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DMWSHNZ LTD and others against Bank of Scotland Plc (Court of Session) [2024] CSIH 18 (26 July 2024)
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[2024] CSIH 18
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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
[2024] CSIH 18
CA105/20
Lord President
Lord Pentland
Lord Tyre
OPINION OF THE COURT
delivered by LORD TYRE
in the Reclaiming Motion
by
DMWSHNZ LIMITED (in liquidation) and MARK WILSON and JAMES ASHLEY
DOWERS, the liquidators thereof,
Pursuers and Respondents
against
BANK OF SCOTLAND PLC
Defenders and Reclaimers
____________
Pursuers and Respondents: D Thomson KC, Watt; Anderson Strathern LLP
Defenders and Reclaimers: Borland KC, Roxburgh; Addleshaw Goddard LLP
26 July 2024
Introduction
[1]
DMWSHNZ Limited ("the company"), formerly known as BOS Holdings (New
Zealand) Limited, was until 2003 a subsidiary of the defenders, who were in turn a member
of a group whose ultimate parent was HBOS plc. In 1998, the company sold its 100%
shareholding in a subsidiary called Countrywide Banking Corporation Limited for
2
NZ$850,000,000, payable under and in terms of loan notes. The sale gave rise to a capital
gain which was not immediately chargeable to corporation tax but would become
chargeable on redemption of the loan notes. The defenders wished to mitigate that tax
liability. They sought advice from Ernst & Young plc.
[2]
At that time the defenders were secured creditors of an insolvent split capital
investment trust called Geared Income Investment Trust plc ("GIIT"), as were Lloyds TSB
Bank plc. Ernst & Young proposed a restructuring which would permit some of the
company's capital gains to escape taxation by being set against losses incurred by GIIT. The
proposed scheme included the appointment by the defenders and Lloyds of administrative
receivers to GIIT, the creation of a subsidiary of GIIT called GIIT Realisations 3 Limited
("GIIT 3"), the purchase by GIIT 3 of shares in the company, and the making of elections to
transfer, for tax purposes, the losses incurred by GIIT, and the gains realised by the
company on redemption of the loan notes, to GIIT 3 where they would be set off against one
another. In consideration of the making of the election, the company made a payment
equating to the potential tax liability to GIIT 3, where that sum was used to pay a dividend
to GIIT which in turn made a distribution to the defenders as secured creditors.
[3]
The scheme failed. HMRC refused to accept that the election to transfer the
company's gains to GIIT 3 was effective in terms of the relevant statutory requirements.
Appeals by the company to the First-tier Tribunal, the Upper Tribunal and the Court of
Court was refused. The company was left with a tax liability which it had no funds to meet.
In 2004 it entered members' voluntary liquidation.
[4]
In this commercial action the company and its liquidators seek payment of
£26,602,775 from the defenders on the ground that the defenders were shadow directors of
3
the company who breached their fiduciary duty and duty of care to the company by
procuring its participation in the scheme for their benefit, and without regard to the best
interests of the company. Alternatively, they seek payment of £26,607,758 from the
defenders on the ground that the defenders have been unjustifiably enriched at the
company's expense because, standing the ineffectiveness of the election, no sum was
payable to GIIT 3.
[5]
The case called before the commercial judge for debate of the defenders' preliminary
plea that the company's pleadings in support of both grounds of action were irrelevant, and
that the action should be dismissed. In his opinion dated 13 July 2023 ([2023] CSOH 47) the
commercial judge rejected the defenders' arguments in relation to both grounds, and
refused the motion to dismiss the action. The defenders now reclaim (appeal against) that
decision with the leave of the commercial judge. As regards the company's first ground of
action, the principal issue arising is the application of the law relating to shadow
directorship to a company with only corporate directors.
Project Raindrop
[6]
For the purposes of these proceedings, the pursuers' pleadings which are unduly
long and repetitive, especially for a commercial action, are taken pro veritate. There is no
material dispute as to the steps taken to implement the proposed tax avoidance scheme, but
it should not be assumed that all of the details of the following narrative, which is based on
the pursuers' averments, are a matter of admission.
The proposed scheme
[7]
By April 2002 Ernst & Young's corporate recovery department were developing a
4
plan to realise value from losses suffered by failed split capital investment trusts. Their
team included Mr Patrick Brazzill and Ms Margaret Mills, both insolvency practitioners.
