UK Supreme Court Redraws the Lines: What Mitchell v Al Jaber Means for Directors

At a Glance

• The UK Supreme Court confirmed that fiduciary duties can arise ad hoc, even after a director’s powers have been removed upon commencement of an insolvency process. A director who purports to act as such even after their formal powers have been removed may still incur liability as a fiduciary. 
• Any equitable compensation for the loss flowing from a breach of fiduciary duties will be assessed in context and with regard to the specific facts of the case.
• When a misappropriation takes place, the value of the property at the time of the misappropriation will be relevant unless the fiduciary can prove that a later event has broken the chain of causation. However, if the fiduciary played a role in the subsequent event, they cannot use that event to evade liability. 

The UK Supreme Court’s judgment in Mitchell v Sheikh Mohamed Bin Issa Al Jaber provides crucial guidance on director duties, the circumstances in which those duties may be breached, and how financial loss is assessed when company assets are wrongfully transferred. 

Background

The case involved MBI International & Partners Inc (Company), which was incorporated in the British Virgin Islands (BVI). Sheikh Mohamed Al Jaber, a prominent international businessman, was a director of the Company prior to a winding up order issued in 2011. Pursuant to BVI law, the sheikh’s powers and duties as a director came to an end upon commencement of the liquidation. 

In 2016, and after the winding up order was issued, the sheikh transferred 891,761 shares in JJW Hotels & Resorts Holding Inc (JJW Inc) previously owned by the Company to JJW Guernsey for no consideration and without the knowledge of the liquidator. JJW Inc and JJW Guernsey were both within the sheikh’s group of companies.

Furthermore, in 2017, JJW Inc’s assets and liabilities were transferred to JJW UK (another company associated with the sheikh), rendering the previously transferred shares (now owned by JJW Guernsey) worthless. The Supreme Court found that there was sufficient evidence to suggest that the sheikh was more than just a bystander in relation to the asset and liability transfer, and was also its prime beneficiary. The liquidators sued the sheikh for breach of fiduciary duty and sought equitable compensation.

The Legal Issues

The Supreme Court examined three principal issues:

1. Did the sheikh breach his fiduciary duties to the Company by transferring the shares after liquidation had removed his powers as director?
2. Did the Company suffer financial loss as a result, or were the shares subject to unpaid vendor’s liens that would have negated any loss?
3. How should loss be calculated, given that the shares later became worthless following a transfer of all JJW Inc’s assets and liabilities to another company within the group?

1. Breach of Fiduciary Duty

The Supreme Court confirmed that fiduciary duties can arise ad hoc, even after a director’s powers have been removed upon commencement of an insolvency process. The sheikh had purported to act as a director of the Company through signing the share transfers “for and on behalf of [the Company] as its ‘Director.’” The Supreme Court found that his actions were a clear breach of fiduciary duty, with no consideration for the Company’s interests, and he could not avoid liability simply because his powers as director had formally ended upon liquidation. Equity will impose fiduciary duties on anyone who assumes such powers, whether or not they technically hold office at the relevant time.

2. The Vendor’s Lien Defence

The sheikh argued that the shares in JJW Inc were subject to unpaid vendor’s liens from the initial acquisition of the shares by the Company, and the Company had not suffered any loss as a result of the transfer in 2016. The Supreme Court disagreed, noting that the parties’ intention (objectively assessed from the initial acquisition of the shares by the Company and surrounding circumstances) was to enable the Company to pay for the shares out of the proceeds of a proposed initial public offering (IPO). The existence of an unpaid vendor’s lien on the shares would have prevented their sale in the IPO and, therefore, the Supreme Court found that it would have been contrary to the parties’ original intentions for a vendor’s lien to arise. The Company was therefore entitled to full ownership of the shares, free of encumbrances, and had suffered genuine loss when deprived of them.

3. Calculation of Loss

The most complex issue for the Supreme Court to assess was in determining the amount of compensation due to the Company. The sheikh argued that, since the shares in JJW Inc ended up worthless following the transfer of JJW Inc’s assets and liabilities to JJW UK, the Company suffered no loss from his earlier breach.

The Supreme Court held that, where a director or fiduciary misappropriates company assets, the date at which the value of the misappropriated property should be assessed is an open question with reference to what is just and equitable. When a misappropriation takes place, the value of the property at the time of the misappropriation will be relevant unless the fiduciary can prove that a later event has broken the chain of causation. However, if the fiduciary played a role in the subsequent event (here, the sheikh was found to have triggered and benefited from the asset transfer that rendered the shares worthless), they cannot use that event to evade liability. As such, the loss suffered by the Company was calculated by reference to the value of the shares close to the date of the breach of fiduciary duty. This was decided with reference to the statement of shareholder value in JJW Inc’s 2016 accounts, as at 31 December 2016, which was only a few months after the sheikh initiated the initial share transfer. The accounts were regarded as the best evidence of value that was made available to the Supreme Court. 

Conclusion 

The Supreme Court unanimously dismissed the sheikh’s appeal and upheld the liquidators’ appeal. The sheikh was ordered to pay €67 million in compensation. 

The case demonstrates that a director’s fiduciary duties are far-reaching and can continue after the loss of office. In this scenario, the initial share transfer in question was initiated by the sheikh after his powers and duties as a director had come to an end. A director who purports to act as such even after their formal powers have been removed may still incur liability as a fiduciary. In addition, any equitable compensation for the loss flowing from a breach of fiduciary duties will be assessed in context and with regard to the specific facts of the case. A fiduciary cannot benefit from subsequent events that they orchestrate and which serve to undermine the person or entity to whom fiduciary duties are owed.