IP Briefing – Banks in the Shadows!
Introduction
The First Division of the Inner House of the Court of Session issued its opinion in the appeal of Liquidators of DMWSHNZ Ltd v the Bank of Scotland PLC on 26 July 2024. The company in liquidation had previously been a subsidiary of the Bank of Scotland. The company had been involved in an historic transaction that would give rise to a future tax charge. A restructuring to avoid or mitigate the tax charge was attempted. The scheme partly involved the transfer of funds away from the company. The tax mitigation scheme failed, and the net result of the scheme was that the company in liquidation had transferred the funds to another bank. The company was now left without funds to make payment. A sum of over £26 Million was sought by the liquidators on the grounds that the Bank had been shadow directors of the company, and they had breached their fiduciary duties, or alternatively they had been unjustifiably enriched.
The Commercial Judge had rejected the Bank’s plea for dismissal of the action. The Bank had said a claim for shadow directorship could not succeed because these circumstances could not amount in law to shadow directorship. This was the decision now appealed against by the Bank.
Shadow Directors
The opinion of the Court is well worth reading for anyone involved in insolvency investigations. Delivering the opinion of the court, Lord Tyre said of the law on shadow directors:
“The policy is clear: to impose the same duties and liabilities on persons in accordance with whose directions or instructions the appointed directors of the company are accustomed to act. The process of interpretation and application of the statutory definition must accord with that policy. A purposive construction requires consideration of the whole circumstances of a particular case, while paying due respect to the separate legal personality of corporate entities..”
The Court rejected the Bank’s view that simply because a person exercising influence on directors had a separate capacity “to which their actings had to be attributed”, this was a reason to reject the possibility of shadow directorship. The liquidators’ case was suitable to go to proof to hear evidence and the appeal was refused.
Advice
The decision acts as a warning for parent companies in particular. There is a danger that if they give instructions directly, or even indirectly, to subsidiaries, then depending on the circumstances they could be held to be shadow directors. For those of us investigating corporate insolvencies the decision is well worth reading because there may be circumstances where shadow directorship would have been dismissed from mind that should now conceivably be considered under Scots Law.
The judgement can be found here:
BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb@bbmsolicitors.co.uk).This briefing note is current as at 26 July 2024 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).