The target market was banks who could appoint receivers. At a meeting in August 2002 the
defenders' Mr Kerr Cruickshank indicated to Ernst & Young that they had a use for capital
losses in relation to the Countrywide capital gain. Ernst & Young advised that receivership
was a pre-requisite and that appointment of receivers from within that firm would facilitate
implementation of the plan. On that basis the defenders in due course supported the
appointment of Mr Brazzill and Ms Mills as receivers, and proceeded on the assumption that
the receivers would implement the scheme in accordance with their directions.
[8]
The scheme devised by Ernst & Young, and supported by senior English tax counsel,
consisted of a pre-planned series of steps. It was described in correspondence between Ernst
& Young and the defenders as "tiptoeing through the raindrops of complex anti-avoidance
rules without getting wet". The scheme came to be referred to as Project Raindrop. The
defenders were aware, having been so advised by counsel, that HMRC would challenge it if
they could, and were further aware that if the scheme failed, the company would be left
with HMRC as a creditor and no means to pay. Ernst & Young made clear that the scheme
would not be implemented without the receivers having the benefit of an indemnity by the
defenders against any personal liability that they might incur for unpaid tax arising in
connection with it.
Implementation
[9]
On 8 April 2003 the defenders and Lloyds appointed Mr Brazzill and Ms Mills as
joint administrative receivers of GIIT. Members of Ernst & Young's tax advisory team
worked with the receivers to implement the scheme.
5
[10]
Implementation of the plan proceeded during October to December 2003 as follows:
(i)
On 3 October, the directors of the company resigned and were replaced by
three new directors including Mr Cruickshank.
(ii)
On 9 October, the company transferred to a separate company in the
defenders' group its interest in the amount of loan notes that it no longer required.
(iii)
On 15 October, the company's share capital was restructured into 99,999
A ordinary shares and one B ordinary share. The new articles in essence gave the
defenders the right to appoint a director with power to veto the sale of the
company's remaining loan notes. Mr Cruickshank was appointed as that director.
(iv)
Assets consisting of securities were hived down from GIIT to two newly
incorporated subsidiaries (GIIT 1 and GIIT 2). The defenders' share went into GIIT 1.
GIIT then transferred 26% of its shares in GIIT 1 to a company outside its capital
gains group, thereby triggering a capital loss on the assets hived down to GIIT 1.
(v)
GIIT 3 was incorporated as a further subsidiary of GIIT. GIIT was appointed
sole director of GIIT 3.
(vi)
The defenders lent GIIT £99,999 to fund the purchase of the company by GIIT
3 from the defenders, which purchase was effected on 22 October. GIIT and GIIT 3
were appointed directors of the company and, with the exception of Mr Cruickshank,
the previous directors resigned.
(vii)
On 28 November, the loan notes were repaid to the company, bringing the
held-over capital gain into charge to tax.
(vii)
On 1 December, Mr Cruickshank resigned as a director of the company,
leaving GIIT and GIIT 3 as its only directors. The company then entered into an
agreement with GIIT 3 to make a joint election to deem the disposal on repayment of
6
the loan notes to have been made by GIIT 3. The agreement provided for the
company to pay £26,607,758 to GIIT 3 in exchange for making the election. On the
same date GIIT 1 and GIIT 3 submitted an election to treat losses accruing on deemed
disposals of assets by GIIT 1 as accruing to GIIT 3.
(viii) On 5 December, the company paid £26,607,758 to GIIT 3. On 8 December
GIIT 3 paid a dividend of £26,502,776 to GIIT, being the election consideration
received from the company under deduction of a small amount in respect of GIIT 3's
liabilities. The following day GIIT paid a distribution of £26,602,775 to the defenders
as secured creditors, which sum was made up of the dividend received from GIIT 3
plus repayment of the loan of £99,999.
(ix)
On 8 December, the defenders executed a deed of indemnity in favour of the
joint receivers, agreeing to indemnify them against any liability which they might
incur personally for unpaid tax arising as a result of or in connection with "the
reconstruction", ie Project Raindrop. The indemnity was stated to be conditional on
the reconstruction having been implemented in terms of the steps set out in a
schedule to the deed.
