Vol 11 (2014) - Issue 4

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Vivendi SA v Richards [2013] EWHC 3006 (Ch)

Introduction
Vivendi SA v Richards [2013] EWHC 3006 (Ch) is an important decision of Mr Justice Newey as to the duties of shadow company directors. The claim was brought by Vivendi SA ('Vivendi') having been assigned the rights to the action by the liquidators of the second claimant Centenary Holdings III Limited ('CH3'). Vivendi brought proceedings against Stephen Bloch (who had been a de jure director of CH3) and Murray Richards (who it alleged was shadow director) for breach of duty in respect to over GBP 10 million in payments made by CH3 prior to its winding-up. As will be discussed below, Newey J considered that the hither-to leading authority Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) understated the extent to which shadow directors owed fiduciary duties.

Factual background
CH3 became part of the Vivendi group in 2000 but by 2003 was no longer trading. In addition to some valuable assets, CH3 held a number of leases but which represented significant liabilities. The most significant of its leases was in respect to a property in Hammersmith called the Ark, for which a GBP 35.4 million provision had been made in its 2002 accounts. CH3 had no right to terminate its leases until the end of 2010 or early 2011 and the Ark's annual rent and related charges amounted to GBP 6.5 million. Vivendi wished to dispose of a number of the group's non-core assets including the Ark.
Mr Richards' brother, Mr Harrod, was the financial controller of CH3's parent company, and had been asked by Mr Richards to look out for projects for him. However, CH3 could not assign its leases in the Ark to one of Mr Richards' companies because the freehold owner required the leaseholder to have a triple-A rating. The solution chosen instead was for Vivendi to transfer CH3 itself, having first removed various assets, and for there to be a reverse premium of GBP 15 million to take account of CH3's lease obligations. A complicated series of steps was undertaken which resulted in CH3 becoming owned by a company indirectly beneficially owned by Mr Richards.
On the day of completion on 22 January 2004, Mr Bloch (who had known Mr Richards since the mid- 1990s) became CH3's sole director. In July 2005, Mr Harrod became a full-time employee of CH3. Mr Richards was appointed under a consultancy agreement dated March 2004 to provide consultancy services to CH3, with his express obligations including the requirement to 'well and faithfully serve CH3' and 'use his best endeavours to promote the interests of CH3'. Under the agreement, an up-front payment of GBP 600,000 was made by CH3 to one of the companies beneficially owned by Mr Richards.
Notwithstanding that the mechanics of CH3's transfer had assumed that rental income would be generated by letting the Ark, no rental income at all was produced by the time CH3 went into liquidation in 2005. A dividend of GBP 5.314 million had been declared and paid nonetheless. On 9 June 2005, Mr Bloch passed a resolution for a petition to be presented for CH3 to be wound up, which was duly presented and liquidators were appointed.

Vivendi's claim
The claim related to various payments made by CH3 between March 2004 and February 2005, namely (i) the consultancy agreement payment, (ii) the dividend, and (iii) 7 payments totalling GBP 4.157 million by way of loans and investments to various companies some of which were controlled by Mr Richards.
Vivendi's case was that Mr Bloch acted in breach of the duty of good faith (or loyalty) in procuring CH3 to make these payments, and that Mr Richards owed and breached similar obligations as a shadow director, and also dishonestly assisted Mr Bloch's breaches of duty. The proceedings were not issued until May 2011, more than 6 years after the last of the payments were made. As a result, Vivendi accepted that its claims would be statute barred unless it could rely on subsection 21(1) of the Limitation Act 1980 ('the 1980 Act'), of which paragraph (a) made it essential that Vivendi establish dishonesty on the part of the directors.