Bank’s appeal against refusal to dismiss £26m commercial action against it refused by Inner House

About this case:

• Citation:
  [2024] CSIH 18
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Tyre

DMWSHNZ Ltd and its liquidators raised the action seeking over £26 million from the defenders on the ground that they were shadow directors of the company in breach of their duties, or alternatively set out a case based on unjustified enrichment.

The appeal was heard by the Lord President, Lord Carloway, together with Lord Pentland and Lord Tyre. Borland KC appeared for the defenders and reclaimers, and D Thomson KC appeared for the pursuers and respondents.

Chain of persons

Until 2003, the first pursuer was a subsidiary company of the defenders, who were in turn a member of a group ultimately parented by HBOS plc. In 1998 the first pursuer sold its 100 per cent shareholding in a subsidiary called Countrywide Banking Corporation Ltd for NZ$850 million, giving rise to a tax liability the defenders wished to mitigate.

The defenders sought advice from Ernst & Young plc, which proposed a restructuring, Project Raindrop, under which some of the capital gains would be offset against the losses of an insolvent capital investment trust, GIIT. However, the scheme failed, leaving the company with a tax liability it had no funds to meet and resulting in members’ voluntary liquidation. As part of this scheme, the pursuer purchased shares in a subsidiary of GIIT for the sum of £26,607,758.

In repelling the defenders’ case of irrelevancy, the commercial judge held that the pursuers had averred circumstances in which the defenders exercised real influence over the company capable of satisfying section 741(2) of the Companies Act 1985, as was in force at the material time. In respect of the unjustified enrichment case, he was unable to conclude that the pursuers’ case was bound to fail.

On behalf of the defenders, it was submitted that the key question was whether an instruction given to an administrative receiver appointed to the property of a company could amount to direction of the board of a second company of which the first was a corporate director. The commercial judge’s conclusion ignored the separate legal personalities of the different entities involved and amounted to an error of law.

For the pursuers it was submitted that members of Ernst & Young’s tax team were agents of the defenders, and as such it was the defenders who, through a chain of persons, ultimately instructed the corporate directors to implement the scheme. In respect of unjustified enrichment, the commercial judge was correct to conclude that in these circumstances the defenders might be held to have been enriched at the expense of the first pursuer.

Capable of justifying

Lord Tyre, delivering the opinion of the court, said of the shadow director case: “A peculiarity of the present case is that the company’s directors included no natural persons. It appeared to be the position of the defenders that in such circumstances the shadow director provisions could never apply to it, because any person exercising influence over the corporate directors would have a separate capacity to which their actings had to be attributed. Such an interpretation, if correct, would subvert the purpose of the legislation, even in its present form where at least one non-corporate director is required.”

He continued: “The pursuers’ case is summarised in their averments that ‘in implementing Project Raindrop, GIIT, GIIT 3, and latterly the [company] were controlled by the [receivers]. The [receivers] were, in implementing Project Raindrop, subject to the influence of and acting according to the instructions and directions of the defenders.’ The court agrees with the commercial judge’s view that the foregoing averments, if proved, are capable of justifying the conclusion that the defenders were a shadow director of the company.”

Turning to the unjustified enrichment case, Lord Tyre said: “Lord Rodger [in Shilliday v Smith (1998)] identified two situations in which property had to be restored: where property comes into someone’s hands on a particular basis which then ceases to exist; and where property comes into the person’s hands on the basis of some future event which fails to materialise.”

He concluded: “Whether the pursuers can bring the circumstances of the present case within these or any of the other circumstances in which the law provides a remedy for unjustified enrichment will be a matter for determination after proof.”

The reclaiming motion was therefore refused, and the court adhered to the interlocutor of the commercial judge, allowing a proof before answer.