In Brief
- The Supreme Court's decision in Mitchell v Al Jaber provides important clarification on when former directors can still owe fiduciary duties to a company. The answer has significant implications for liquidators pursuing claims against former directors, and for individuals who continue to act on behalf of companies without formal authority.
- The Supreme Court considered claims by a company against a former director for alleged breaches of their directors' duties.
- The key issue was whether the former director owed the usual fiduciary duties to the company at a time when he was no longer actually a director.
- The Supreme Court held that a former director could still owe director's duties to the company if, and to the extent, that they sought to act as a director.
- The Supreme Court also considered when: vendor's liens will apply to shares that have been transferred without the required consideration being paid; and, whether a subsequent change in the value of an asset should be taken into account when valuing the loss caused by its transfer.
Introduction
In Mitchell and another (Joint Liquidators of MBI International & Partners Inc (In Liquidation)) v Sheikh Mohamed Bin Issa Al Jaber [2025] UKSC 43 the Supreme Court grappled with three key issues:
- fiduciary duties (the obligations of loyalty and good faith owed by directors to their company);
- when vendor's liens apply to share transfers; and
- how to calculate loss equitable compensation asset values change.
The case related to disputes between: the joint liquidators of MBI International & Partners Inc (the Company), incorporated in the British Virgin Islands; and, Sheikh Mohamed Bin Issa Al Jaber (the Sheikh), the main shareholder in and former director of the Company.
The disputes arose out of the allegedly dishonest transfer of 891,761 shares in JJW Hotels & Resorts Holding Inc (JJW Inc) (the Shares) by the Company after the Company went into liquidation. The transfer of the Shares was effected by the Sheikh, who had ceased to be a director of the Company. The liquidators sought to recover the value of the Shares as at the time of the transfer.
Background
The Company acquired the Shares in 2009, as part of a series of transactions designed to facilitate an Initial Public Offering (IPO) of the Company. The IPO never materialised, and ultimately the consideration for the Shares was never paid.
Two years later, the Company was wound up. Under BVI company law the Sheikh's powers as director ceased upon the winding up. Despite this, after the Company was wound up the Sheikh executed share transfer forms on behalf of the Company transferring the Shares back to one of the original holders, JJW Guernsey (the Share Transfer). Subsequently, in 2017, all of JJW Inc's assets and liabilities were transferred to another of the Sheikh's companies (the 2017 Transfer). As a result, the Shares became worthless.
The liquidators argued that the Sheikh had breached his directors' duties by effecting the Share Transfer. They sought equitable compensation (a monetary remedy for that breach of fiduciary duty) from the Sheikh. They also argued that JJW Guernsey was liable to compensate the Company as a result of its 'knowing receipt' of the Shares in breach of the Sheikh's duties.
The case moved from the High Court to the Court of Appeal and finally to the Supreme Court. In its judgment the Supreme Court considered the following issues:
Can former directors still owe fiduciary duties after resignation or liquidation?
Yes. The Supreme Court held that former directors can still owe fiduciary duties to a company if they attempt to exercise directors' powers.
The Court considered whether the Sheikh had breached fiduciary duties to the Company as a director by causing the Company to transfer the Shares. The Sheikh argued that, as his powers as director had ceased upon liquidation of the Company under BVI Law, he had also ceased to owe any fiduciary duties to the Company at this time. Therefore, he submitted, he could not have breached any duties by arranging for the transfer of the Shares.
The High Court had previously ruled that: the Sheikh had breached post-liquidation fiduciary duties to the Company by acting dishonestly and in bad faith; the Share Transfer was void; and that JJW Guernsey should be held liable as the knowing recipient of the shares in breach of those duties.
The Court of Appeal upheld the finding of breach of fiduciary duty, and the Supreme Court affirmed the Sheikh's breach. The Supreme Court held that fiduciary duties can arise on an ad hoc basis. This can include where a person assumes a fiduciary power, even if they are not formally appointed or they lack the legal authority to act as director. In this case, by causing the Company to transfer the Shares, the Sheikh had been acting as if they were still a director, and as such took on the fiduciary duties of a director when doing so.
Further, the Supreme Court held that the Sheikh could not rely on the subsequent 2017 Transfer (in which he was involved and benefited) to reduce or extinguish his liability for the loss caused by his misappropriation of the Shares. The burden is on the fiduciary to prove that a 'supervening event' has broken the chain of causation. The Sheikh had failed to do so.
What is a vendor's lien and when does it apply to share transfers?
The second issue the Court considered was whether the Company could be said to have actually suffered financial loss if the Shares were subject to unpaid vendor's liens.
A vendor's lien is an equitable security interest that arises when property or shares are transferred but the purchase price is not paid. Such liens arise automatically. However, the parties can exclude such liens by agreement, particularly where the lien would defeat the commercial purpose of the transaction.
The Sheikh asserted that, because the Company had never paid the consideration for the Shares, the Shares were subject to unpaid vendor's liens totalling €89,176,160. Therefore, no loss was suffered by the Company when the Shares were transferred back to JJW Guernsey.
The Court of Appeal rejected this defence. It held that the Company and the sellers of the Shares had intended to exclude such liens when entering into the original share purchase agreements. Had such liens existed, they would have prevented a sale of the Shares in the proposed 2009 IPO, thus preventing the purpose of the Share Transfer. The Supreme Court agreed with the Court of Appeal. Thus, the vendor's lien defence failed.
How is equitable compensation calculated for breach of directors' duties?
The third issue was how the loss should be calculated, given that the Shares became worthless after the transfer of JJW Inc's assets and liabilities in 2017.
The High Court awarded equitable compensation of €67,123,403.36 based on JJW Inc's net assets in 2016. The Court of Appeal, however, reversed this, ruling that the Company suffered no loss as the Shares had become worthless by the date of judgment.
The Supreme Court reinstated the original award. It held that the date of the transfer of the Shares to JJW Guernsey was the relevant date for valuing the loss caused by the transfer.
This demonstrates that the relevant date for calculating equitable compensation is typically the date of the breach, not a later date when asset values may have changed. The fiduciary who breached their duty bears the burden of proving that subsequent events broke the chain of causation.
Legal principles from Mitchell v Al Jaber
- Fiduciary duties post liquidation: A director who purports to exercise powers after ceasing to be a director, even without formal authority, can still be held accountable if their actions are in breach of the usual directors' fiduciary duties.
- Vendor's Liens: The existence of a vendor's lien in respect of transferred assets depends on the parties' objective intention when the assets were transferred. This intention may be inferred from the transaction's nature and circumstances, not just the express contractual wording governing the transfer.
- Equitable compensation: The fiduciary in breach cannot automatically rely on subsequent events breaking the chain of causation in order to reduce their liability – the fiduciary must proof that this is the correct approach.
This decision confirms that directors cannot escape liability simply by resigning or being removed from office if they continue to act as directors. Courts will assess conduct, not just formal status.
Mishcon de Reya has extensive experience advising directors, shareholders, and companies on fiduciary duty disputes, equitable compensation claims, and corporate governance matters. If you require advice on directors' duties or are facing a claim relating to alleged breach of duty, please contact us.