Supreme Court ruling strengthens liquidators’ claims in Mitchell v Al Jaber

The decision of the Supreme Court in Mitchell v Sheikh Mohamed Bin Issa Al Jaber strengthens liquidators’ ability to pursue equitable compensation against directors for breach of their fiduciary duties.

Key takeaways for insolvency practitioners

• Directors who are found to have exercised their powers as a director post-liquidation may still owe fiduciary duties to the liquidated company, even where statute has removed their formal powers. 

• The date upon which the loss was suffered will require consideration of what is just and equitable. 

• The fiduciary as a result will have the burden of proving an innocent explanation.   

Background 

The Supreme Court considered the consequences of a dishonest share transfer carried out after a BVI company, MBI International & Partners Inc (MBI) had entered liquidation.

In March 2009, MBI acquired 891,761 shares in JJW Hotels & Resorts Holding Inc (JJW), also a BVI company, which had been established in contemplation of an IPO (Initial Public Offering). Two sharer purchase agreements provided for consideration in the sum of €88.9million, payable on demand. No demand for payment nor any payment was ever made and, the IPO never proceeded. MBI however remained the registered owner of the shares.

An order to wind up MBI was made by the Eastern Caribbean Supreme Court in October 2011. At the time of the order, MBI remained the registered owner of the shares.

By virtue of s175(1) of the BVI Insolvency Act 2003, a director’s powers cease on liquidation.

However, in February 2016, over four years after the Company had entered liquidation, and without the knowledge or consent of the Liquidator Sheikh Mohamed Bin Issa Al Jaber (the Sheikh),the Company’s sole shareholder and director, purported to execute share transfer forms for and on behalf of the Company transferring the Shares owned by the Company to JJW Guernsey, for no consideration (the February 2016 Transfer).

In July 2017, the shares were transferred again to MBI International Holdings (the July 2017 transfer). The assets and liabilities of JJW were also transferred to JJW UK. At trial, the judge agreed that this transfer made the shares valueless as JJW no longer had any assets.

MBI’s liquidators commenced proceedings against the Sheikh for breaches of his fiduciary duties and against JJW Guernsey for knowing receipt.

The decision of the lower courts 

The trial judge, Joanna Smith J, found that the Sheikh was in breach of his fiduciary duties and ordered that he (on a joint and several basis with JJW Guernsey) pay equitable compensation for €67,123,03. The sum was reflected the loss to MBI, namely the value of the shares.

The decision went to the Court of Appeal where the trial judge’s findings of breach of duty were upheld. The Court of Appeal however found no equitable compensation was payable as the shares had become worthless by the time of trial because of the July 2017 transfer.

The liquidators and the Sheik appealed this decision and this went to the Supreme Court.

Appeal to the Supreme Court

There were three issues for the Supreme Court to consider: 

1. Did the Sheikh breach his fiduciary duties? 
2. If so, did MBI suffer a loss? 
3. And if so, how do you quantify the equitable compensation to be awarded because of that loss? 

Did the Sheikh breach his fiduciary duties?

The Sheikh’s powers as a director had ceased upon liquidation of MBI, therefore, the court had to consider whether the Sheikh owed fiduciary duties to MBI post-liquidation. The Sheikh sought to argue that he could not owe fiduciary duties as by virtue of BVI law, his powers had ceased on liquidation and any registration for the share transfer by JJW should be treated separately.

However, the Sheikh had purported to exercise his powers as a director (post liquidation) by signing the share transfer forms and effecting registration. The Supreme Court therefore held that a person who purports to exercise director-level powers post-liquidation can create fiduciary obligations. A former director cannot rely on the loss of formal authority where he has deliberately intermeddled in company property. Furthermore, effecting the registration of the share transfer was “part and parcel of the same dishonest transaction”.

Therefore, the Supreme Court found that the Sheikh had breached his fiduciary duties.

Did MBI suffer a loss?

The Sheikh argued that MBI suffered no loss because the shares were subject to unpaid vendor’s liens from earlier share purchase agreements. Both the Court of Appeal and the Supreme Court rejected this defence.

The shares had been initially transferred to facilitate a proposed IPO, with the intention the proceeds would pay the vendors. The existence of an unpaid lien on the shares would have prevented the IPO sake and thereby undermining the initial transfer. There was no evidence to suggest the parties intended to create a lien.

How do you quantify the equitable compensation to be awarded because of that loss?

The Supreme Court also addressed the assessment of loss.

The Court of Appeal had previously quantified the loss as at the date of the trial, after the July 2017 transfer. As the liquidators had not been able to demonstrate that they would have sold the shares prior to the July 2017 transfer, MBI had suffered no loss as a result.

However, the Supreme Court rejected this approach, finding that there is no fixed rule whereby equitable compensation is to be valued as at the date of trial. The relevant date for assessment should be “an open one, which requires consideration of what is just and equitable as between the beneficiary and the trustee (or the principal and the fiduciary)”.

The Supreme Court therefore held that here a fiduciary (the Sheikh) misappropriated assets (the shares) and the principle (MBI) suffered an immediate loss in value when the property is taken. The Sheik’s breach of duty caused a loss by effecting the February 2016 transfer putting the shares out of the reach of MBI. The shares’ value was “reduced to zero when the Sheikh misappropriated them in 2016″ when MBI could no longer deal with them. The burden was therefore on the fiduciary to provide an innocent explanation or that any subsequent intervening event impacted the analysis of causation.

The order of the trial judge that compensation be paid for €67,123,403 was therefore re-instated.

Conclusion

“… a fiduciary, as steward of his principal’s property or affairs, to whom he owes a duty of loyalty, has the responsibility to account for and explain what has happened in relation to them”.

The judgment provides strong authority for liquidators pursuing dishonest post-liquidation asset transfers.

Most significantly, the Supreme Court’s judgment brings much-needed clarity to the quantification of loss in claims for equitable compensation against delinquent fiduciaries. By rejecting any presumption that loss must be assessed at the date of trial, the court reaffirmed that valuation is a fact-sensitive exercise guided by what is just and equitable in the particular circumstances. Where a fiduciary misappropriates company property, the loss is suffered at the point the asset is put beyond the company’s control.

This approach prevents fiduciaries from escaping liability by pointing to later events that render the asset worthless, particularly where those events form part of the same dishonest transaction. Crucially, the burden shifts to the fiduciary to demonstrate either an innocent explanation or a break in the chain of causation.