Smithton Ltd v Naggar

This is a claim for loss suffered by the Claimant when two companies, Insureprofit Ltd (‘Insureprofit’) and Mariona Ltd (‘Mariona’) defaulted on their obligations to pay margin calls under open-ended contracts for difference entered into between the Claimant and those two companies. When the defaults occurred, on 10 July 2008, the Claimant had to arrange the rapid placing on the market of several million shares that had been referenced by the contracts for difference and had been acquired as a hedge for those contracts. The shares were sold at a price substantially below the average price at which the shares had been acquired over the previous months when the contracts for difference had been set up. Hence the loss that the Claimant alleges it has suffered.

These proceedings are not brought against Insureprofit or Mariona because both those companies are insolvent. The claim is brought against the Defendant, Mr Naggar, personally. Insureprofit was a property and equity investment company owned in part by family companies of Mr Naggar. Mariona was an equity and derivative trading company owned by Mr Naggar and his wife. The issue underlying this claim is, broadly speaking, whether Mr Naggar is personally liable for the losses which his two companies allegedly caused to the Claimant.

During much of the period with which this case is concerned, the Claimant was called Dawnay Day Capital Markets Ltd. Shortly after the collapse of the Dawnay Day group in July 2008, the Claimant was renamed Hobart Capital Markets Ltd. In March of this year it was renamed again Smithton Limited. In this judgment I shall refer to the Claimant as ‘Hobart’ although for certain parts of the narrative it is significant that its name was Dawnay Day Capital Markets Ltd.

Mr Naggar has been working in the financial services sector in the City of London since 1963. Dawnay Day International (‘DDI’) was incorporated in 1985 and became the parent company of certain companies within the Dawnay Day group. Mr Naggar held, either directly or indirectly, a substantial interest in DDI and at all times material to this case he was the Chairman of that company. In 1992, Peter Klimt and his family acquired a substantial interest in the group. Although I refer to the Dawnay Day ‘group’, this was not a straightforward corporate group of parent and subsidiary companies but a much more complex network of interests held by companies, by family trusts and by individual members of the Naggar and Klimt families. It is useful however to refer to the Dawnay Day group using that term in a non-technical sense. The term ‘Dawnay Day group’ as used by the parties thus extends beyond those companies in which DDI held an interest (those were mainly financial services companies) to include any companies jointly owned by Mr Naggar and Mr Klimt or their families. They include Insureprofit, Starlight Investments Limited (‘Starlight’) and Dawnay Day Properties Ltd. Other companies involved in this matter were entirely owned by Mr Naggar’s family rather than jointly with Mr Klimt. Those include Mariona, Forwardissue Limited and Fitzgerald Securities Ltd (‘Fitzgerald’). These were regarded as being outside the Dawnay Day group. The term ‘Connected Companies’ was adopted by the parties to cover both Dawnay Day group companies and those personally owned by Mr Naggar and his family and I adopt that term in this judgment.

The Dawnay Day group had two main business areas, financial services which was primarily Mr Naggar’s purview and property investment which was primarily Mr Klimt’s. As regards financial services business, Mr Naggar described the model he developed as providing ‘a platform for capable and talented merchant bankers working for large institutions who had the entrepreneurial drive to set up their own operation focused on their specialised area’. The model was that each new business started as a division of an existing regulated business within a Dawnay Day company but keeping separate accounts as though it were independent. Mr Naggar referred to this process as ‘incubating’ the new business. If the business became successful, a new company would be formed and the business spun off into this company as a joint venture between Dawnay Day and the individuals concerned. Dawnay Day would provide the initial capital and the group would continue to provide the new company with IT, accounting and compliance services. Dawnay Day would also own a majority of the voting shares in the new company and would appoint directors to look after its interests. This model of incubating and then spinning off businesses was used by the Dawnay Day group on a number of occasions during the 1980s and 1990s. At its height, the group was a very substantial empire with businesses across the world said to comprise assets of over £1 billion and employing directly or indirectly over 10,000 people.

The contracts for difference business that subsequently became Hobart’s business was initially set up as a division within the company called Dawnay Day Brokers Ltd (‘DDBL’). DDBL was a wholly owned subsidiary of DDI and Mr Naggar was the chairman of the board of DDBL as well as of DDI. The business was developed from about 2004 by Mr Barry Townsley who was a long-standing friend of Mr Naggar. It was a broking business which specialised in setting up contracts for difference for various clients. Mr Townsley brought into the division people with whom he had worked at various points in his career. Chief among these was Mr Colin Thomas who ultimately became the CEO of Hobart. They were successful in building up Hobart’s business and on 1 October 2007 the business was spun out of DDBL and became Dawnay Day Capital Markets Ltd; the company to which I am referring as Hobart.

The interests and responsibilities of the individuals to be involved in the new company were set out in a joint venture agreement made on 12 September 2007 (‘the JV Agreement’) between DDBL, DDI, Hobart and the six individuals who then made up the senior management of the company namely Mr Townsley, Mr Thomas, Jason Berry, Darryll Warnford-Davis, Richard O’Neill and Neil Ridley. The JV Agreement provided that:

In order to do business, Hobart and the individuals working in it had to be approved by what is now the Financial Conduct Authority (‘FCA’). An important point for the purpose of this case was that Hobart was not authorised to take a position itself on shares or derivatives. In other words Hobart could not hold shares in a way which made it possible for it to make either a profit or a loss as a result of movements in the price of that stock. There were two ways in which Hobart could therefore buy stock. One way was to buy as an agent for someone else. The other was by making a back-to-back deal whereby at the time it bought the stock, the company knew it had a customer for that stock at precisely that price so that it could pass through any fluctuation in the share price to that customer. This is called acting as ‘a riskless principal’.

Hobart’s business flourished both during the time it was a division of DDBL before October 2007 and once it was spun off into the separate joint venture company. At any one time over the period from 1 October 2007 until the collapse of the Dawnay Day group in July 2008, Hobart had about 50 clients. A number of these clients were Dawnay Day group companies including Insureprofit, Starlight and Dawnay Day Properties Limited. Other clients included personal companies of Mr Naggar (Mariona and Fitzgerald) and of Mr Klimt (Jetpath). Hobart also had clients who were entirely independent of the Dawnay Day group and of Mr Naggar. The largest client of Hobart by far was the investor Robert Tchenguiz who dealt with Hobart primarily through two companies, Alzama and Violet. The Connected Companies made up the second largest tranche of business and the third largest client was the investor Mr Peter Shalson through various companies controlled by him.

Under a contract for difference (‘CfD’) the client, usually referred to as the CfD holder, enters into a contract with the CfD provider referencing a particular volume of shares at a particular price. If the CfD is long, the provider promises to pay the holder a sum equal to the difference between the total value of that number shares at the date that the contract is entered into and the value at the date that the contract is closed, if that later value is higher. If the value of the shares is lower when the contract is closed, then the holder has to pay the provider the difference. (Footnote: ¹) All the CfDs concerned in this case were open-ended, that is to say there was no fixed date at which the difference is crystallised – the holder can choose to close out the contract at any time.

Most CfD providers will want to hedge their risk under the CfD. There are a number of ways they can do this. The way that is most relevant for this case is where the provider will itself buy the shares which are referenced by the CfD in a one-to-one hedge. (Footnote: ²) Although Hobart entered into CfDs with its clients, its business was in fact as an intermediary because it always entered into a back to back CfD itself with its own CfD provider referencing exactly the same volume and value of shares as it wrote for its own clients.

Once the CfD is written, the provider requires the holder to give some security to ensure that the provider will get paid if the CfD is closed at a point when the holder’s obligation to pay the provider is triggered. This security is referred to as the margin and the requirement to pay margin is referred to as a margin call. The initial margin is usually calculated as a percentage of the value of the shares referenced. The size of that percentage depends on various factors such as the liquidity of the stock. For example, shares which are in the FTSE 100 generally require a lower percentage margin than FTSE 250 shares or more ‘exotic’ shares because it will be easier for the provider to sell any shares acquired as a hedge when the contract is closed out. The margin percentage may also depend on the provider’s assessment of the creditworthiness of the holder. After the CfD has been written, if the share price starts to move against the holder, a further margin call will be made by the provider, increasing the security that the provider holds. Thus in a long CfD, if the price of the referenced share starts to fall, it becomes more likely that the holder will be liable to pay the difference to the provider rather than vice versa and the margin required to guarantee the payment of that difference is increased. If the holder defaults on the payment of a margin call then the holder may close the contract forthwith, sell any referenced shares it holds as a hedge and demand payment of the difference.

Hobart’s income came from three sources. It charged its clients a commission for each CfD written; it earned interest on the money it held as margin and it was given a share of the interest charged by the ultimate CfD provider who entered into the back to back CfD with Hobart.

CfDs started to emerge as an important financial instrument in the City of London in about 2003. According to the FCA, by 2007 up to 35 per cent of the value of domestic equity transactions was attributable to CfDs. There are two main reasons why people buy CfDs referencing shares rather than the shares themselves. The first is that it is a relatively cheap way to make money on the basis of predicting how a particular share price is going to move. (Footnote: ³) At the time relevant to this case, CfDs had another important advantage over the purchase of shares. The Stock Exchange rules requiring investors to disclose to the market when they had bought a substantial percentage of the shares in a particular company did not apply to people who held CfDs referencing the same percentage of shares in that company. If an investor wanted to build a substantial interest in a company but did not want to disclose that intention to the market, he could, over the course of several months, enter into CfDs referencing millions of shares in the company without having to disclose that growing interest to the Stock Exchange. There was a limit to this though because the Takeover Panel did treat CfDs like shares for the purpose of shareholdings which triggered obligations to disclose under the Takeover Code.

When the CfD holder decided to close the CfD, he could also decide whether to acquire the shares that were referenced by the provider. Where, as commonly happened, the provider held the shares as a hedge for its risk, the provider would sell those shares to the holder. This is called ‘taking the shares physical’.

Part of Mr Naggar’s investment strategy for the Dawnay Day group involved trying to identify publically quoted companies which he thought were undervalued by the stock market. By July 2003 these activities were carried on by a division of DDI known as Dawnay Day Principal Investments. This comprised a team of about 10 analysts and private equity professionals, overseen by Mr Naggar. Once a suitable corporate candidate had been identified, Dawnay Day would then enter into CfDs referencing those shares. Rather than simply sit back and hope that the share price would rise, Mr Naggar could take steps to interest potential bidders in the company with the expectation that if the company became the target of takeover activity, the share value would rise. The Dawnay Day companies became, as Mr Naggar put it, ‘an active and sometimes activist investor and were known as such’.

Two examples of this strategy have figured largely in this case. The first was in 2004 when Dawnay Day identified the clothing company Austin Reed as an undervalued stock. Three Connected Companies entered into CfDs referencing Austin Reed stock and in November 2006 the Dawnay Day group acquired Austin Reed.

The second occasion is the investment which led, in part, to the collapse of the Dawnay Day group. In early 2007, Dawnay Day analysts identified Foreign & Colonial Asset Management Ltd (‘F&C’), a FTSE 250 company, as an undervalued stock. Mr Naggar believed that if he could bring about the takeover of F&C by another company, the value of the F&C shares would rise. One major issue between the parties in this case is the precise nature of Mr Naggar’s intentions as regards F&C and in particular whether he intended that he would ultimately participate as a shareholder in the acquisition of F&C (as Hobart contends) or whether he simply intended to close the CfDs at a profit once the share value had increased (as he contends).

In any event, starting in February 2007 Hobart wrote a series of long CfDs for the Connected Companies referencing many millions of shares in F&C. In June 2007 the Dawnay Day group entered into an agreement with investment vehicles operated by the business man Nicolas Berggruen under which the parties were to acquire up to 20 per cent of the ordinary shares of F&C. Mr Naggar attempted to generate interest in F&C as a target for acquisition. He lighted on Aberdeen Asset Management (‘Aberdeen’) as a likely purchaser of F&C because, Mr Naggar calculated, there were substantial cost savings to be made by combining Aberdeen’s and F&C’s businesses. Over the first part of 2008, Mr Naggar held discussions with Martin Gilbert, the Chief Executive of Aberdeen to discuss a potential takeover. By the end of June 2008 the Connected Companies had CfDs written by Hobart referencing over 28 million shares in F&C. Those companies also held CfDs for many more F&C shares with other CfD providers.