[11]
The decision by the company to enter into the agreement with GIIT 3 was taken at a
board meeting on 1 December 2003, the persons present being listed as "[GIIT 3], Director
(acting by Patrick Brazzill as administrative receiver of [GIIT], without personal liability)",
and "{GIIT} (in administrative receivership), Director (acting by Patrick Brazzill as
administrative receiver without personal liability)". Mr Brazzill was the only natural person
present. Having received Mr Cruickshank's letter of resignation, the meeting unanimously
agreed that it was in the best interests of the company to enter into the agreement with GIIT
3, and the two directors were authorised to cause the company to enter into it. The
7
agreement to enter into the joint election was executed on behalf of the company by
Mr Brazzill acting as joint administrative receiver of GIIT on behalf of the company's
directors GIIT and GIIT 3, and on behalf of GIIT 3 by Mr Brazzill acting as joint
administrative receiver of its director, GIIT.
The meaning of shadow directorship
[12]
Section 741(2) of the Companies Act 1985, which was in force at the material time,
defined a shadow director as follows:
"(2)
In relation to a company, `shadow director' means a person in accordance
with whose directions or instructions the directors of the company are accustomed to
act. However, a person is not deemed a shadow director by reason only that the
directors act on advice given by him in a professional capacity."
(A similar definition is now contained in section 251(1) and (2) of the Companies Act 2006.)
[13]
Further guidance is provided by English case law. In Re Hydrodan (Corby) Ltd
[1994] BCC 161, a wrongful trading application under section 214 of the Insolvency Act 1986, it was
held that the directors of a parent company which was alleged to be a shadow director of a
subsidiary would not themselves, without more, be shadow directors of the subsidiary.
Millett J considered that a clear distinction had to be drawn between a de facto director and a
shadow director. At page 163 he identified the following facts which had to be proved to
establish that a defendant was a shadow director of a company: (1) who were 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 was needed was, first, a board of directors claiming and purporting to act as
8
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.
[14]
In Secretary of State for Trade and Industry v Deverell [2001] Ch 340, an application by
the Secretary of State for directors' disqualification orders, the Court of Appeal (Morritt LJ,
others concurring) expressed its conclusions at paragraph 35 in a number of propositions,
including the following:
(1)
The definition of a shadow director is to be construed in the normal way to
give effect to the parliamentary intention ascertainable from the mischief to be dealt
with and the words used. As the purpose of the Act is the protection of the public
and as the definition is used in other legislative contexts, it should not be strictly
construed.
(2)
The purpose of the legislation is to identify those, other than professional
advisers, with real influence in the corporate affairs of the company. But it is not
necessary that such influence should be exercised over the whole field of its
corporate activities.
(3)
Whether any particular communication from the alleged shadow director,
whether by words or conduct, is to be classified as a direction or instruction must be
objectively ascertained by the court in the light of all the evidence. Evidence of the
understanding or expectation of either giver or receiver may be relevant but it cannot
be conclusive. In many, if not most, cases it will suffice to prove the communication
and its consequence.
[15]
The Court of Appeal also warned at paragraph 36 against the use of epithets or
descriptions in place of the statutory definition. To describe the board as the cat's paw,
puppet or dancer to the tune of the shadow director implied a degree of control in excess of
9
what the statutory definition required. A person might be a shadow director
notwithstanding that he took no steps to hide the part he played in the affairs of the
company: lurking in the shadows was not an essential ingredient. What was needed was
that the board was accustomed to act on the directions or instructions of the shadow
director.
[16]
payment under section 212 of the Insolvency Act 1986, the UK Supreme Court held, by a 3-2
majority, that the mere fact of an individual acting as director of the sole corporate director
of a company was not enough to make the individual a de facto director of that company; so
long as the individual's acts were entirely within the ambit of the discharge of his duties and
responsibilities as director of the corporate director, it was to that capacity that his acts had
to be attributed. It should be noted that the issue in Holland was not whether the defendant
was a shadow director but rather whether he was a de facto director; unlike section 214,
section 212 of the 1986 Act does not apply to shadow directors.
