Director - Duty - Insolvency
Weavering Capital (UK) Ltd (in liquidation) and others v Peterson and others: ChD (Mrs Justice Proudman): 30 May 2012
The first defendant was the chief executive and managing director of the first claimant company. The second and ninth defendants were also directors of the first claimant.
The 10th defendant was a highly paid senior employee of the first claimant. In March 2000, the first defendant caused another company to be incorporated in the Bahamas (the Bahamas company). In April 2003, the first defendant caused a hedge fund to be incorporated (the macro). The first claimant acted as an investment adviser and manager of the macro. The macro was unsuccessful in trading, and in February 2005 entered into swap transactions with a company incorporated in the British Virgin Islands, which carried on business as a hedge fund (the Islands company). Between July 2005 and February 2009, the first claimant made 30 payments to a bank account controlled by the first defendant, recorded in the first claimant’s accounting records as ‘introductory fees’ (the introductory fees payments).
Following September 2008, the macro experienced a very high volume of redemption requests which it was unable to meet. In October 2008, the first and second defendants resolved as directors of the first claimant to make a payment of £4m to the third defendant bank as an addition to an appointed sub-fund (the sub-fund payment). The first defendant and first claimant, on the authority of the first and second defendants, also made transfers to the fourth to seventh defendants (the transfers).
In February and March 2009, the first defendant made transfers out of assets he held personally (the personal transfers). In March 2009, PricewaterhouseCoopers (PwC) was called in. It determined that the value of the Islands company’s assets was much lower than that stated by the first defendant and that his valuation of some of the assets was so grossly overinflated as to be absurd. Following discovery by PwC of another 29 swaps that had purportedly been concluded, the macro was placed into liquidation and the first defendant into administration, and thereafter into liquidation.
In April 2009, the first claimant’s administrator demanded the repayment of a loan made by the first claimant to the first defendant (the loan). The first claimant and the second claimant liquidator sought relief under the Insolvency Act 1986 (the 1986 act) for the investment advice given to the macro and its management. The claimants alleged that the first defendant had committed fraud as the swaps had been shams. They further sought the repayment of the loan in debt or under sections 197 and 213 of the Companies Act 2006 (the 2006 act). The first defendant claimed that there had been an agreement that the loan would only be repayable from dividends which had been expected to be declared in April 2009. The claimants contended that they had been entitled to recover all moneys paid in the personal transfers because they were made out of moneys held on constructive trust for the first claimant, and over which the first claimant was entitled to assert a proprietary claim or, under section 423 of the 1986 act, as transfers defrauding creditors. The claimants sought to recover the salary, bonuses and other benefits paid to the first, second, ninth and 10th defendants. The application would be allowed.
(1) It was well established that for acts or documents to be a ‘sham’, with whatever legal consequences would follow from that, all the parties thereto should have had a common intention that the acts or documents had not been to create the legal rights and obligations which they had given the appearance of having created (see  of the judgment). In all of the circumstances, the swaps had never been intended to be enforceable instruments but had simply been used to manipulate the net asset value figures to give the impression to investors that the macro had been successful. Accordingly, the swaps had been shams (see ,  of the judgment).
(2) On the basis of the factual findings, the first defendant would be liable for breach of his duties to the first claimant as a director and in the tort of deceit. The first defendant would further be liable for the introductory fees payments. With one exception, all of the personal transfers had been made in fraud of creditors under section 423 of the 1986 act (see , , ,  of the judgment). The first defendant would be liable for fraud, deceit, repayment of the loan and the personal transfers (see , , , ,  of the judgment).
(3) In all of the circumstances, it was both factually and legally unsustainable for the second defendant to assert that she could escape liability for negligence by saying she had only had a limited role in the management of the first claimant and had not been alerted to wrongdoing by the first defendant (see  of the judgment). The second defendant would not be liable for just and equitable contribution or fraud but would further be liable for negligence (see  of the judgment).
(4) The ninth defendant had been in breach of his duties to the first claimant as director, by having failed to acquire a sufficient knowledge and understanding of its business and having failed to satisfy himself in respect of the details and propriety of the swaps. He would also be liable in the tort of negligence for having failed to act with reasonable care, skill and diligence and for negligently having made false representations to investors (see  of the judgment).
(5) On the evidence, although not fraudulent, the 10th defendant had been plainly negligent. As a senior employee, he had not conducted the firm’s business with due care, skill and diligence, nor had he taken reasonable care to organise and control the first claimant’s affairs responsibly and effectively, with adequate risk-management systems. Although the 10th defendant would not be liable to the first claimant for dishonest assistance, he would nevertheless be liable in the tort of negligence (see - of the judgment).
(6) In the circumstances, the court had not been satisfied under either limb of section 238(5) of the 1986 act. The sub-fund payment could not have been said to have been made in good faith in view of the first defendant’s fraud in relation to the first claimant, and there had been no reasonable grounds for believing it would have benefited the first claimant (see  of the judgment). The court would make an order under section 238(3) of the 1986 act requiring the third defendant to restore the £4m sub-fund payment to the claimants (see  of the judgment).
(7) On the facts, the first claimant could claim an account of profits on the simple ground that the first, second and ninth defendants had all been paid on the basis of breaches of fiduciary duties to the first claimant. The 10th defendant had not been a director of the first claimant but he had been a fiduciary in relation to the first claimant’s assets and had been in breach of his fiduciary duties so that he too would be liable to account (see  of the judgment).
The first, second, ninth and 10th defendants would be liable to account for their salary, bonuses and benefits.
Robert Anderson QC and Tom Richards (instructed by Jones Day) for the claimants; James Aldridge (instructed by Stephenson Harwood) for the second and fourth to seventh defendants; The first, ninth and 10th defendants appeared in person.