Mr Naggar’s efforts foundered and it did not prove possible to encourage a takeover of F&C. Mr Gilbert thought that the F&C share price was too high and Aberdeen preferred to pursue a different opportunity that came along at that time.

In April or May 2008 the Dawnay Day group started to suffer from liquidity or cash flow problems. Over the next few months, loans totalling around £30 million were provided to the group by Mr Naggar and his family. In addition in May 2008 David Gelber, a non-executive director of DDI made a secured loan of £2 million and a further secured loan of £5 million was obtained from Heron International. Mr Naggar’s evidence was that he thought that the Group’s problems were short-term and he was taking steps to address them, not only by arranging these loans but also by making substantial asset disposals to release some cash.

From about mid June 2008, F&C’s share price started to fall. There was an aggressive short seller repeatedly putting bundles of many thousands of shares into the market and pushing the price of the shares down, despite Mr Naggar’s efforts to shore the price up with his purchases. The drop in share price meant that more margin calls were made on the Connected Companies in respect of CfDs entered into by them with Hobart and other CfD providers.

The last purchase of shares in F&C carried out by Hobart for the Connected Companies was on 4 June 2008 although the Connected Companies entered into CfDs referencing F&C shares with other providers after that date. There was one further CfD transaction between the Connected Companies and Hobart namely a ‘switch’ of a CfD between two companies. It is common ground that CfDs cannot themselves be sold or transferred. In order to ‘transfer’ a CfD from one client to another, one must close down the existing CfD and then open another CfD under the same terms with the new client. On 30 June 2008, Hobart was instructed to close a CfD entered into with Fitzgerald referencing 3 million F&C shares and enter into a matching CfD with Mariona. I shall refer to this transaction as ‘the Mariona transfer’.

Other aspects of the Dawnay Day group business also started to go wrong. Mr Naggar described the position as ‘a perfect storm’ of troubles. The group had difficulty in realising assets to meet its immediate cash requirements and was unable to agree a deferral of interest payments due on loans. Between 8th and 10th July the Dawnay Day group collapsed and the Connected Companies entered into insolvency proceedings.

When the Connected Companies defaulted on the payment of margin calls, Hobart moved immediately to close the CfDs. It was owed substantial differences under the CfDs because the price of F&C shares had moved against the clients. Hobart held the money which had been provided as margin to offset against the differences owed but this was not enough to satisfy the Connected Companies’ liabilities under the CfDs. Other CfD providers who had written CfDs in F&C shares for the Connected Companies and held those shares as a hedge were in the same position as Hobart. Hobart and those other providers agreed that there should be an orderly placing of all the holdings of F&C shares on the market to prevent a disastrous fall in the F&C share price. It was agreed that a major bank and CfD provider, Kaupthing Singer & Friedlander would place the entire F&C position on 10 July 2008. The shares were eventually placed at £1 per share, a price substantially below the price at which all the CfDs had been written. During the course of that one day, 10 July 2008, the F&C share price fell from 135p to 97.5p.

So far as Hobart’s trades with Insureprofit were concerned, as at 10 July 2008 Hobart had written CfDs referencing a total of 19.3 million shares in F&C valued at £35.8 million. The total consideration received on the sale of these shares by Hobart was only £19.3 million. When other trades with Insureprofit were taken into account, the shortfall claimed by Hobart in respect of Insureprofit’s account is £4,083,632. So far as the Mariona transfer CfD was concerned, the 3 million F&C shares had been valued at 144.5 pence per share resulting in a total CfD value of £4.3 million. The total loss when the shares were sold at £1 each was £1.3 million. When margin and other excess monies in Mariona’s account were offset against this, and interest charges added, the total loss claimed by Hobart as arising from the Mariona transfer is £635,989.

When the Dawnay Day group collapsed, Hobart too was at risk of insolvency because it had to meet its own obligations under its back to back CfDs without having the monies expected from the Connected Companies. Mr Townsley stepped in and over the course of a few days provided substantial capital injections amounting to £5 million to enable Hobart to meet its own liabilities and to continue in business. As a condition for doing this, he acquired all of DDI’s shareholding in Hobart so that the company effectively came under the control of Mr Townsley and his colleagues. The JV Agreement was terminated and Mr Pincus, Mr Keane and Mr Morley all resigned as directors.

The company’s name was changed to Hobart and the business has continued to trade successfully since that time either within the Hobart corporate entity or more recently as an LLP.

It is helpful here to set out an overview of the claim. It has three limbs.

The first claim is that Mr Naggar acted in breach of his duties as a de facto or shadow director of Hobart. It is common ground that Mr Naggar was never formally appointed a director of Hobart. Hobart asserts that he was either a ‘de facto’ director for the purposes of section 250 of the Companies Act 2006 (‘CA 2006’) or a shadow director within the meaning of section 251 of the CA 2006. It is further alleged that Mr Naggar was in breach of various duties that he owed to Hobart as a de facto director and as a shadow director in that the transactions entered into between Hobart and the Connected Companies involved a conflict of interest between Mr Naggar’s interest in the holder of the CfD and his duty to Hobart or that the transactions were not entered into for the benefit of Hobart but to further Mr Naggar’s interest in building up a substantial CfD position in F&C.

As regards the Mariona transfer, Hobart alleges that this involved a conflict of interest for Mr Naggar because it resulted in the transfer of a CfD position from one company which had at least some assets to meet a margin call to another company which was not in a position to meet any margin calls.

The second head of claim is that Mr Naggar’s conduct constituted a breach of section 190 CA 2006 which, broadly, prohibits arrangements under which a director acquires a substantial non-cash asset from the company, or vice versa, without shareholder approval. The allegation here is put two ways. First it is alleged that the mechanism by which the CfDs were created over the course of the trading day involved the transfer of property rights or interests in shares between Hobart and either Mr Naggar or the Connected Companies and then later on the trade day the transfer back of those rights or interests to Hobart. Secondly, it is alleged that the overall arrangement under which Hobart opened the CfDs in F&C shares for the Connected Companies was an arrangement under which Mr Naggar or his Connected Companies would ultimately acquire the F&C shares themselves.

The third head of claim is for negligent misrepresentation. It is alleged that Mr Naggar, through his spokesmen on the board of Hobart, represented to Hobart that there was no cause for concern arising from the very substantial CfD positions that the Connected Companies had built up referencing F&C shares. Mr Naggar ought to have known at the relevant time that the representations were not true because the Dawnay Day group was already in financial difficulties. Hobart says that if it had been told of these financial difficulties it would not have opened the CfDs for Insureprofit or Mariona and so would not have suffered the loss – or at least some of the loss.

The first two heads of are said to create liability for the whole of the loss claimed, that is £4,719,621. As regards the misrepresentation claim, this may entitle Hobart to recover only part of the loss depending on findings as to which alleged misrepresentation were made and how many CfDs were opened following the representations and so could be said to have been opened by Hobart in reliance on the representation.

Mr Naggar denies that he was a director or shadow director of Hobart or that he has committed any breach of directors’ duties or of section 190. He also denies that any representations were made either on his behalf or at all. Mr Naggar has brought contribution proceedings against three of the executive directors of Hobart on the grounds that they knew as much about the writing of the CfDs as he did and that they approved them. He submits that if he is liable to Hobart then so must they be.

When the Hobart business moved from being a division of DDBL to being a separate company, the board under the chairmanship of Mr Townsley was made up in part of the DDI-appointed directors who were long standing friends and colleagues of Mr Naggar in the Dawnay Day group and in part by a number of long-standing colleagues and friends of Mr Townsley who made up the management of the company. At the trial of this claim, those Hobart directors who came to give evidence lined up behind either Mr Naggar or Mr Townsley according to where their loyalties lay. Thus, for Hobart, Mr Townsley, Mr Thomas, Mr Berry and Mr Kelly gave evidence. Hobart also relied on evidence from Joseph Rundle (who was not called for cross-examination). Mr Rundle was Head of Trading at a company, Monecor (London) Limited, which was used by Hobart as a CfD provider to hedge the CfDs Hobart entered into with its clients.

Mr Naggar gave evidence on his own behalf and Mr Pincus and Mr Keane who had been DDI-nominated non-executive directors of Hobart also gave evidence for him. Mr Naggar also relied on the evidence of Mr David Gelber who was a non-executive director of DDI. Mr Martin Gilbert, the Chief Executive Officer of Aberdeen Asset Management Ltd gave evidence about his discussions with Mr Naggar about the possible takeover by Aberdeen of F&C – an issue that is relevant to the section 190 claim.

Both parties instructed expert witnesses to give evidence about CfDs. For Hobart, evidence was given by Mr Toby Campbell-Gray who is the Managing Director of Tavira Securities which is a broker trading over a wide range of investments including equities and derivatives. He is responsible for trading, risk and risk management and also jointly responsible for that group’s back office function and reporting process. Mr Naggar instructed Dr Timothy May who is Chief Executive Officer of a trade body for private client investment managers and stockbrokers and who has worked in the past for stockbrokers and banks, including as Chief Operating Officer for Investec.

The two protagonists in this case are undoubtedly Mr Townsley, the current Chairman of Hobart, and Mr Naggar. Both men provided witness statements on which they were vigorously cross-examined. Both men clearly found the experience of being in the witness box an unfamiliar and uncomfortable one. Both were combative – not to say argumentative - and frequently supplemented their response to counsel’s questions with additional material intended to bang home some point in support of their overall case. Both men appeared at times to be focussed more on trying to work out where a line of questioning might be leading than on giving straight-forward, relevant answers.

That said, I did not form the view that either of them gave evidence that was deliberately untruthful. Rather I find that the evidence of both men has been coloured to some extent by the bruising turmoil into which their lives were thrown by the events of July 2008. They had been friends and colleagues for many years but since those events they have been engaged in this bitter feud with each considering that he has been shabbily treated by the other. This may have led to them recalling the position within Hobart in more black and white terms than I consider is likely to have been true. I have approached the evidence of both men with caution because of that.

I consider that the other factual witnesses were doing their best to assist the court. Where I have had reason to reject their version of events this is not because I find that they were trying to mislead the court but rather that their loyalty to either Mr Naggar or Mr Townsley, as friend, colleague and mentor may have influenced their recollection of events in subtle ways or have led them to interpret those recollections in the light of what happened later.

In respect of several of the topics on which the witness evidence clashed, I have concluded not that one witness’s evidence is wholly accurate and the another false, but that the truth most likely lies in between the two positions adopted by the rival parties.

In order for Hobart to succeed under this head of its claim, Hobart has first to establish that Mr Naggar was a de facto director or a shadow director of Hobart.

Section 250 of CA 2006 defines a ‘director’ as ‘any person occupying the position of director, by whatever name called.’ The term ‘director’ therefore covers not only those who are formally appointed but those who occupy the position of director even if not formally appointed. A person in this latter class is generally referred to as a ‘de facto’ director but that person is just as much a director, so far as the need to comply with the duties imposed on the directors by the CA 2006 as someone who has been formally appointed.

Section 251 of the CA 2006 defines a shadow director in the following terms:

‘(1) In the Companies Acts http://www.bailii.org/cgi-bin/markup.cgi?doc=/uk/legis/num_act/2006/ukpga_20060046_en_1.html&query=title+(+Companies+)+and+title+(+Act+)+and+title+(+2006+)&method=boolean - disp2012#disp2012 "shadow director", in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act.

(2)

A person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity.

(3)

A body corporate is not to be regarded as a shadow director of any of its subsidiary companies for the purposes of–

•

Chapter 2 (general duties of directors),

•

Chapter 4 (transactions requiring members' approval), or

•

Chapter 6 (contract with sole member who is also a director),

by reason only that the directors of the subsidiary are accustomed to act  in accordance with its directions or instructions.’

So far as directors (including de facto directors) are concerned, the duties owed to the company comprise primarily:

Section 170(5) of the CA 2006 provides that the general duties of directors apply to shadow directors ‘where, and to the extent that the corresponding common law rules or equitable principles, so apply’. The precise scope of the duties thereby imposed on shadow directors is one of the issues between the parties in this case.

