UK: FI And D&O International Review, May 2018 – Case Summaries

Case summaries

Financial Institutions - Liability

No duty of care owed to experienced borrower

Deslauriers and another (Appellants) v Guardian Asset Management Limited (Respondent) (Trinidad and Tobago) [2017] UKPC 34

Guardian Asset Management ("GAM") advanced a commercial loan to the Deslauriers in October 2007 for development. After agreed extensions, the Deslauriers defaulted on their loan and GAM sued for repayment and interest in 2009. The Deslauriers denied liability, although they did not dispute the non-payment, and counterclaimed for damages for a loss of TTD 24m for being unable to complete the project due to GAM's failure to advance further loans (which would go over lending limits).

They argued that GAM's failure to disclose these lending limits at earlier stages of negotiation was a misrepresentation and that GAM made a negligent misstatement, failing in its duty of care to disclose the existence of lending limits.

In 2011, judgment was given against the Deslauriers in the High Court of Trinidad and Tobago. In 2016, the Deslauriers' appeal was dismissed by the Court of Appeal of Trinidad and Tobago. This appeal was heard by the Privy Council.

It held that there was no misrepresentation; there was no evidence, prior to entering the loan agreement, that GAM would be asked to make further, future loan advances for the project to be completed. Therefore, the lending limits were not relevant and there was no misrepresentation.

Regarding duty of care, citing Hedley Byrne v Heller [1964] AC 465, the Court held that there had been no assumption of responsibility. In a commercial, arm's length relationship between experienced lenders and borrowers, it would be very unusual for the relationship to give rise to a duty of care to advise the borrower of its internal lending policies or any external influences on its approach to evaluating loan applications. The appeal was dismissed.

Financial advice firm not vicariously liable for agent's actions in relation to property development scheme

Frederick & Ors v Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431

The appellants ("A") were introduced to a property development scheme run by an acquaintance's business partner ("W"), who was an IFA, appointed as the respondent firm's agent. The money needed for the investment was raised by re-mortgaging A's properties. W submitted the applications for loans through an online portal with a bank, to which he had access because he was an agent of the respondent.

A argued that the respondent was vicariously liable for W's actions. The Court of Appeal held it was not. The judge at first instance had correctly identified the appropriate test as: "(1) was the harm wrongfully done by an individual who carried on activities as an integral part of the business activities of the defendant and for its benefit, rather than his activities being entirely attributable to the conduct of a recognisably independent business of his own or that of a third party; and (2)... whether the commission of the wrongful act is a risk created by the defendant by assigning those activities to the individual in question, in which case liability will be imposed."

W was engaged on a "recognisably independent business" of his own (namely, the property investment scheme). W's "use of the portal was simply the means by which he was able to obtain funds from the appellants to invest in the scheme." W had been acting on a frolic of his own and the receipt of commission by the respondent did not alter that position, as it had been generated automatically by the bank and had been held by the respondent in a suspense account. Furthermore, it is well established that merely providing the opportunity for wrongdoing is not sufficient, without more, to give rise to vicarious liability.

Directors – Breach of Fiduciary Duties

Court declines to grant relief under s1157 Companies Act 2006

(1) Cullen Investments Ltd (2) Eric John Watson (3) Cullen Investments Ltd v (1) Julian Brown (2) Quentin Brown (3) Kauri Investments Ltd [2017] EWHC 2793 (Ch)

The underlying action ([2017] EWHC 1586 (Ch)) was a consolidation of various proceedings, comprising claims by Cullen and by Mr Watson against both Defendants, and a derivative claim by Cullen against both Defendants. Having succeeded in overcoming the high barrier to pursue derivative claims, the Defendants (D1 and D2) were held at trial to be in breach of their fiduciary duties, breach of their duties under the Companies Act 2006 (CA) and breach of their duties under the common law (D1 was also found to be in breach of his contractual duties). In particular, D2 was held to have breached his duty under s175 CA to avoid conflicts of interest following an agreement to accept profits from a development project that his brother (a party to a joint venture contract of which both brothers were directors) had entered into in his personal capacity (i.e. depriving the joint venture of the opportunity).

In these proceedings, D2 applied for relief from liability under s1157 Companies Act 2006 which provides for relief in proceedings for negligence, default, breach of duty or breach of trust against an officer of a company if it appears that the officer is or may be liable but he acted honestly and reasonably and, having regard to all the circumstances, he ought fairly to be excused.

D2's application was dismissed. The Court held that whilst D2 had not been dishonest (for example, D2 genuinely thought that the transaction had been authorised by the joint venture partner), he had failed to act reasonably by not disclosing his interest in the profits to be obtained from the project and not seeking specific authorisation to do so. He should have realised that he would need to do this, especially as he was a lawyer. Whilst the Court did not grant relief in this case, the Court's approach demonstrates that it will look at all the facts to determine whether the director in question acted honestly and reasonably in the circumstances, even if what the director believed to be the case was not, in fact, the case. Further, it acknowledged that, in principle, relief could be sought in cases involving an account of profits.

Shareholders' ability to discover breach could not be attributed to company so as to bar claim against directors on limitation grounds

Julien & Ors v Evolving Tecknologies & Enterprise Development Co Ltd [2018] UKPC 2

A company's former directors appealed to the Privy Council against a decision of the Court of Appeal (Trinidad & Tobago) that a claim brought against them by the respondent company ("Eteck") was not time-barred under s14 of the Limitation of Certain Actions Act 1997 (which is in materially identical terms to s32 of the English Limitation Act 1980).

Eteck, a state-owned company, on the decision of its directors, invested in a technology company and suffered loss. An audit was carried out into the cause of the loss by a subsequent government and Eteck brought proceedings against the directors alleging negligence and failure to conduct full due diligence. The claim was brought outside of the prescribed 4 year limitation period. Eteck argued that the term should be extended as the deliberate breach of duty resulted in it not being discovered in time. The directors argued that it could have been discovered by the minister of finance (the sole shareholder of Eteck) and, as such, discoverability was attributable to Eteck.

The Privy Council dismissed the appeal. There was no trigger sufficient to put the minister on inquiry as to the breach and it had been correct for the Court of Appeal to approach the question thus. As to attribution, in obiter remarks, the Privy Council expressed the view that a shareholder's ability to discover a breach could not be attributed to the company so as to allow time to run for limitation purposes; shareholders are under no duty to seek out breaches which could form a claim against the company's directors. Whilst decisions of the Privy Council are not binding on the English Courts, given that the limitation provision is materially identical to the equivalent provision in the Limitation Act 1980, this decision may be persuasive on English Courts that find themselves faced with this issue.

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