[17]
Finally in Re Coroin Ltd (No 2); McKillen v Misland (Cyprus) Investments and Others
[2013] 2 BCLC 583, David Richards J at first instance observed (at paragraph 594) that in
order to make out the case that an individual was a shadow director of a company, his
instructions had to be given to the directors so as to affect their decisions as directors.
The commercial judge's decision
The shadow director case
[18]
The commercial judge gave careful consideration to the authorities summarised
above. The issue of whether the defenders were a shadow director was ultimately a
question of statutory interpretation. The decision in Hydrodan was not a useful starting
10
point in the present case, given the context of distinguishing between shadow and de facto
directors in which it was decided. Deverell provided more useful guidance: that the purpose
of section 741(2) was to identify those with real influence in the corporate affairs of a
company, and that the question whether any particular communication from an alleged
shadow director ought to be classified as a direction or instruction was one that had to be
answered in light of all of the evidence. It was clear from that proposition that there need
not always be an express instruction: an instruction might be inferred from conduct.
[19]
The pursuers averred circumstances in which the defenders had exercised real
influence over the company. Those averments, if proved, were capable of justifying the
conclusion that the defenders were a shadow director within the meaning of section 741(2).
Taken as a whole, they were habile to prove that Mr Brazzill was directed to act as he did,
and that the directions emanated from the defenders via Ernst & Young, who were closely
involved in the planning, evolution and implementation of Project Raindrop. Whether the
deed of indemnity, which was formally entered into after the transactions had been effected,
influenced the receivers to act in a particular way was a question of fact. This, and other
questions which arose, could only be decided after the court had heard evidence.
The unjustified enrichment case
[20]
As regards the pursuers' claim based on unjustified enrichment, it was averred that
the dividend paid by GIIT 3 to GIIT, and the onward distribution by GIIT to the defenders
were paid in error, without lawful basis, and without intention of donation. The error was
the assumption that the tax election had been effective. As a general rule, a pursuer could
only make an unjustified enrichment claim against the person who was directly enriched at
his expense. There were however exceptions to that rule, including where the agent of one
11
of the parties had been interposed between them, or where there was a set of coordinated
transactions which were treated as a single transaction on the basis that it was unrealistic to
treat each one individually (Investment Trust Companies v Revenue and Customs Commissioners
[2018] AC 302, Lord Reed at paragraph 48). A similar approach might be taken in the
present case with the defenders being held, on a realistic view of the various transactions, to
have been enriched at the company's expense. The commercial judge was unable to
conclude that if the pursuers succeeded in proving all of their averments, their unjustified
enrichment claim was bound to fail.
Submissions for the defenders
The shadow director case
[21]
On behalf of the defenders it was submitted that the key question in relation to the
shadow director case was whether an instruction given to an administrative receiver
appointed to the property of a company could amount to direction of the board of a second
company of which the first company was a corporate director. The court should answer that
question in the negative. The decision of the Supreme Court in Holland made clear that the
separate legal personalities of corporate entities had to be respected. In the present case the
receivers had separate legal capacities from each of GIIT, the directors of GIIT, GIIT 3, and
the company. They could not be treated as if they were directors of GIIT. It was not
asserted by the pursuers that the receivers acted outside their authority as receivers. That
being so, their actings had to be attributed to their receivership capacity and not to any other
capacity. The pursuers had not identified anything "more" (per Millett J in Hydrodan) to
cause them to be treated as shadow directors of the company.
12
[22]
The receivers were not agents of GIIT in the ordinary sense. The agency of an
administrative receiver was simply a device to render the borrower rather than the creditor
liable for the acts of the receiver. A receiver was neither an officer nor a manager of the
company to whose property he was appointed. If in the present case the defenders issued
instructions to the receivers, those instructions would not be received by them in a
directorial role as regards the company.
[23]
The commercial judge had erred when he decided that Hydrodan was not a useful
starting point, and in relying on Deverell for the proposition that it was not necessary to
identify instructions or directions given to the directors of the company and that the better
approach was to ask whether the alleged shadow director had exerted a real influence on the
corporate affairs of the company. That was not what the court in Deverell had held; nor was
it consistent with the plain wording of section 741(2). Had Parliament intended that a "real
influence" in relation to the company's affairs would be sufficient to establish shadow
directorship it would have said so. In Holland, the Supreme Court had rejected a submission
that, for the purposes of establishing whether a de facto directorship existed, it was sufficient
that the alleged de facto director had been the guiding spirit of the company on the basis that
such an approach was productive of uncertainty. The same reasoning fell to be applied in
the case of shadow directors.