The leading authority on the circumstances in which a person should be regarded as a de facto director of a company is the decision of the Supreme Court in HMRC v Holland and another [2010] UKSC 51. There the question arose in proceedings against Mr Holland alleging misfeasance in his conduct as de facto director of an insolvent company. Lord Hope of Craighead reviewed the authorities and concluded:

‘It is plain from the authorities that the circumstances vary widely from case to case. Jacob J declined to formulate a single decisive test in Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333, as he saw the question very much as one of fact and degree. He was commended by Robert Walker LJ in Re Kaytech International plc [1999] 2 BCLC 351, 423 for not doing so, and I respectfully agree that there is much force in Jacob J's observation. All one can say, as a generality, is that all the relevant factors must be taken into account. But it is possible to obtain some guidance by looking at the purpose of the section. As Millett J said in Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, 182, the liability is imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests. As he put it, those who assume to act as directors and who thereby exercise the powers and discharge the functions of a director, whether validly appointed or not, must accept the responsibilities of the office. So one must look at what the person actually did to see whether he assumed those responsibilities in relation to the subject company.’

The observation of Jacob J in Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333, 343-344 which was approved by Lord Hope was in the following terms:

‘For myself I think it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks 'was this individual part of the corporate governing structure', answering it as a kind of jury question.’

Lord Collins of Mapesbury in Holland noted that there was not a single case prior to the 1980s in which the term de facto director was applied to someone other than a person who had been appointed a director, but whose appointment was defective, or someone who had been, but had ceased to be, a formal director. The first case in which a person who had not been appointed a director was held to be a de facto director because he took part in the management of the company was In re Lo-Line Electric Motors Ltd [1988] Ch 477. His Lordship referred to the courts being confronted thereafter with ‘the very difficult problem of identifying what functions were in essence the sole responsibility of a director or board of directors’. He went on to say:

‘A number of tests have been suggested of which the following are the most relevant. First, whether the person was the sole person directing the affairs of the company (or acting with others equally lacking in a valid appointment), or if there were others who were true directors, whether he was acting on an equal footing with the others in directing its affairs: Re Richborough Furniture Ltd. Second, whether there was a holding out by the company of the individual as a director, and whether the individual used the title: Secretary of State for Trade and Industry v Tjolle. Third, taking all the circumstances into account, whether the individual was part of "the corporate governing structure": Secretary of State for Trade and Industry v Tjolle, at pp 343-344, approved in Re Kaytech International plc [1999] 2 BCLC 351, 423, where Robert Walker LJ also approved the way in which Jacob J in Tjolle had declined to formulate a single test. He also said that the concepts of shadow director and de facto director had in common "that an individual who was not a de jure director is alleged to have exercised real influence (otherwise than as a professional adviser) in the corporate governance of a company" (at p 424). … In fact it is just as difficult to define "corporate governance" as it is to identify those activities which are essentially the sole responsibility of a director or board of directors, although perhaps the most quoted definition is that of the Cadbury Report: "Corporate governance is the system by which businesses are directed and controlled" (Report of the Committee on the Financial Aspects of Corporate Governance, 1992, para.2.5).’

Subsequent to the Holland case was In the Matter of Mumtaz Properties Ltd [2011] EWCA Civ 610. In that case Arden LJ (with whom Aikens and Patten LJJ agreed) said that the first step in approaching the question of whether a person is a de facto director is to examine the governance structure of the company. That case concerned a family company which was:

‘… run with a high degree of informality with decisions not necessarily being taken at board meetings but whenever relevant family members were in communication with each other.’

Arden LJ held that the judge had been entitled to be satisfied looking at the evidence as a whole that the respondent was part of the corporate governance structure of the company. In her words he was ‘one of the nerve centres from which the activities of the Company radiated’ (see paragraph 47 of her judgment).

These authorities show that in so far as earlier cases such as Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 suggested that the de facto director needed to have held himself out to third parties as being a director of the company, or to have been held out by the management of the company as being a director, that is now relegated to being one of a number of factors to consider rather than an essential element in the test.

The leading authority on shadow directors is Secretary of State for Trade v Deverell [2001] Ch 340. The principles set out in the judgment of Morritt LJ can be summarised as follows:

In Hydrodam Millett J said:

“To establish that a defendant is a shadow director of a company it is necessary to allege and prove: (1) who are the directors of the company, whether de facto or de jure; (2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act. What is needed is, first, a board of directors claiming and purporting to act as such; and, secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.”

That summary of the law was considered recently by David Richards J in McKillen v Misland (Cyprus) Investments Limited (‘Coroin Limited’) [2012] EWHC 521 (Ch). There the claimant shareholder sought permission to amend an unfair prejudice petition and particulars of claim to allege that Sir David and Sir Frederick Barclay were de facto and shadow directors of Coroin Ltd. The learned judge said (in paragraph 23 of his judgment) that two qualifications to that passage from the judgment of Millett J emerge from the authorities. First, it is not necessary that all the directors should act in accordance with the directions of the shadow director. It is enough that a majority do so. Secondly, it is not necessary that the shadow director should exercise control through the instructions which he gives over all the matters which are decided by the board.

After considering the authorities on de facto directors, the learned judge continued (at paragraph 34):

“None of these authorities suggests that there is not a real distinction between de facto and shadow directors, nor would it be proper to do so given the distinction drawn by the Companies Act. The fact, as Lord Collins observed in HMRC v Holland, that the distinction has been eroded does not mean that it has disappeared. For the most part, it remains. The fact that persons in both categories will have a real influence in the corporate governance of the company does not mean that it need only be shown that a person has such influence for him to be both a de facto and a shadow director.”

Having considered the allegations the Claimant sought to introduce, David Richards J held that there was no arguable case that either of the brothers had been a de facto director (paragraph 75):

“… can the paragraphs which I have identified above support a case of de facto directorship against Sir David Barclay? In my judgment, they cannot. Even on the most expansive analysis of a de facto director, the pleaded case falls well short of what is arguable. I have already pointed out that there is no suggestion that Sir David Barclay was ever held out as a director or other officer of the company, or as having any place in its corporate governance, either externally or internally. He never attended any board or other meetings, or took part in any discussions on company matters with any directors except Mr Faber and, perhaps, Mr Seal and Mr Mowatt. There is no suggestion of his involvement in any decision of the board other than those specifically pleaded. I was shown the minutes of board meetings held in 2011 and they covered a wide variety of matters, but it is not suggested that Sir David Barclay had any involvement in more than a few of them. The alleged sporadic involvement in the shape of giving instructions or guidance to the Barclay appointed directors is, in my view, incapable of amounting to his assumption of the role or responsibilities of a director such as to subject him to the full range of statutory and other duties attached to a de jure or de facto director.”

He allowed the allegations to be pursued only in so far as it was alleged that Sir David Barclay was a shadow director. Following the trial of the matter, David Richards J concluded that Sir David was not a shadow director: see McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 2343 (Ch), paragraph 592 onwards.

One feature of this case that Mr Crystal emphasises on behalf of Mr Naggar was that Mr Naggar was wearing a number of hats in his dealings with the Hobart business over the relevant period:

The case law indicates that the identification of the hat which the individual was wearing in his dealings with and for the company is crucial in determining whether he is a de facto or shadow director. The Holland case itself was a striking example of this. The issue there was whether Mr Holland was a de facto director of 42 insolvent companies of which Her Majesty’s Revenue and Customs was the only creditor. It was undisputed that Mr Holland was a de jure director of a company, Paycheck (Directors Services) Ltd (‘Paycheck’) and that Paycheck was the sole de jure director of each of the 42 insolvent companies. Lord Hope of Craighead emphasised that the question whether Mr Holland was a de facto director of the 42 insolvent companies as well as being the de jure director of Paycheck must be approached on the basis that Paycheck and Mr Holland ‘were in law separate persons, each with their own separate legal personality’ (see paragraph 25 of his judgment). His Lordship then reviewed the authorities and found that:

‘..it is not easy to identify a simple and reliable test for determining whether a person in Mr Holland’s position was acting as a de facto director of a company whose sole director was a company of which he was a director de jure’ (paragraph 26).

Lord Hope also referred to a passage in the judgment of Timothy Lloyd QC (sitting as a deputy High Court judge) in In re Richborough Furniture Ltd [1996] 1 BCLC 507, at p524 that:

‘… if it is unclear whether the acts of the person in question are referable to an assumed directorship, or to some other capacity such as a shareholder or, as here, consultant, the person in question must be entitled to the benefit of the doubt’.

Lord Hope expressed his conclusion that Mr Holland was not a de facto director in the following terms:

‘The problem that is presented by this case, however, is that Mr Holland was doing no more than discharging his duties as the director of the corporate director of the composite companies. Everything that he did was done under that umbrella. Mr Green QC for HMRC was unable to point to anything that he did which could not be said to have been done by him in his capacity as a director of the corporate director.’

In Holland,Lord Collins of Mapesbury also held that Mr Holland was not part of the corporate governing structure of the 42 insolvent companies because there was no material to suggest that he was doing anything other than discharging his duties as the director of the corporate director of those companies (in paragraph 96):

‘It does not follow from the fact that he was taking all the relevant decisions that he was part of the corporate governance of the composite companies or that he assumed fiduciary duties in respect of them. If he was a de facto director of the composite companies simply because he was the guiding mind behind their sole corporate director, then that would be so in the case of every company with a sole corporate director’.

Finally Lord Saville of Newdigate in Holland recognised that the Revenue’s case involved a substantial inroad into the long established principle that a company is to be treated as a legal personality separate and distinct from its directors and member.

This ‘hat identification’ issue does not only arise in relation to human directors of corporate directors. In Ultraframe (UK) Ltd v Fielding Lewison J considered the position of a lender alleged to be a shadow director of the debtor company. He held that where the alleged shadow director is also a creditor of the company, he is entitled to protect his own interests as creditor without necessarily becoming a shadow director (at paragraphs 1267 and 1268 of his judgment):

‘Mr Snowden [Counsel for the putative director] submitted that it is critical to distinguish the position of a lender (whether or not also a shareholder) from that of a director. A lender is entitled to keep a close eye on what is done with his money, and to impose conditions on his support for the company. This does not mean he is running the company or is emasculating the powers of the directors, even if (given their situation) the directors feel that they have little practical choice but to accede to his requests. Similarly with customers who may, because of their buying power, be able effectively to dictate conditions to their suppliers (or the other way around). In other words a position of influence (even a position of strong influence) is not necessarily a fiduciary position. To find otherwise would place a wholly unfair and unnatural burden on men of business. In broad terms, I accept this submission.’

Hat identification is therefore an important legal qualification to the general principle that one must look at what the putative director actually does rather than how he is described when deciding whether to impose fiduciary duties upon him.

The hat identification issues here are relevant to two other aspects of the evidence relied on by Hobart for this limb of its claim. First, Hobart’s evidence drew on incidents that occurred both during the period before 1 October 2007 when Hobart operated as a division of DDBL and after that date when it became a separate company. The evidence of Hobart’s witnesses was that nothing really changed so far as the running of the business was concerned when Hobart became an independent company. Mr Thomas said that he carried on the same behaviour from the very first day he started working for DDBL and that the fact that they changed to a joint venture company and there was a legal agreement underlying the relationship did not change things.

I consider that incidents occurring before the 1 October 2007 should be accorded considerably less weight than incidents occurring after. It is in the nature of the model of incubating businesses within an existing company that the directors of the ‘incubator’ are heavily involved in the business at this early stage. The impression gained by those working in the business may well extend to the later period even if Mr Naggar did in fact step back from the management of the business following its incorporation. Mr Thomas’ evidence was that most important managerial issues were resolved during the incubation period of the business before it became a separate company so that there was less need for Mr Naggar’s involvement in steering the company after 1 October 2007. Of course, before 1 October 2007 it was impossible for Mr Naggar to be acting as a de facto director of Hobart because it did not have a separate existence and so did not have its own board of directors. Mr Marshall QC, appearing for Hobart, accepted that the fact that Mr Naggar’s actions before 1 October 2007 continued to influence how the business was run after that date was not evidence to support him being a de facto director of Hobart once it was separately incorporated. He relied on them rather as evidence of the kinds of things that Mr Naggar did when he was a director to support the allegation that when he did those same things post 1 October 2007, he also did them as director. The evidence of the Hobart witnesses however did not indicate to me that they drew a clear distinction between instructions given by Mr Naggar after 1 October 2007 and the continued effect of instructions given earlier during the incubation period. They also did not distinguish between the different roles that Mr Naggar was playing in his discussions with them. This meant for example, that in cross-examination Mr Thomas fairly accepted that some of the instances he was putting forward were probably instances of Mr Naggar acting as customer or as shareholder of Hobart rather than as de facto director.

