. P claimed that D1 was its de facto director, a shadow director and a fiduciary and that Ds held the sum of €200,000 on trust for P.
Held, allowing P’s claim, that:
- D1 was acting as a de facto director of P and owed to P the same fiduciary duties as if he were an actual director, including the duty not to make a personal profit for himself at the expense of the company. Further, by assuming control of P’s account, D1 entered into a fiduciary relationship with P. However, D1 was not a shadow director of P. The essential element of being a shadow director was that of pulling strings from behind the stage in such a way that actual directors were essentially puppets who moved only in accordance with the way the strings were pulled. X ran the business and her companies through all the years of her relationship with D1. X was clearly not a puppet.
- X made no decision to incorporate a company in Hong Kong. Even if such a decision had been made, there could be no credible reason why such company should have D2 as its sole shareholder and director. D1 used P’s money to establish D2 and in so doing was in breach of his fiduciary duty to P. To the extent that D1 had profited thereby, he must disgorge that profit to P. D2, through the mind of D1, had knowledge of D1’s breaches of fiduciary duty and trust. Further, in allowing itself to be the vehicle into whose name P’s funds were sent, D2 knowingly assisted D1 in his breach of fiduciary duty and was thus liable to compensate P by way of equitable compensation for the loss it had suffered as a result of D1’s breach.
- Pursuant to s. 728 of the Companies Ordinance (Cap. 622), if a breach of fiduciary duty was established the jurisdiction of the court under s. 729 was engaged. Section 729 vested in the court a wide power to make orders against a defaulting director who had been found to be in breach of a fiduciary duty, including a power to order the director to perform a positive act. The Court was satisfied that it had the power to order D1 to resign as D2’s director.
- Accordingly, orders were made, inter alia: (a) for a declaration that Ds held the sum of €200,000 on trust for P; (b) that Ds pay P the sum of €200,000; (c) a declaration that D1 held on trust for P shares in D2 registered in his name and D2’s books and records; and (d) an order that D1 resign forthwith as director of D2.