[24]
The commercial judge's approach failed to recognise the distinction between a
company and its directors on the one hand and the role of a receiver on the other. The
authority of an administrative receiver was not co-terminous with that of the board of
directors. A receiver had different duties, namely to try to secure repayment of a secured
debt for the benefit of the creditor. The directors of a corporate body, which was itself the
director of a second company, were not ipso facto shadow directors of the second company
13
(Hydrodan). That scenario would not be enough to prove that the directors of the body
corporate had assumed a role in the management of the second company (Holland). The
same had to be true of a receiver who was managing the property of a corporate director, or
any person who was instructing the receiver in that situation. In the present case, the parties
directing action on the part of the company were GIIT and GIIT 3, not the receivers or the
Bank. The party directing and procuring action on the part of GIIT 3 was GIIT. The
commercial judge had apparently concluded that the defenders' instruction of Mr Brazzill,
as the natural person who was making decisions on behalf of GIIT and GIIT 3, was sufficient
to establish the defenders as a shadow director of the company. That conclusion ignored the
separate legal personalities of the different entities involved and amounted to an error of
law.
[25]
The commercial judge further erred in holding that the pursuers' averments to the
effect that the receivers were compelled to act in a particular way by the deed of indemnity
were relevant for proof. His conclusion ignored the fact that the receivers entered into the
deed in their capacity as the administrative receivers of GIIT. In addition, as a matter of
timing, the deed could not have compelled the receivers to implement the scheme because it
was executed on 8 December 2003, after the critical steps to implement Project Raindrop had
been taken.
The unjustified enrichment case
[26]
The commercial judge also erred in failing to hold that the unjustified enrichment
case was irrelevant. The pursuers' position was that there had been no legal justification for
the payment it made to GIIT 3 on 5 December 2003, but it was clear on their own averments
that there had been. The pursuers averred that the company had entered into an agreement
14
with GIIT 3 to make a joint election, that the agreement provided for the payment in
exchange for the making of the election, and that the election had been submitted to HMRC.
There was no better justification for an enrichment than that it was obtained and retained in
the exercise of a contractual right ((Dollar Land (Cumbernauld) Limited v CIN Properties Limited
1998 SC (HL) 90, Lord Hope at 94). The requisite "unjustified" factor was therefore absent.
[27]
The pursuers referred in their submissions to the election agreement having been
impugned by a "mutual error", but no error rendering the agreement void or voidable was
averred. The parties had been aware that it was uncertain whether the claim would be
accepted by HMRC. They might have been disappointed by the outcome but that did not
impugn the validity of the agreement.
Submissions for the pursuers
The shadow director case
[28]
The commercial judge correctly held that the pursuers' case was relevant for proof.
They had averred circumstances from which it was to be inferred that the company's board
was directed by the defenders by means of their control of the administrative receivers. It
was unnecessary to offer to prove that the company's directors were directly instructed by
the defenders. Nor did the pursuers require to offer to prove that the receivers were acting
as shadow directors or as de facto directors. Control by the defenders was effected by their
control of natural persons in such a way as to control the corporate directors.
[29]
The rules of agency rendered a company liable in respect of acts performed by its
agents. The powers of an administrative receiver included the power to generally carry on
the business and to exercise the managerial functions of the company. A creditor who
issued instructions to a receiver incurred liability for acts that the receiver took consequent
15
on those instructions. The pursuers' case was that members of Ernst & Young's tax team
were agents of the defenders. They instructed the receivers as to the implementation of
Project Raindrop on behalf of the defenders. Their actions were ascribed to the defenders.
Mr Brazzill was acting as agent of the company's corporate directors, GIIT and GIIT 3. His
actions were ascribed to those companies. GIIT and GIIT 3, acting through Mr Brazzill,
caused the company to enter into the joint election with GIIT 3. It was therefore the
defenders who, through a chain of persons, ultimately instructed the corporate directors to
implement Project Raindrop.