Hobart emphasised the similarities between the way its business was managed and the characteristics of the company in the Mumtaz case where Arden LJ stressed the importance of examining the way in which the company was governed. Hobart argued that it was governed in the same informal way as the family owned company in Mumtaz. I do not accept that Hobart was operated in the same way as the company in Mumtaz. Although Board meetings and Executive Committee (‘Exco’) meetings of Hobart were not the forum in which important issues were discussed and decided, this was a company the structure of which was exhaustively laid out in the JV Agreement entered into by DDI and the Hobart management when Hobart was incorporated. Those provisions show that the balance of power and the limits of discretion as between the Hobart management and DDI were carefully delineated. Part of Hobart’s case in this regard depended on downplaying the significance of the JV agreement. Hobart’s witnesses said in effect that they did not examine the JV Agreement in detail before signing it and that once it was signed, the JV agreement was never referred to - it did not have any influence on the way that the management behaved. I do not accept that the JV Agreement should be disregarded in this manner. Naturally, when things are going well, the terms of the underlying contract may lie in a drawer and people deal with each other in a cooperative and friendly manner. As Mr Thomas put it:

‘we didn’t ever go back to it [the Agreement] because we ran, you know, on a friendly basis. We just ran it, we all knew what was happening and we all did what we should do.’

But even lying in a drawer, the JV Agreement had an important effect on the management’s participation in the business. Mr Townsley, Mr Thomas and Mr Berry were now shareholders with a significant financial stake in the business rather than simply employees of DDBL. As Mr Thomas said,

“It was the legal document that was there. You know, it was a fallback. It's like lots of contracts, it's there for when things go wrong. That's the fallback. We were running it quite happily with the group. The finance was run by their finance division, the compliance by their compliance division, the secretary was the company secretary and we were meant to be left getting on with just sort of doing the sharp end of the business.”

Things could now fairly be described as having gone wrong and therefore I consider that the JV Agreement’s terms do govern the relationships between the parties. The JV Agreement shows that the fact that Mr Naggar did not become a director of Hobart was a deliberate decision of which the other Hobart directors must have been aware - as experienced business men they must also have appreciated the significance of that decision.

Further, as Mr Naggar pointed out, when Hobart was set up, it had to obtain its own authorisation from the FCA and to identify those who performed ‘controlled functions’ within the meaning of the FCA rules, including those who were directors. The definition of a director in FSMA includes both de facto and shadow directors. Mr Naggar was not included on the list of people carrying out controlled functions either as a director or in any other capacity when Hobart’s permission was initially granted and he was not added to the list at any later stage. Mr Marshall dismissed this point on the grounds that compliance was one of the functions centrally undertaken by the Dawnay Day group and that the Hobart management did not turn their minds to the question whether there were de facto or shadow directors in addition to the de jure directors of Hobart. I do not accept that this point can be so easily brushed aside. Mr Townsley, Mr Thomas and the rest of the Hobart management fully appreciated how important it was that Hobart obtain and maintain its authorisation from the FCA. If the position really was that they thought that Mr Naggar was making important decisions about how the business was run once it had separated from DDBL, they ought to have turned their minds to how this affected the information that they had provided to the FCA and the content of Hobart’s permissions.

Finally by way of preliminary remark, Mr Naggar relied on the stance that Hobart had taken in the course of some earlier litigation as showing the real state of affairs and as being inconsistent with Hobart’s allegations in this claim. In July 2008, proceedings were brought by Hobart against MF Global UK Limited (‘MF Global’) which had provided brokerage services to Hobart during 2007. MF Global purported to deduct from Hobart’s account over £2.5 million which MF Global claimed it was owed by three insolvent Connected Companies, Dawnay Day Property Ltd, Starlight and Insureprofit. Whether MF Global was entitled to deduct the loss from Hobart’s account depended on the application of section 421 of FSMA which defines the word ‘group’ for the purposes of FSMA. In its Defence served on 20 August 2008, MF Global set out in great detail the shareholdings of Mr Klimt and Mr Naggar in DDI and the relevant Naggar companies asserting that they were the parent undertakings or had participating interests in several different companies. MF Global pleaded that Hobart and the other Dawnay Day companies were members of a group of companies in which DDI was the parent company. It alleged that they were all subsidiaries of Mr Klimt or Mr Naggar for the purposes of section 421 of FSMA because Mr Klimt and Mr Naggar ‘had the power to exercise, or actually exercised, dominant influence or control over them’. That phrase ‘dominant influence or control’ comes from section 1162(4)(a) of the CA 2006 which defines parent and subsidiary undertakings.

It was also alleged:

Hobart approached Mr Naggar in November 2008 to ask for his help in the proceedings against MF Global. Solicitors acting for Hobart wrote to Mr Naggar explaining that one of the issues in the MF Global proceedings was whether Mr Naggar or Mr Klimt exercised dominant influence or control over DDI. He was asked to confirm, if it be the case, that neither he nor Mr Klimt controlled DDI because they both had equal legal interests and voting rights in that company. He was also asked to confirm that DDI was not managed on a unified basis with any of the three Connected Companies involved. At the end of the letter the solicitors wrote:

‘It would also be helpful if you could confirm that in relation to Hobart (formerly Dawnay, Day Capital Markets Limited) you did not play any role in relation to management decisions.’

Mr Thomas sent Mr Naggar a draft reply he might use. That draft included three substantive paragraphs stating that neither Mr Naggar nor Mr Klimt had control of DDI, that they each had equal influence and that DDI was not managed on a unified basis with the three Connected Companies. The draft reply did not say anything about Mr Naggar’s role in relation to management decisions for Hobart. The letter Mr Naggar in fact sent on 19 November 2008 was much shorter than the draft and confirmed simply that DDI and the three Connected Companies (not included Hobart) were not managed as a single unit and their accounts were not consolidated with those of DDI. The MF Global proceedings were ultimately settled by a compromise under which MF Global deducted only a small proportion of its loss from Hobart’s account.

Mr Thomas was cross-examined about the wording of the Reply lodged in the MF Global proceedings on 19 September 2008 as he had signed the statement of truth at the end of the pleading. The paragraph in the Reply which responded to the allegation in paragraph 17.5 of the Defence contained the words:

“Paragraph 17.5 is denied. … Neither Mr Klimt nor Mr Naggar exercised de facto control over [the three Connected Companies] or Hobart or DDIL. Furthermore, Mr. Naggar and Mr. Klimt never exercised control over the business of Hobart and have never been part of its management team or been involved in making management decisions.”

In relation to the assertion in paragraph 18.4.4. of the Defence, it was denied that Mr Naggar was at any time a director of Hobart and asserted that:

“Hobart was established as a joint venture arrangement whereby DDIL invested cash as capital in return for a stake in the business, but its management team exercised control of running the business. Neither Mr Naggar nor Mr Klimt were ever directors of Hobart; they did not attend any board meetings of Hobart and they never exercised any control over Hobart”.

Mr Thomas said that although the sentences in the Reply I have quoted are rather general, they were drafted in the particular context of the MF Global proceedings where the issue was not whether Mr Naggar was a de facto or shadow director but whether he exercised dominant control such that, on the application of the relevant FSMA and CA 2006 provisions, Hobart and the three companies were part of the same group. It was that which would determine whether or not MF Global was entitled to deduct sums owed by the three defaulting companies from Hobart’s account.

I accept Mr Thomas’ evidence on this. The pleadings in the MF Global proceedings are almost entirely focused on the intricate network of interests held by Mr Naggar, Mr Klimt, their respective families and their various family trusts. There are references to various people being directors of the companies but there is no suggestion that this is dealing with anything other than de jure directors. I accept that the discussions about the MF Global proceedings all centred on these technical details and on how the provisions of the CA 2006 and FSMA applied and not on the kinds of issues with which these proceedings are concerned.

Further, although the solicitor’s letter seeking Mr Naggar’s help asked him to confirm that he was not involved in the management of Hobart in any way, the draft reply sent to him did not invite him to make any such assertion and the letter he in fact sent did not, for whatever reason, make any such assertion.

I do not therefore consider that the pleadings in the MF Global proceedings help me to understand Mr Naggar’s role in the Hobart business between October 2007 and July 2008 for the purpose of resolving the issues that arise in this claim.

With those preliminary remarks out of the way I now turn to the incidents that Hobart relies on as showing that Mr Naggar was an informal director of Hobart. Although I fully accept that there remain important distinctions between the tests for de facto directors and shadow directors, as described by David Richards J in the first McKillen judgment, the parties did not distinguish between the two concepts in their analysis of the incidents relied on. I will adopt the same approach.

There are four main elements relied on:

The evidence falls within two categories. The first category can be described as general assertion by the Hobart witnesses. The second comprises particular examples of conduct. At the start of the hearing, Hobart produced a comprehensive list of the incidents which it relies on to show that Mr Naggar was an informal director. I shall refer to that list as ‘The Factors Document’.

As regards the general assertions, the principal witness for Hobart on this issue was Mr Colin Thomas. His witness statements contained many general statements of his impression of how the Hobart office ran and of Mr Naggar’s role in the business. For example he described Mr Naggar as ‘a dominant force in the business’; asserted that ‘it was certainly well accepted within DDCM/Hobart that “if Guy asks you to do something – you do it.’ (emphasis in the original) and that ‘it was always clear’ to him that Mr Keane and Mr Pincus were acting at the direction of Mr Naggar and would refer to him on any significant decision.

Such general impressions are difficult, if not impossible, to refute. If Mr Thomas says in effect that he ‘always thought’ of Mr Naggar as his boss, how is Mr Naggar to counter that evidence by showing that Mr Thomas did not ‘always think’ that or that there were no grounds for his thought? Such impressions also do not distinguish clearly between Mr Naggar’s conduct wearing his alleged informal director’s hat as compared with his various other hats and they tend to blur the line between impressions gained from conduct before 1 October 2007 when Hobart operated as a division of DDBL and after that date when it became a separate company. As I have already indicated, incidents occurring before the 1 October 2007 should be accorded less weight than incidents occurring after.

It is therefore important to examine the particular instances that are relied on by Hobart in the Factors Document to see if they show that Mr Naggar was an informal director. It is common ground that Mr Naggar never held himself out to a third party as director and he was never held out by anyone within Hobart to be a director of Hobart. It is also accepted that he never attended board meetings or Exco meetings. I take those facts into account although the case law as I have set out earlier is clear that the absence of such holding out does not preclude a finding of de facto directorship.

Conduct of DDI nominated directors

Hobart’s first point is that Mr Pincus, Mr Keane and Mr Morley (‘the DDI nominated directors’) effectively did what Mr Naggar told them rather than exercising their own discretion in the performance of their functions. Mr Morley, it was accepted, played only a small part in the relevant events so the focus of attention was on Mr Naggar, Mr Pincus and Mr Keane. I accept that Hobart may have been hindered in putting forward this part of its claim by the fact that it does not have access to all the correspondence passing between the DDI nominated directors and Mr Naggar. However I cannot base findings on speculation about the content of correspondence that might have existed but was not part of the evidence in the trial.

Mr Naggar denied that he got involved with the day to day management of Hobart or ever gave Mr Pincus directions as to what to do at Board meetings. Mr Pincus also denied that he acted simply as a nominee for Mr Naggar. I bear in mind that Mr Pincus acts as director on many boards within the Dawnay Day group and has done so for many years. I accept that he has sufficient experience and judgment to know when he needed to take a matter back to DDI and when he could exercise his own judgment in dealing with the matter within the subsidiary company. One part of Mr Pincus’ evidence was particularly convincing when he described his interaction with Mr Naggar in the following terms:

“But in practice, Mr Naggar … was very much a deal person, going from one deal to another ... . He was not interested in Exco meetings and things like that. And most of the time his favourite phrase with me -- I just recalled the other day -- was, "In your hands. In your hands." … And I worked there for a long time and he trusted me. And I have to tell you he was very much a big picture person, and he was not interested in what he considered the minutiae. It was a job to get him to listen sometimes to the things that were going on in some of the companies.”

Mr Keane’s evidence, which I also accept, was that he did sometimes consult Mr Naggar about issues that had arisen in Hobart but that he also sometimes spoke to the other directors of DDI such as Mr Klimt or Mr Smouha if they were the more appropriate person given the matter in issue.

Hobart’s case on this point was also inconsistent with other parts of its case. The pleaded case initially was that between October 2007 and July 2008 the DDI nominated directors sought and complied with the instructions of Mr Naggar to whom they sent the agenda for Board meetings and from whom they took instructions in respect of any resolution at such meetings. Hobart’s case as it developed in opening and at trial, however, was rather that nothing of much significance was discussed or decided at board meetings – all the important decisions were taken by Mr Townsley and Mr Naggar acting effectively as partners in the business outside of the formal setting of the Board meeting. In the following paragraphs I consider the incidents relied on as showing that Mr Pincus and Mr Keane referred decisions back to Mr Naggar and implemented his instructions.

The Fidessa contract. When the Hobart business was first set up as a division of DDBL, it needed to enter into a contract to acquire an electronic trading platform from Fidessa. Mr Keane emailed Mr Thomas saying that the contract would need Mr Naggar’s approval. I do not regard this as a pertinent example of Mr Keane being prepared only to act on Mr Naggar’s instructions. It occurred at the start of the business when DDBL (of which Mr Naggar was a director) was actively setting up the business. The Fidessa contract represented a substantial capital outlay of £47,000 costs and a further £144,000 per year, all of which money DDBL had to find. It is not at all surprising that Mr Keane would want to check with Mr Naggar and that the latter would be involved in this decision. I do not see it as an indication that the DDI-appointed directors subsequently fulfilled their role as directors of Hobart as mere conduits for Mr Naggar’s instructions.

Mr Naggar’s approval of new employees. An email of 9 March 2006 from Mr Smouha to Mr Thomas and Mr Keane refers to a job candidate, Mr Colin Sandlan, attending a number of meetings with people to test his competence on relevant matters. At the end of the email is the statement “If Colin survives all the meetings he will be seeing Guy on Friday for a “blessing”. This was relied on as an example of Mr Naggar wishing to approve the appointment of Hobart personnel. I do not accept that this supports the allegation made. The incident took place in March 2006, about 18 months before the Hobart business was spun off into a separate company. Further, Mr Thomas’ evidence was that when he met Mr Sandlan he realised that he was far too senior to be coming to work for the Hobart division of DDBL and assumed that he was a candidate for a group-wide role, perhaps as group finance director. If that was the case, then Mr Naggar’s involvement is entirely explicable on the basis of his leadership of the group and nothing to do with his involvement in the management of the Hobart business.

Mr Keane seeking Mr Naggar’s consent for decisions. Two illustrations are relied on by Hobart showing Mr Keane discussing issues with Mr Naggar and seeking his consent. Both illustrations were in 2006, before Hobart was spun off as a separate company. The first was a comment by Mr Keane in an email he sent to Mr Thomas in May 2006 referring to two other teams in DDBL, namely Corporate Broking and Corporate Finance. After proposing a meeting of the people concerned, Mr Keane stated “I mentioned to Guy that I was going to suggest this to you and he thought it was a good idea”. Mr Thomas accepted that the Corporate Finance team referred to was a different Dawnay Day company not part of DDBL. The Corporate Broking business was at that time part of the Hobart division but frictions between them meant that they were being separated out as a different profit centre – raising consequential issues as to what they should pay the Hobart division for the services that Hobart would continue to supply. This was therefore clearly a concern raising issues for DDBL and the Dawnay Day group beyond the Hobart business. The second incident arose from a team of bond traders who were working as part of the Hobart division within DDBL and wanted to explore setting up a bond fund. That activity would be outside the FCA authorisations held by the people in the Hobart division of DDBL so would have needed to be set up elsewhere in the group. There is an email from Mr Keane to Mr Naggar and Mr Townsley discussing the proposed profit split between the two traders, Hobart and the DDI group and asking if they are content with that. Again, this seems to be a wider Dawnay Day group matter in which it is not surprising that Mr Naggar was involved as Chairman of DDI.

Mr Keane referring to Mr Naggar as a ‘driving force behind the business’. Mr Thomas asserted that Mr Keane openly accepted that Mr Naggar and Mr Townsley ‘were the driving forces behind the business’ and referred to an email sent by Mr Keane in June 2008 about a dispute Mr Naggar and Mr Townsley. Mr Keane concluded the email saying:

“I can no more sort this out than you can. … I assume Barry won’t talk to Guy. I know he thinks other people should make decisions, but how can I (or anyone else) override what Barry and Guy decide between them?”

The email dispute in question concerned the respective shareholdings in the new Hobart company. DDBL as a wholly-owned subsidiary of DDI was in effect owned equally by Mr Naggar and Mr Klimt. Once the Hobart business was spun out of DDBL, there was a negotiation as to how the shareholding in the new company would be split between Mr Townsley and DDI. The discussion rumbled on long after the JV Agreement was signed in September 2007. Mr Keane’s email recognises that the split of the future shareholdings of Hobart was entirely a matter for Mr Naggar, Mr Klimt and Mr Townsley to thrash out amongst them and something which he and Mr Thomas could not expect to influence. It is not evidence that Mr Keane recognised more generally that Mr Townsley and Mr Naggar ran the Hobart business and that Mr Naggar was part of the management of the company.

Acquisition of new office space. Mr Naggar’s involvement in the acquisition of new office space for Hobart or for the refurbishment of the existing office space was also cited as an instance of Mr Naggar’s involvement in the management of the business. The document in support of this is an email sent by Mr Maurice Gilbert on 15 March 2007. It concerns a substantial item of expenditure for the business, over £100,000 per year for office premises. Mr Thomas agreed that this was a significant commitment and that if the Hobart business had foundered at this stage, the liability to pay would have fallen on the company of which it was then a division. Further it appears that another Dawnay Day company, Homedouble, was the landlord of the premises and the subject heading of the email refers to that company as well as the address of the premises. This therefore appears to be a Dawnay Day Group matter rather than purely a Hobart matter. A second example of Mr Naggar’s approval being sought for outlay on premises was on 10 October 2007, shortly after Hobart had become a separate company, when there was an email about incurring a substantial sum on furniture and office refurbishment. This was another key decision and long term commitment. This is one of the matters that is ‘reserved’ to DDI in the Schedule to the JV Agreement. This incident is entirely explicable as an approach to Mr Naggar in his capacity as chairman and director of DDI which was the majority shareholder in the new company.

Mr Keane consulting Mr Naggar over the choice of artwork. There was an exchange of emails in which Mr Thomas sought Mr Keane’s assistance to ask whether Mr Naggar was content for a particular piece of artwork to be displayed in Hobart’s premises. Mr Keane’s evidence on this point rang true, to the effect that Mr Naggar and Mr Townsley were both assiduous art collectors and that there was an element of one-upmanship over the display of artwork in the offices. I hardly see this as an example of directorial activity as few directors would so concern themselves with the detail of office aesthetics.

Changing the name of Dawnay Day Capital Markets Ltd. The issue of whether the name of another Dawnay Day group company, Dawnay Day Investment Banking Ltd should be changed to avoid confusion with Hobart (then called Dawnay Day Capital Markets Ltd) is relevant to the misrepresentation claim discussed below. Here it is relied on as evidence that Mr Naggar’s consent was needed to change the name of Hobart. A meeting was held on the afternoon of 4 June 2008 between Mr Townsley and Mr Naggar. When Mr Naggar refused to countenance this, Mr Townsley reported back to his Hobart management colleagues that he and Mr Naggar had agreed that Hobart would change its name. However, in my view that is a misreading of the email. I accept Mr Keane’s evidence that Mr Naggar did not want either company’s name to change because he did not see that there was a problem with confusion between the two companies. What Mr Townsley was reporting back was that Mr Naggar refused to change the name of Dawnay Day Investment Banking so that if Hobart still thought that there was a risk of confusion, they would have to change Hobart’s name rather than rely on Mr Naggar to change the name of the rival company. This does not evidence the need for Mr Naggar’s consent to Hobart’s change of name.

Mr Keane consulting Mr Naggar about Investec. Hobart relies on an email in March 2008 sent by Mr Keane to Mr Naggar about the margin position of Investec, which was a trustee for Mr Tchenguiz’s interests, Mr Tchenguiz being by far the largest client of Hobart. Mr Keane reports the level of exposure to Mr Naggar at a time of market turbulence. Mr Keane was asked by Mr Adkin QC why he had told Mr Naggar about this. He said that Hobart was running a large position for Alzama – about £300 million. If something had gone wrong then Hobart might have become insolvent, unless the shareholders had decided to support it. I accept that this is a matter where one would expect the DDI appointed director to keep the majority shareholder informed of a worrying situation. This point is entirely consistent with Mr Naggar’s role as chairman of DDI.

In my judgment there is no evidence to support the contention that the DDI nominated directors acted in accordance with Mr Naggar’s instructions so that he effectively operated as a de facto director or shadow director.

Mr Naggar exerted control over the management of the day-to-day business of Hobart

The second set of examples said to show that Mr Naggar acted as an informal director of Hobart were under the rubric that Mr Naggar exerted control over the management of the day-to-day business of Hobart.

One of the main grounds relied on by Hobart was that Mr Naggar was sent the daily Open Position Reports prepared by Hobart. The Open Position Report lists every client of Hobart and sets out their market position in three columns: available funds (being the amount of money in the client’s account in excess of its required margin); market value (being the market value that day of shares referenced by the CfDs held by the client) and percentage of free equity to market (being the available funds expressed as a percentage of the market value of the CfDs). Where there is a negative figure stated in the first and third columns, that shows that the client owes margin to Hobart. The second column shows the value of the client’s overall business with Hobart. From the OPRs that I have seen it is clear that Robert Tchenguiz’s two companies, Alzama and Violet have market values far exceeding those of any other client. The Connected Companies are all listed separately as are a number of companies clearly linked to Mr Klimt. The OPRs do not identify the shares referenced by the clients’ CfDs or whether their investments are spread among a number of companies. So they do not give the entire picture as to the risk to Hobart of that position since that risk depends on, for example, whether the shares referenced by the CfD are FTSE 100 shares or more unusual shares. Each client would get a statement of its own position early each morning and would be able to see from that whether extra margin was required. I accept Mr Thomas’ evidence that Mr Naggar was keen to receive these, that it appeared to the Hobart management that Mr Naggar read them carefully and that if for some reason he did not receive one, he would chase it up promptly.

Confidential information contained in the OPRs There were two ways in which Hobart relied on the fact that Mr Naggar saw the Open Position Reports. First, Hobart submitted, that the very fact that Mr Naggar was shown this information about other clients’ positions indicated that he was receiving them in his capacity as a director rather than as a client. These reports contain confidential information about other clients’ level of exposure and that is information that would not be provided to clients. In fact in cross-examination Mr Thomas said that he did not think that the OPRs contained confidential information – the trades made by clients each day were publicly available to the market and this information was already a day old by the time it was circulated. Mr Thomas’s evidence was that the confidential information provided to Mr Naggar was rather information (not provided in the OPRs) about the margins Hobart was having to pay to its own back to back CfD provider. This was, Mr Thomas said, because Mr Naggar insisted that the Connected Companies should only pay that margin and not an additional mark up that Hobart might charge its customers over and above what it had to pay itself. As Mr Thomas put it:

“From the start when he started opening CfDs with us, you know, I think it was a simple instruction that it was a group company, there would be no point in him providing larger margins than we required from our provider because this is all part of the same group it’s just moving money onto our balance sheet.”

Putting on one side the fact that reliance on the disclosure of confidential margin rates to Mr Naggar was not pleaded as the relevant confidential information for this part of Hobart’s case, I do not see that Mr Naggar’s ‘insistence’ on being told the margin rates being obtained by Hobart from its providers shows that he was a de facto director. It is true that Dr May, the expert witness for Mr Naggar said that a client would not normally know the margin that Hobart was required to provide by its back-to-back CfD provider. But this was not a normal situation because Mr Naggar was the joint owner of the group of which both Hobart and the Connected Companies formed a part as well as being responsible for providing a large part of Hobart’s business. As Mr Thomas accepted, Mr Naggar, as co-head of that group had an interest in making sure that monies moved round group companies in a reasonable way.