[30]
The commercial judge was correct to conclude that Hydrodan did not specify the
manner in which instructions must be transmitted to a company's board of directors in
order for the person issuing the instructions to become a shadow director. Nor did Re
Coroin. The judge was also correct to conclude that Deverell provided the more helpful
guidance in the circumstances of this case. He did not err in his treatment of Deverell. There
was nothing in the observations of the Supreme Court in Holland that created a barrier to
inquiry in the present case. Those observations would be relevant if the pursuers were
seeking to argue that Mr Brazzill had acted as a de facto or shadow director, which they were
not.
[31]
As regards the deed of indemnity, the timing of execution was immaterial: its terms
had been settled before the critical events occurred. The pursuers' contention was that the
receivers took care to implement Project Raindrop in accordance with the defenders'
instructions in order to ensure that the defenders would indemnify them at the end of the
process. The commercial judge did not err in law in deciding to hear evidence before
determining the relevancy of the averments regarding the deed of indemnity.
16
The unjustified enrichment case
[32]
The commercial judge correctly held that the unjustified enrichment case was
relevant for proof. The essence of the claim was that (a) the transactions comprising Project
Raindrop had been entered into on behalf of the defenders by the receivers (and by GIIT and
GIIT 3 acting by the receivers), and (b) that those transactions had been based on the
erroneous mutual assumption that the election was valid. The commercial judge had been
correct to conclude that in these circumstances the defenders might be held to have been
enriched at the expense of the company on a realistic view of the transactions, planned as
they were from the outset. On that analysis, the agreement was not a legal justification for
the payment made by the company to GIIT 3.
Decision
The shadow director case
[33]
Company legislation contains numerous provisions treating shadow directors as
directors. Some of these, such as liability for wrongful trading and company directors'
disqualification proceedings, are illustrated by the case law summarised above. 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.
[34]
A peculiarity of the present case is that the company's directors included no natural
persons. It appeared to be the position of the defenders that in such circumstances the
17
shadow director provisions could never apply to it, because any person exercising influence
over the corporate directors would have a separate capacity to which their actings had to be
attributed. Such an interpretation, if correct, would subvert the purpose of the legislation,
even in its present form where at least one non-corporate director is required. It is not
correct. Nor would it be in accordance with purposive construction to adopt a narrow
approach to the characterisation of a receiver's agency.
[35]
The court agrees with the commercial judge's view that the analysis by Morritt LJ in
Secretary of State for Trade and Industry v Deverell provides helpful guidance on the
application of the legislation to the situation of a company with corporate directors. The
expression "real influence in the corporate affairs of the company" meets the statutory
definition of directions or instructions in accordance with which the company's directors are
accustomed to act. Although, as Morritt LJ made clear, it must be proved that the company
did in fact treat the communications from the alleged shadow director as instructions, there
is nothing in the definition to exclude instructions given indirectly, as we understood
counsel for the defenders ultimately to concede. In the present case the pursuers do not aver
that the directors of its own corporate directors were shadow directors of the company, nor
that the administrative receivers were shadow directors. Rather they offer to prove that the
Bank, which instigated and instructed the planning, putting in place and execution of a
scheme intended to avoid tax on the company's chargeable gains, is the person meeting the
statutory definition of a shadow director.
[36]
At paragraph 36 of his opinion, the commercial judge listed the key averments made
by the pursuers: that Project Raindrop was conceived solely for the defenders' benefit; that it
was made clear by the defenders on numerous occasions to Ernst & Young that the step plan
must be followed; that the (Ernst & Young-appointed) receivers were aware of the step plan;
18
that the effect of the deed of indemnity was to oblige them to follow the step plan; that part
of the step plan was the entering into of the joint election agreement and the payment of the
consideration to GIIT 3; that the natural person who made the necessary decisions on behalf
of the directors of the company was one of the receivers; and that no independent advice
was taken by the receivers. The pursuers' case is summarised in their averments in article 17
that "in implementing Project Raindrop, GIIT, GIIT 3, and latterly the [company] were
controlled by the [receivers]. The [receivers] were, in implementing Project Raindrop, subject
to the influence of and acting according to the instructions and directions of the defenders."
The court agrees with the commercial judge's view that the foregoing averments, if proved,
are capable of justifying the conclusion that the defenders were a shadow director of the
company.