Further, I do not accept that these open position reports would only be of concern to Mr Naggar as an informal director of Hobart. They were of the utmost importance to his ability to keep an eye on the exposure of the Dawnay Day group to the risks of the business in which Hobart was involved. For example the OPR sent on 11 August 2007 showed that Mr Tchenguiz’s companies had a margin shortfall of £11 million on market value positions of about £450 million. The email contains a note saying that another Tchenguiz entity has sent £15 million to cover this. Mr Naggar responded to Mr Townsley (copying in Mr Klimt) saying:

“I am pleased to see the rapid reaction but ….With positions of 450 M a surplus of 4M can be wiped out in seconds ! I am worried. What do you think?”.

Mr Klimt then responds asking Mr Naggar and Mr Townsley what the margin on all of Mr Tchenguiz’s large positions is and what is the size and liquidity of each position. Mr Townsley responds from where he is on vacation in the USA noting that all the positions are on FTSE stocks. He goes on:

“We have not missed a call since we started and I see no problem. However the business is going to continue to grow with the introduction of new clients. Will DDI be happy with this?” (emphasis added)

Mr Naggar replies:

“My question is what is the margin over and above the surplus? Is it 10%? We are not worried about an increase in business But about fully understanding our risk”. (emphasis added)

This shows that exposure on the clients with very large market value positions was a concern not only of Mr Naggar but also of Mr Klimt. Mr Townsley’s response shows that he understood that this was their concern because it was potentially a concern of DDI – he was inquiring whether DDI would be happy with the expansion of Hobart’s business. Mr Naggar’s email shows that he is responding on behalf of DDI, which is clearly the “We” referred to in his email.

Mr Naggar’s comments on reading the OPRs Hobart also points to a number of occasions when Mr Naggar commented on the picture shown in the OPRs. Mr Naggar says that out of about 200 OPRs in the trial bundles at the hearing, there were only comments from Mr Naggar on 16 of them, 12 of those 16 had been at a time before Hobart was spun out of DDBL. Mr Naggar’s evidence was that these were the only occasions on which he ever queried OPRs. Mr Thomas’s evidence was that Mr Naggar would often raise queries on the telephone or by speaking to him in person so that the evidence in the bundles was not the full extent of Mr Naggar’s involvement. I prefer Mr Thomas’ evidence on this point as it is very likely that Mr Naggar would sometimes raise a point by email and sometimes by telephone and sometimes face to face if he happened to be talking with Mr Thomas. Similarly, Mr Berry said that he was often ‘summoned’ to go over to Mr Naggar’s offices to discuss client open positions particularly because Mr Berry was responsible for bringing Mr Shalson to the business and Mr Shalson’s trading gave rise to some concerns on occasion. Although Mr Naggar dismissed this evidence about frequent meetings as fabricated, it is more likely that the attention paid by Mr Naggar to the OPR information did result in at least some telephone discussions and meetings with the Hobart executives as well as the email comments that I have seen.

Although I accept that there were probably more comments than are apparent from the emails in the bundle, I did not understand Mr Thomas or Mr Berry to be saying that the phone comments were of a different nature from the ones set out in the emails. I therefore treat the emails available at trial as illustrations of the kinds of comments that Mr Naggar would make rather than as an exhaustive list of all his comments.

Mr Alexander QC in cross-examining Mr Thomas took him to each of the 16 instances. In summary the position is this:

Having considered each of the illustrations of Mr Naggar’s comments on the OPRs, I do not see that the provision of the OPRs to Mr Naggar or Mr Naggar’s practice of commenting on them shows that he was a de facto director. As regards his comments on the margins owed by Alzama and Violet, these companies’ positions grew to very large sums, about £450 million, so that the margins were similarly very high. Although such brokering offered the prospect of substantial income for Hobart, it also exposed the company to a serious risk of insolvency if the market moved against the clients and they defaulted on their margin calls. I do not regard it as at all surprising that Mr Naggar, in his capacity as Chairman of DDI watched the position closely and expressed his concern to Mr Townsley.

In addition to receiving the OPRs, Mr Naggar was also sent weekly figures showing what Hobart had earned in terms of commissions and interest received on the previous week’s business. These were sent to him by Mr Kelly who gave evidence at the trial. In his witness statement, Mr Kelly said that Mr Naggar had often commented on the weekly figures. Before he confirmed his statement in the witness box he corrected ‘often’ to ‘sometimes’.

In fact all the comments of which I have seen evidence occur before the Hobart business was spun out into the new corporate entity. The comments from Mr Naggar are entirely anodyne and certainly do not support the assertion that he was a director of the company once it was formed in October 2007.

In the Factors Document, the allegation is made that Mr Naggar gave instructions to Hobart employees about a range of matters relating to the treatment of Hobart clients. Nine kinds of instructions were listed with references to where they were dealt with in the evidence. Mr Thomas and Mr Naggar were both taken through each of these incidents in turn when they were cross-examined. Some of the incidents were in fact the same comments on the OPRs that I have already discussed. Others were matters for which Mr Naggar had a clear and convincing explanation. For example it was alleged that Mr Naggar gave instructions “not to chase certain clients for margin”. Mr Thomas could only recall one occasion where such an instruction had been given. That was an email regarding a company called Marlin Equities III LLP which was run by a close friend of Mr Naggar and was based in the USA. Mr Thomas said that Hobart accepted instructions on behalf of Marlin from Mr Naggar and that Mr Naggar told Hobart not to chase Marlin for margin. But Mr Thomas accepted that subsequently it was explained that the Connected Companies would cover margin owed by Marlin. This appears to be a one-off arrangement and does not amount, in my judgment, to Mr Naggar giving instructions that would only normally be given by a director of the company.

There were other instances too where a general allegation of how Mr Naggar used to act turned out on examination to refer to a single incident for which there was a particular explanation. For example it was alleged that Mr Naggar instructed Hobart to ‘print’ or report ‘certain trades’. On analysis there was only one occasion where Mr Naggar wanted a trade printed and where Mr Thomas consulted the Hobart compliance officer to ensure that this would not result in the market being misled. I accept Mr Naggar’s evidence on this point which is that he gave this instruction as a client and it was up to the management of Hobart to decide whether they were prepared to comply with his instruction. He also said that he had asked another CfD provider to do a similar thing and they had done it without raising any problems. It was also alleged that Mr Naggar gave instructions to book certain trades to parties unconnected with him or the Dawnay Day group. Again, there was in fact only one instance of this which involved a relative of Mr Naggar.

There was a dispute between Mr Naggar and the Hobart witnesses about the frequency with which Mr Naggar met the Hobart management to discuss the position of clients, risk profiles and other aspects of the business. Mr Naggar insisted that the suggestion of weekly meetings and discussions about Hobart taking place in corridors was a fantasy and completely absurd. On this aspect I find that Mr Berry’s and Mr Thomas’ evidence about such meetings elides the periods when the Hobart business was in incubation within DDBL with the period after it came under separate management. I accept that there were discussions and meetings between Mr Naggar and the Hobart management during the short life of the separate company but they are likely to have been less frequent than previously and, again, there is no evidence that anything discussed there went beyond Mr Naggar’s legitimate interest, as chairman of DDI, in the risks to which the new company was exposed.

I will not lengthen this judgment by going through each email and each explanation for it given by Mr Naggar in relation to each of the nines kinds of instructions alleged to have been given. I have considered each one carefully and have concluded that all of Mr Naggar’s interventions are readily explicable either on the basis of his role as client or Chairman of DDI or because they are one-off incidents arising from a particular unusual situation. Whether considered individually or taken as a whole, they do not evidence Mr Naggar’s involvement in the management of Hobart as a de facto director.

Mr Naggar, rather than the Board, made decisions about important aspects of Hobart’s business

The third class of incidents on which Hobart relies in support of the allegation that Mr Naggar was an informal director was that Mr Naggar rather than the Board ‘would make decisions over important aspects of the business of Hobart’. 11 kinds of conduct were set out in support of this. As regards this class of incident, I consider that decisions which were taken before 1 October 2007 when Hobart had no board of directors cannot be relevant.

Many of the incidents relied on in support of this were matters also relied on under other headings such as the purchase of the Fidessa trading platform (see paragraph 94, above) or the engagement of Colin Sandlan (see paragraph 95, above) or the display of artwork (see paragraph 100, above). Again, without setting out the detail of each and every incident in this judgment, I am satisfied having considered them all that they are incidents in which Mr Naggar was acting in another capacity or they are particular one-off situations in which his involvement was unremarkable.

Mr Naggar’s instructions causing Hobart to enter into the CfDs with the Connected Companies

The fourth and final set of incidents relied on by Hobart is that Hobart entered into the CfDs with the Connected Companies upon Mr Naggar’s instructions. So far as this point is concerned, it is clear to me that Mr Naggar’s instructions were given to Mr Fraser or other Hobart brokers on behalf of the Connected Companies (even if it was not clear at the time precisely which Connected Company) and this was well understood by everyone at Hobart. The instructions included not only instructions to acquire F&C shares to be referenced by subsequent CfDs but also instructions as to which of the Connected Companies should be the counterparty in the CfD with Hobart referencing a particular packet of shares. Mr Naggar could only give these instructions in his capacity as representative of the Connected Companies not in his capacity as director of Hobart.

In my judgment the evidence put forward falls far short of showing that Mr Naggar was involved in the management of Hobart after it became a separate company to any significant extent. The business continued to run along the lines that he had established when it started out as a division of DDBL. The Hobart management were aware that Mr Naggar was keeping an eye on the fortunes of the business and that he wanted to be provided with information to enable him to do this. But there is nothing that I have seen that goes beyond the involvement one would expect to see from a person who combined the roles of major client and chairman of the majority shareholder. So far as Mr Naggar being a shadow director is concerned, there is no evidence that the majority of the Board were accustomed to act in accordance with his instructions.

I therefore find that Mr Naggar was neither a de facto nor a shadow director of Hobart. It is not necessary therefore to consider the difficult legal and factual issues that would arise if my decision on this point had been different.

Section 190 of the CA 2006 (‘section 190’) provides as follows:

“190Substantial property transactions: requirement of members' approval

(1)

A company may not enter into an arrangement under which–

(a)

a director of the company or of its holding company … acquires or is to acquire from the company (directly or indirectly) a substantial non-cash asset, …

(b)

the company acquires or is to acquire a substantial non-cash asset (directly or indirectly) from such a director or a person so connected

unless the arrangement has been approved by a resolution of the members of the company or is conditional on such approval being obtained.

…

(5)

For the purposes of this section–

(a)

an arrangement involving more than one non-cash asset, or

(b)

an arrangement that is one of a series involving non-cash assets,

shall be treated as if they involved a non-cash asset of a value equal to the aggregate value of all the non-cash assets involved in the arrangement or, as the case may be, the series.”

An asset is ‘substantial’ for the purposes of section 190 if its value (a) exceeds 10 per cent of the company’s asset value and is more than £5,000 or (b) it exceeds £100,000: see section 191(2) of the CA 2006. Section 1163(1) of the CA 2006 defines a ‘non-cash asset’ as meaning any property or interest in property, other than cash. For the section 190 claim, Hobart does not have to establish that Mr Naggar was a director or shadow director of Hobart because he was undoubtedly a director of a ‘holding company’ of Hobart, namely DDI.

The claim that Mr Naggar was in breach of section 190 is put on two bases:

I must first consider whether the mechanism used to open CfDs during the course of the trading day involved Mr Naggar or one of his Connected Companies acquiring from Hobart the shares or an interest in the shares and/or subsequently passing those shares or interests in them back to Hobart.

The first step in the creation of a CfD was when Mr Naggar rang up a Hobart broker in the morning and indicated that he wanted to buy a volume of F&C stock. At that stage Mr Naggar did not specify whether it would be referenced by a CfD with Hobart or by a CfD with another provider and he did not indicate which of the Connected Companies would be the counterparty. There are many transcripts of conversations between Mr Naggar and Hobart’s brokers in which he instructs Hobart to buy shares. It is common ground that Hobart did in fact go into the market and buy shares at prices notified to Mr Naggar in those calls. However, both Hobart and Mr Naggar knew and intended that all those shares would be used to hedge CfDs rather than be held longer term by a Connected Company. I accept also that some of the shares were transferred by Hobart to other CfD providers if Mr Naggar decided that he wanted the Connected Company to enter into a CfD referencing those shares with another intermediary or bank rather than with Hobart.