[37]
The observations of Millett J in Re Hydrodan and of the Supreme Court in Revenue &
Customs Commissioners v Holland are of limited assistance in the circumstances of the present
case. The requirement for "more" in Hydrodan related to the question whether the director
of a company was ipso facto a shadow director of a subsidiary of which the parent is a
corporate director. That is not what is averred in the present case. In so far as the
requirement for "more" may have relevance here, it is capable of being satisfied by the
averments listed above regarding the extent of the defenders' involvement in the conception
of Project Raindrop and their control, through the medium of the receivers, of its
implementation. Holland was concerned with de facto directors and not shadow directors.
The observations of the majority cannot simply be applied mutatis mutandis to shadow
directors for whom, as already discussed, policy considerations require a different approach
to the according of respect to separate legal personality.
19
The unjustified enrichment case
[38]
In order to succeed in a claim for redress of unjustified enrichment, a pursuer must
show that the defender has been enriched at his expense, that there is no legal justification
for the enrichment, and that it would be equitable to compel the defender to redress the
enrichment: Dollar Land (Cumbernauld) Limited v CIN Properties Limited (above); Lord Hope at
page 99. The pursuers in the present case aver that payment of the election consideration to
GIIT 3 was made on the basis of a mutual hope or expectation that the election would be
effective, and not with any intention of donation. The payments by GIIT 3 to GIIT and by
GIIT to the defenders were made on the assumption that the election had been effective.
That assumption having proved to be erroneous, the defenders were enriched at the
company's expense and were due to make recompense to them for such enrichment.
[39]
The defenders for their part found upon the fact that the payment was received by
GIIT 3 from the company in exercise of a contractual right under the election agreement, and
that the disappointing outcome did not affect the validity of the agreement. Whether or not
that amounts to legal justification for the defenders' enrichment cannot be determined
without enquiry. It is sufficient at this stage to say that the pursuers' case based upon
unjustified enrichment is not bound to fail.
[40]
In Shilliday v Smith [1998] SC 725, Lord President Rodger noted (page 727) that some
of the situations in which persons are to be regarded as having been unjustly enriched at
another's expense fell into recognisable groups for which Scots law had used Roman law
terminology such as condictio indebiti and condictio causa data, causa non secuta. He continued:
"...It is unnecessary in this case to examine all the groups and it is sufficient to note
that the term condictio causa data, causa non secuta covers situations where A is
enriched because B has paid him money or transferred property to him in the
expectation of receiving a consideration from A, but A does not provide that
consideration. The relevant situations in this group also include cases where B paid
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the money or transferred the property to A on a particular basis which fails to
materialise -- for example, in contemplation of a marriage which does not take
place."
Later in his opinion (at page 730), under reference to Stair, Institutions, I vii 7, Lord Rodger
identified two situations in which property had to be restored: where property comes into
someone's hands on a particular basis which then ceases to exist; and where property comes
into the person's hands on the basis of some future event which fails to materialise.
Whether the pursuers can bring the circumstances of the present case within these or any of
the other circumstances in which the law provides a remedy for unjustified enrichment will
be a matter for determination after proof.
[41]
Before the commercial judge there were submissions by the defenders that the party
averred to have been enriched by payment of the election consideration was GIIT 3, and that
any claim for unjust enrichment ought to be directed against that company rather than being
directed against the defenders, missing out the intermediate parties, GIIT 3 and GIIT. That
argument was not maintained in the reclaiming motion.
Disposal
[42]
By interlocutor dated 13 July 2023, the commercial judge repelled the defenders'
second plea in law, that the pursuers' averments ought not to be admitted to probation, and
refused the defenders' motion to dismiss the action. He put the case out by order to discuss
what further orders were to be made, but on 27 July 2023 he granted the defenders' motion
to reclaim without making any order for further procedure. He did not therefore pronounce
an interlocutor allowing proof before answer.
[43]
The pursuers' pleas in law are difficult to follow; senior counsel provided an
explanation of which pleas were said to relate to the shadow director case and which to the
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unjustified enrichment case. The defenders have a plea of prescription but did not seek a
preliminary proof. The court will refuse the reclaiming motion and adhere to the
commercial judge's interlocutor. It will allow a proof before answer, leaving all pleas (other
than the defenders' second plea) standing.