Hobart does not have authorisation from the FCA to take a risk on share positions even for a moment- it can only act as a riskless principal (see paragraph 8, above). However, the rules of the Stock Exchange trading platform SETS and the London Clearing House stipulate that any broker buying stock must do so as a principal. If and when a CfD was created at the end of the trading day, Hobart had to be in a position to be able to transfer the entire interest in the shares to its own CfD provider (such an MF Global) to be held as a hedge for the CfD.

Hobart argues that because Hobart did not know at the point it bought the stock on Mr Naggar’s instruction which Dawnay Day company will be Hobart’s counterparty for the CfD, Hobart must have bought that stock as principal but on behalf of Mr Naggar personally. Hobart submits that this means that Mr Naggar acquired a proprietary interest in the shares at that point. Then, when all the shares to be acquired that day had been bought and Mr Naggar gave the instruction to open the CfD for the particular company, the rights were then transferred from Mr Naggar or one of the Connected Companies to Hobart in order for Hobart to pass those rights along to the CfD provider who was entering into the back to back CfD with Hobart to hedge Hobart’s risk on the CfD with its client. Otherwise, Hobart would constantly be in breach of the limitation imposed on its FCA authorisation.

Hobart’s expert witness, Mr Campbell-Gray stated in his report that a broker which does not have regulatory principal permission can buy and sell securities on behalf of a client during the course of the day. He says:

“This may sometimes look as though the broker is at risk in the market, but this is not in fact the case. It is accepted by the regulators as being part of what may be referred to as an agency model or a broker acting as back to back (or riskless) principal.”

Mr Campbell-Gray described situations in which this might happen. He said that in his firm, it was entirely standard for a hedge fund client to give instructions for the acquisition of shares within parameters and then later to give instructions as to which of their multiple accounts they want the shares booked to or whether they are to be sold to a CfD provider. He says that during the time after the shares are bought by the broker but before the CfD is issued the shares are “regarded as being the client’s shares” so that the client is responsible for any loss and takes the benefit of any gain resulting from market movements in the price of those shares. Further, if there were a corporate action in respect of the shares during the course of the day, the broker would be duty bound to give the entirety of the benefit of that corporate action to the client and the client would be bound, if the action were detrimental to his interest, to accept it. He says it is his professional understanding that “when an order is passed by a client, it is binding and the client has total ownership of the execution as long as the execution is within the criteria set out by the client in the first place”. He considers that the client therefore obtains an interest in the underlying shares in the sense that he has explained.

Dr May, instructed by Mr Naggar, did not take issue with much of what Mr Campbell-Gray said so far as what happens in practice during the course of the trading day. But he did not accept that this required or resulted in any transfer of ownership of or any other interest in the shares from Hobart to Mr Naggar and then back from Mr Naggar to the Connected Companies. He pointed to the facts that:

Dr May agreed that as soon as the shares were bought at the start of the day, the market risk lay with the person on whose behalf the instructions to purchase had been given. But he rejected the idea that the effect of that was that ownership of or any other proprietary interest in the shares had to be transferred by Hobart to Mr Naggar in order for that to happen. As to what would happen if the person who gave the instruction tried to walk away from the transaction before the CfD was opened, Dr May referred to an instance he had experienced when the client had died in the course of the day. He said that in such a case the broker would sell the shares and, if the price had fallen, would pursue the estate for the loss suffered. But this liability would not arise because the shares had been sold to that client but because the client had assumed the liability on a contractual basis. When pressed as to how this would have worked if the client had clearly been giving instructions not on his own behalf but on behalf of an as yet unidentified company among a pool of potential client companies Dr May said that would give rise to “a very interesting legal situation”.

When pressed also about how it was that Hobart was not constantly in breach of the limitation on its authorisation, Dr May referred to a rule which deals with just this situation. In the prudential section of the rules promulgated by the Financial Conduct Authority at the time, (BIPRU 1.1.23R. section 2) is a rule which states (emphasis added):

“(2)

… [an] investment firm that executes investors' orders for financial instruments and holds such financial instruments for its own account does not for that reason deal on own account if the following conditions are met:

(a)

such position only arise as a result of the … investment firm's failure to match investors' orders precisely;

(b)

the total market value of all such positions is no higher than 15% of the … investment firm's initial capital;

(c)

[it complies with large exposures requirements];

(d)

[it complies with its domestic capital requirements if it is an EEA firm];

(e)

…; and

(f)

such positions are incidental and provisional in natureand strictly limited to the time required to carry out the transaction in question.”

This exemption is reflected in the permission granted to Hobart by the FCA which authorised the company to deal in investments as principal but subject to the important limitation that it was (emphasis added)

“Unable to hold investors’ financial instruments for own account unless the following conditions are met:

(i)

such positions arise only as a result of the firm’s failure to match investors’ orders precisely;

(ii)

the total market value of all such positions is subject to a ceiling of 50% of the firm’s initial capital;

(iii)

the firm meets the requirements laid down in articles 18, 20 and 28 of the re-cast Capital Adequacy Directive; and

(iv)

such provisions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question”

Hobart submitted that this exemption from the limitation could not have been relied on by Hobart in its day to day dealings to prevent its acquisition of F&C shares on the instruction of Mr Naggar being a breach of the limitation. Hobart points out that the conditions in both the BIPRU rule and in the limitation set out in its permission are cumulative, not alternative. The exemption can only operate where the first condition applies, namely that the position has arisen as a result of a mistake on Hobart’s part in matching orders. This is not what happened on a day to day basis. Therefore they argue that the only way one can explain why Hobart was not regarded as constantly engaging in activity outside its authorisation is to conclude that the interest in the shares acquired moved to Mr Naggar personally as soon as they were acquired and then moved back later to enable Hobart to pass that interest to the back to back CfD provider who wanted the shares to hedge the CfD.

On this point I prefer the evidence of Dr May. I do not see that the creation of a proprietary interest on the part of Mr Naggar or a Connected Company when Hobart buys the shares during the course of the day is necessary for the mechanism to work. That is not what happens as a matter of fact or of law. All that is needed for Hobart to operate as it does is a rule or practice on the part of the FCA to the effect that when Hobart buys shares on behalf of a client, the FCA will not regard Hobart as going beyond the limit of its authorisation provided that it is clear at the time the shares are bought that by the end of the trading day a client will be responsible for the shares and will accept retrospectively anything good or bad that has happened in relation to those shares in the intervening period.

The FCA is content for Hobart, and other brokers in a similar position, to treat the counterparty identified at the end of the day as having assumed the market risk as at the moment when the shares were bought. It may be – and according to the evidence this is not uncommon – that the precise identity of the client is not known when the instruction is given. This happens where the individual giving the instructions to the broker is authorised to give such instructions on behalf of more than one of the broker’s client companies and has not yet decided who will be the counterparty. The answer to the question: how does this fit with the riskless principal concept is simply that the FCA and everyone else involved in the transactions is content to treat the whole transaction as being ‘back-to-back’ even though there is a time lag of a few hours between the different steps. The practice is a convenient way to square the circle of brokers retaining the benefits (in terms of reduced capital requirements) that come from being precluded from taking on market risk while at the same time the trading platforms such as SETS retain the benefit of always dealing with principals rather than agents. There is no evidence that the FCA or the market treats what is happening as involving the transfer of proprietary interests in the shares back and forth during the course of the day.

In my judgment, therefore, the mechanism for creating the CfD does not constitute an arrangement under which Mr Naggar acquires an asset from Hobart or under which Hobart acquires an asset from him.

Mr Naggar’s evidence is that he was actively involved in trying to generate interest in F&C as a takeover target. However, he strenuously denies that it was ever his intention to take the F&C shares physical if his plan had succeeded – his intention was only ever to close the CfDs once the price of the F&C shares had risen and receive the difference from Hobart. F&C was far too large a company in terms of market capitalisation for the Dawnay Day group to swallow. Moreover, the attraction of F&C as a target was the cost savings that could be made by amalgamating the F&C business with another similar business. The Dawnay Day group could not achieve those synergies since it was not in the same kind of business as F&C. Mr Naggar’s plan would only work if he could interest another asset management company in acquiring F&C.

His evidence on this point was supported by that of Martin Gilbert who was and still is the Chief Executive of Aberdeen and who attended various meetings with Mr Naggar once Mr Naggar and Mr Berggruen announced that they had acquired a substantial stake in F&C. He said that he always realised that the stake that was held by Mr Naggar, through his companies, was in the form of CfDs rather than the physical shares. He said that Aberdeen had no interest in Mr Naggar as the potential holder of a physical stake in F&C shares. He was interested initially in meeting Mr Naggar because he was curious why the Mr Naggar thought there was value in a stake in F&C, how he thought he would make money out of it, whether there was a potential deal and whether Mr Naggar had spoken to F&C management. He said that the discussions with Mr Naggar did not get to the stage where they considered how the various stakes held by major shareholders would be voted.

Both Mr Naggar and Mr Gilbert emphasised that the mutual insurance company Friends Provident owned 52 per cent of the shares of F&C and could ‘deliver’ F&C to any buyer who met with their approval. There was no point, they said, in Hobart planning to take the F&C shares physical in order to encourage a potential bidder for F&C since Dawnay Day’s shares would be neither necessary nor sufficient to enable any bid to succeed.

For its part, Hobart relies on various matters as showing that Mr Naggar’s intention was to take the shares physical. First, there are indications in the contemporaneous documents that Mr Naggar was concerned about the application of the Takeover Code rules on disclosure of aggregate interests by concert parties. (Footnote: ⁴)

Mr Naggar wrote to Mr Berggruen on 28 June 2007 stating that “as at 27 June 2007, Dawnay Day owns 42,952,350 shares (by way of CfD) of [F&C] representing 8.9% of the issued share capital’. The letter then set out the terms of the agreement between them under which they would ‘acquire between us in aggregate up to 20% of the Ordinary Shares of [F&C]’. The letter refers to the fact that Mr Berggruen’s company would be ‘acting in concert’ with Mr Naggar. Hobart relies on the reference in this letter to the purchase of shares as indicating that at this stage, the intention was to purchase physical shares. Hobart also argues that the reference to ‘acting in concert’ is a reference to the Takeover Code rules about disclosure of interests in shares.

Further, in one of his conversations on 8 January 2008 with the Hobart broker, Mr Naggar asked for information about the highest price at which F&C shares had been acquired. This question, Hobart argues, indicates that Mr Naggar had in mind the Takeover Code rule that a takeover bidder must offer to buy the target’s shares at a price no lower than the highest price he has paid for shares over the previous 12 months. (Footnote: ⁵) There were also various references in analyst reports and other contemporaneous documents which indicate that one option being considered was for Dawnay Day to acquire F&C with a joint venture partner.

The parties disagreed about how likely it was that Hobart would be able to take the shares physical if it wanted to be able to vote those shares in favour of a particular bid. Mr Naggar said that this was not guaranteed in the case of F&C, contrasting this with the position in the earlier purchase of Austin Reed where Dawnay Day had entered into a separate agreement with the CfD provider to ensure that the shares could be taken physical. Hobart points to the references in FCA Consultation documents about CfDs which refer to the practice of building stakes in companies through entering into CfDs referencing the target’s shares and the general ability to take shares physical. On this point, I consider that where the shares referenced by a CfD are easily available, a CfD holder can be confident of being able to take the shares physical even without a supplementary agreement with the provider. I therefore do not accept that the absence of such a supplementary agreement in this instance proves that Mr Naggar had no intention of taking the shares physical at some future point.

In my judgment the truth as to Mr Naggar’s intentions lies somewhere between the opposing positions adopt by the parties. I do not accept Mr Naggar’s vehement denial that he did not envisage, under any circumstances, taking the shares referenced by the Connected Companies’ CfDs physical. Similarly I consider Mr Gilbert would have had in mind that it might be helpful to a bidder if the concert parties’ shares were taken physical or at least that they were released to the market en bloc if the CfDs were closed out at an appropriate moment. The contemporaneous documents show clearly that this was a possibility. Converting the CfDs into physical shares may well have proved useful if, for example, the Friends Provident shareholding in F&C had dropped to less than 50 per cent by the time Mr Naggar’s scheme came to be realised so that Aberdeen needed additional votes to win the day. In his witness statement Mr Naggar refers to the fact that in January 2008, Friends Provident indicated that it planned to dispose of its 52 per cent shareholding in F&C. Mr Naggar says that that encouraged him to increase the CfD positions of the Connected Companies. Mr Gilbert also referred to a decision that had already been announced, though not implemented, by Friends Provident to distribute their shareholding in F&C among their own shareholders in an in specie distribution. It may well have been attractive to Aberdeen to obtain the Connected Companies’ shares once they had been taken physical in order to bring them up to the 90 per cent holding that would enable them to acquire the whole of F&C’s share capital.

On the other hand, I do not accept Hobart’s submission that Mr Naggar had a settled intention either that the Dawnay Day group would bid itself for F&C or that it would take part in a consortium bid so that it was definite that the overall arrangement would result in Mr Naggar acquiring the shares. One foreseeable outcome was that no bidder would come forward for F&C but that Mr Naggar might have been able to close out the CfDs profitably, taking advantage of a higher share price whilst it was buoyed up by takeover talk. Another possible outcome was that in fact the F&C share price would start to drop and the Connected Companies would decide to close the CfDs and cut their losses. In either of those scenarios the hedging shares would not be taken physical by Mr Naggar or a Connected Company.

Mr Crystal submitted that the wording of section 190(1) requires a high degree of certainty at the time when the arrangement is entered into that the asset will be acquired. I agree with that submission. Here, the most that can be said is that the overall arrangements entered into were arrangements under which Mr Naggar or his companies might at some future point acquire the shares in F&C. This would depend on how negotiations developed and what arrangements any bidder ultimately wanted to make with Dawnay Day and the concert party. That possibility is not enough to bring the arrangements within the wording of section 190 because they were not arrangements under which Mr Naggar acquired or was to acquire the shares.

In my judgment, the section 190 claim fails on both the narrow and the wider basis.

The Particulars of Claim as originally served in January 2011 did not contain a claim based on misrepresentation. However, in February 2013 amendments were made which alleged that Mr Naggar made, or caused to be made, a series of misrepresentations. The misrepresentations are alleged to be express and implied.

So far as express misrepresentations are concerned, the pleaded case is complex but broadly comprises:

In both cases the alleged misrepresentation was, again broadly, that there were no problems in connection with the business of the Dawnay Day group and that the companies in the Dawnay Day group ‘were well able to meet all of their financial obligations to Hobart including any obligation to meet any margin calls that might thereafter materialise’.

There are also alleged implied misrepresentations to the effect ‘that the financial status of the Dawnay Day group … had not changed’ said to have been made by continuing to instruct Hobart’s directors and employees to enter into CfD contracts with those companies at the same margin call rates. As regards the Mariona Transfer (see paragraph 23, above) it is alleged that there was an implied representation by Mr Naggar when he gave instructions for that to be done to the effect that Mariona Limited was no less able to meet any margin call under the CfD’ than Fitzgerald.

It is further alleged that those misrepresentations were false; that they were made negligently because Mr Naggar ought to have known that, as at the date of the misrepresentations, the Dawnay Day group was either insolvent or at serious risk of insolvency; that Hobart relied on them; and that Hobart has thereby suffered the loss claimed.

As regards the general allegation that assurances were sought and received in mid 2008, there is no documentary evidence to support this. Hobart sought to rely on a letter sent by Hobart to Wragge & Co, the solicitors acting for the Secretary of State in the investigation into the collapse of the Dawnay Day group. One of the questions asked by Wragge & Co was how Hobart satisfied itself of the Connected Companies’ financial position prior to entering into the CfDs. The reply sent by Hobart was that:

“We were instructed to open these accounts by Mr Naggar who with his business partner had 100% control of our business at the time the accounts were opened. He had confirmed to us that the group of companies had sufficient assets to meet their liabilities. This was continually reconfirmed … over the periods that the accounts were opened. In the weeks before the collapse of the group we had called a meeting with Mr Brian Smouha (one of the most senior Directors of Dawnay Day International Limited) to discuss DDIB and we were assured that there was ample capital within the group to continue running all of the businesses and their positions. The group had, without fail, always successfully met their margin calls on all of the formal and informally related group companies. We were also assured by a number of group directors and employees that the group had significant liquid assets to meet any obligation the group would entire into. We hold a number of documents containing financial information …”

I do not accept that this statement supports the case now being put forward by Hobart. Indeed the case pursued at trial was significantly watered down from what was said to Wragge & Co at that earlier stage. There is now no allegation that representations were made directly by Mr Naggar to anyone in Hobart about the health of the Connected Companies. All that is pleaded in the Re-Amended Particulars of Claim is that statements were made by Mr Naggar to Mr Pincus and Mr Keane to be repeated by them to Hobart. The alleged content of the misrepresentations is also now much vaguer than set out in that letter.

Further, if there really were concerns among the management of Hobart about the ability of the Connected Companies to meet their liabilities and those concerns caused the management to seek assurances from DDI executives and employees, then that is something one would expect to see committed to writing in email or memo to provide a record for the future in case things came to grief. I therefore reject the allegation that there were any general misrepresentations made to Hobart in mid 2008.

The background to the meeting held on the morning of 4 June 2008 was a deep unhappiness within the Hobart management about the fact that the Dawnay Day group had set up an investment banking business called Dawnay Day Investment Banking Ltd (‘DDIB’). The complaints were sparked when Mr Pincus drew to Mr Townsley’s attention to the fact that when the words ‘Dawnay Day’ were entered into an internet search engine, the results displayed showed a sponsored link to the website of DDIB. That company was described on the search results page as an integrated stock broking and investment business.

The Hobart senior management were concerned that Dawnay Day seemed, by sponsoring that link, to be favouring the DDIB business over the Hobart business – at that time Hobart was in fact called Dawnay Day Capital Markets Ltd. Mr Thomas in an email described the situation created as ‘100% unacceptable and highly group unfriendly’. Mr Berry referred to the fact that he was getting calls from the market and clients who were very confused about who does what at Dawnay Day and he said that he thought it ‘extremely frustrating and annoying’ that confusion had been created between Dawnay Day Investment Banking and Hobart.

The meeting on 4 June 2008 was held for this problem to be discussed. It was attended by (at least) Mr Gelber, representing DDI, Mr Pincus and Mr Keane as the DDI nominated directors of Hobart, and Mr Townsley and Mr Thomas on behalf of the Hobart management. It was common ground that Mr Townsley expressed Hobart’s concerns forcefully to Mr Gelber during the course of the meeting which lasted no more than 30 minutes.

Mr Thomas’ recollection was that one of the points raised by Mr Townsley was whether the Dawnay Day group had enough money to set up the new investment business of DDIB while still supporting Hobart. He says that they were assured that there was enough money for both. Neither Mr Townsley nor Mr Thomas could remember the exact words spoken or by whom they were spoken but they were very sure that the question had been asked and answered. Mr Thomas’ evidence of what happened at the meeting included the following:

‘I do not know who confirmed to Barry [Townsley] when he was – when Barry raised the question, but someone did confirm that the group had no financial problems. Barry was particularly -- I was very impressed with him, actually. I mean, I don't particularly like him being aggressive, but he was looking -- he was going through all the points, every single one. It's like he had pre-thought it, about this is the problem, that's the problem and one of the things, as I mentioned earlier, was he was concerned that if they were investing in a new investment banking group that there would be insufficient cash in the group to finance both, and he did get an assurance that there were no problems in the group, but I cannot tell you who said it.’

Mr Gelber and Mr Pincus were equally emphatic that this point had not been mentioned at the meeting – that no assurance along these lines had been either sought or given. In the middle of his cross-examination Mr Pincus (to the surprise of everyone in court) produced from his pocket a short note he had made after the meeting. The note made no mention of any assurance though that of course does not prove that such an assurance was not sought or given.

Mr Keane says that he does not recollect what happened at the meeting. But he thinks that he would have remembered if an assurance about the financial health of the company had been sought or given. He considers it unlikely that anyone would have had a concern about the health of the group at that stage, although he himself was, by that time, actively engaged with Mr Naggar in dealing with the cash flow crisis that was soon to engulf the group.

With some hesitation I accept Mr Thomas’ and Mr Townsley’s evidence that amongst the list of concerns raised by Mr Townsley during the heated discussion about DDIB at the meeting on 4 June 2008 was a concern that Dawnay Day’s resources might be spread too thin by the addition of DDIB. I also accept that he and Mr Townsley came away from the meeting with the impression that Mr Gelber had rejected that – as well as every other - reason why DDIB threatened the prospects for the future of the Hobart business.

However, I find that any assurance given was no more than an ‘off the cuff’ remark made by one of the DDI-nominated directors in response to a list of complaints raised by Mr Townsley. Concerns about the financial health or otherwise of the Dawnay Day group are not expressed at all in the email exchanges among the angry Hobart management in the lead up to the meeting. They focus entirely on the confusion generated in the market by the presence in the market of DDIB. I find that it is likely that the possible overstretching of the group’s resources was put forward by Mr Townsley as one of a number of reasons why DDIB was a bad idea, and that this reason was rejected by the DDI nominated directors. Looking back on that meeting with the benefit of hindsight, Mr Townsley and Mr Thomas consider that this amounted to an assurance that there was no shortage of money within the group. In my judgment whatever was said fell far short of being a firm statement of the kind alleged and did not amount to a representation by the DDI nominated directors that there were no financial difficulties within the Dawnay Day group.

Mr Townsley met Mr Naggar later in the afternoon also on 4 June 2008 to discuss the same issue. Mr Townsley accepts that he did not raise the adequacy of the Dawnay Day group’s resources with Mr Naggar at that meeting. Further, when Mr Townsley reported back by email to his colleagues on the result of the two 4 June meetings, Mr Townsley referred only to the confusion in the names of the two companies. He did not pass on any assurance received about financial matters. This evidence confirms my view that what was said at the 4 June morning meeting about the finances of the Dawnay Day group was not regarded as significant by Mr Townsley or Mr Thomas at the time and they did not treat it as a statement on which they could rely.

In any event, there is absolutely no evidence to support the assertion that Mr Gelber, Mr Pincus or Mr Keane were passing on information that they had been provided with by Mr Naggar, still less that Mr Naggar gave them such information with the intention that they pass it on to the Hobart management. This claim is not made against those men personally but only as conduits for misrepresentations from Mr Naggar. There is no evidence at all that they acted as such a conduit for this purpose.

Finally, Hobart alleges that implied misrepresentations were made to the effect that all was well with the Dawnay Day group and that those misrepresentations arose from the continued course of dealing in CfDs between Hobart and the Connected Companies after it should have been apparent to Mr Naggar that they would not be able to meet their margin calls.

It is fair to say that this point was put forward rather tentatively by Mr Marshall, and with good reason. If it were the law that executives negotiating a contract on behalf of their company thereby give a personal collateral representation that the company is willing and able to perform its obligations under that contract in all circumstances, one would expect to see this cropping up in litigation arising in the wake of many insolvent companies. Similarly if there were a continuing personal duty on the part of those executives to warn the counterparty of subsequent problems that might lead their company to be unable to meet its obligations, one would expect to see this relied upon frequently in the courts.

Mr Marshal submitted that the situation was different here because the client accounts were opened by Hobart for the Connected Companies without carrying out the usual creditworthiness checks at Mr Naggar’s insistence. It is accepted that at the time this occurred, in January 2008, Mr Naggar had no reason to think that the Connected Companies would soon be facing financial problems. But he submitted that Mr Naggar came under a duty to alert Hobart when the creditworthiness of the Connected Companies was reduced. Even if it were true that Mr Naggar’s assurances in January 2008 led Hobart to open client accounts without carrying out credit checks – and that is strongly disputed by Mr Naggar – that does not amount to a personal representation by him that the Connected Companies will meet all future liabilities. It does not place on Mr Naggar a duty to alert Hobart of subsequent financial difficulties within the group.

I therefore find that no misrepresentations were made by Mr Naggar to found the basis for this limb of Hobart’s claim.

I therefore find that all three limbs of Hobart’s claim against Mr Naggar fail and the claim is dismissed. The third party proceedings also fall away as a consequence.