James Saunders features in the April issue of CRIJ

James Saunders’ latest article, ‘Concealment in insolvency litigation after Canada Square v Potter [2023] UKSC 41′ is featured in the April 2024 edition of the Corporate Rescue and Insolvency Journal.

Limitation is often a concern for claims in an insolvency context and in breach of duty claims against directors more generally. In this article, James explores the implications of the recent Supreme Court decision of Canada Square v Potter with a particular eye on what the decision means for those in the insolvency litigation space.

What does Canada Square mean for the earlier approach in Haysport v Ackerman? When does a director’s duty of disclosure tie in with concealment for limitation purposes? How can office holder investigations have a key role to play in reviving statute barred claims?

For a discussion of all these issues and more, you can see an extract of James Saunders’ article below. Alternatively, The online version of CRI is published within Lexis+ UK (formerly known as LexisLibrary).

Access the full article here

This article first appeared in Corporate Rescue and Insolvency Vol 17.2 April 2024
Official citation (2024) 1 CRI 59

Concealment in insolvency litigation after Canada Square v Potter [2023] UKSC 41

KEY POINTS

• A director’s ‘duty of disclosure’ is not free-standing but a particular application of s 172 of the Companies Act 2006 requiring a nuanced approach to subjective consideration and the engagement of the objective approach where such consideration is lacking.
• Breach of the ‘duty of disclosure’ does not automatically or even necessarily equal the postponement of limitation under s 32 of the Limitation Act 1980.
• The central focus for concealment must remain (i) what facts are concealed, (ii) how are they concealed and from whom, and (iii) is that concealment intentional. Alternatively, under s 32(2) was the original breach committed in the knowledge that it was a breach of duty?
• The lesser-known decision in Sheldon v RHM Outhwaite (Underwriting Agencies) Ltd [1996] AC 102 (HL) confirming that deliberate concealment need not be contemporaneous with the wrong concealed is likely to assume a renewed importance in insolvency litigation.

Introduction

Claims against errant directors often raise limitation concerns where the improper conduct occurred long before an independent board of directors is appointed, before an insolvency practitioner takes office or still later, before funding is obtained to pursue a claim. Section 32 of the Limitation Act 1980 (LA 1980) is a vital tool to postpone limitation and allow such claims to be pursued.

The reasoning in Haysport v Ackerman [2016] EWHC 393 (Ch), a decision of Peter Smith J, was seen as something of a panacea to postponing limitation where directors failed to comply with a duty to disclose their wrongs. Was the Haysport approach sound and does it hold good after the Supreme Court’s decision in Canada Square v Potter [2023] UKSC 41?

Haysport v Ackerman

Haysport involved claims for breach of fiduciary duty against former director Joseph Ackerman. The claimants were two companies Haysport Properties Ltd and Twinsectra Ltd (the ‘Claimants’). Naomi Ackerman was also a director of the relevant companies until 2006.

The Claimants averred that in 2005 Mr Ackerman caused the companies to grant security over various properties to support a facility obtained by another company and wrongly caused Twinsectra to enter into an unsecured loan but never sought payments of interest or repayments of capital.

A new board was appointed in 2011 and proceedings commenced in 2014, prima facie long out of time. It was held that no board meetings took place and that minutes were signed by Mr Ackerman for himself and Naomi but it was accepted that Naomi was aware of the transactions at the time.

The court considered concealment under s 32 (obiter). In summary the court reasoned that:

1. Mr Ackerman had a positive duty to disclose his own breaches of fiduciary duty;
2. He failed to disclose those breaches;
3. With the result that he concealed the existence of the breaches from the Claimants;
4. That position continued until 2011 when new directors were appointed;
5. Limitation was postponed until 2011.

An approach founded upon this analysis has been applied subsequently in, inter alia: Re Pantiles [2019] EWHC 1298 (Ch), Re Vining Sparks UK Ltd [2019] EWHC 2885 (Ch), Re Shahi Tandoori [2021] EWHC 337 (Ch).

There are three questions to explore in this article:

1. Does a director owe a duty to disclose their wrongdoing?
2. Does a breach of that duty equal s 32 concealment and postpone limitation?
3. If the answer to (2) is no, then how does concealment function?

The ‘Duty of Disclosure’?

The genesis of a duty of disclosure was largely Peter Smith J’s own decision in Tesco Stores Ltd v Pook [2003] EWHC 823 (Ch) and latterly the Court of Appeal’s decision in Fassihi v Item Software (UK) Ltd [2004] EWCA Civ 1244. However, it is in the author’s view incorrect to draw from these authorities any standalone duty to disclose wrongdoing.

The correct analysis is that one element of a director’s duty under s 172 of the Companies Act 2006 to act in the way they consider in good faith would be most likely to promote the success of the company. Where they have contemplated the question of disclosing past wrongdoing one looks to how the director considers, in good faith, they ought to act. Only where they have not considered the matter does one pose the objective question of whether an intelligent and honest director could reasonably have acted as the director in fact did.

As GHLM v Maroo [2012] EWHC 61 (Ch) confirms:

A company complaining of a director’s failure to disclose a matter must, I think, establish that the fiduciary subjectively concluded that disclosure was in his company’s interests or, at least, that the director would have so concluded had he been acting in good faith.

Arden LJ in Fassihi presented disclosure in this way, as part of s 172, and the court in Hunt v Balfour-Lynn [2022] EWHC 784 (Ch) confirmed this approach. One cannot, without more, impose a standalone objective duty upon directors and then cite the fact of non-disclosure alone as a breach of that ‘duty’.

Section 32 concealment

The analysis in Haysport goes further still and links a breach of the ‘duty of disclosure’ with seemingly automatic concealment for the purposes of s 32 by way of (i) duty, (ii) factual non-disclosure, (iii) s 32 concealment. In the author’s view if this reasoning was ever correct it does not survive Canada Square.

Time will be postponed under s 32 where:

32(1)(b): any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant, or

32(2): there has been a deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time.

If either is made out limitation is postponed until the concealment has been discovered or could with reasonable diligence have been discovered.

For 32(1)(b) what is required per Canada Square at [109] is (emphasis added):

1. A fact relevant to the claimant’s right of action;
2. The concealment of that fact from the claimant by the defendant, either by a positive act of concealment or by a withholding of the relevant information; and
3. An intention on the part of the defendant to conceal the fact or facts
   in question.

The defendant must have considered whether to inform the claimant of the relevant fact and decided not to. The existence of a duty of disclosure may be evidentially relevant but is of no more value than this. The court in Canada Square at [100] said of duties of disclosure:

[I]f the defendant is subject to a duty of disclosure to the claimant, it is possible that that may be a relevant circumstance bearing upon whether it can be concluded that there has been deliberate concealment… that the relevant fact was one which it was the defendant’s duty to disclose, or was one which he would ordinarily have disclosed in the normal course of his relationship with the claimant – may therefore have an evidential significance in determining whether there was deliberate concealment. But it has to be emphasised that this is not to say that the question of deliberate concealment can either be reduced to, or is dependent upon, a breach of duty.

As for s 32(2) it must be shown that the defendant knew they were committing a breach of duty, or intended to commit
the breach of duty, not merely that they knew of an act which happened to be a breach of duty. Section 32(2) also will not operate to cover an earlier breach of duty to which s 32(2) was not separately applicable: see IT Human Resources plc v Land [2014] EWHC 3812 (Ch) at [135] and as such one is looking to demonstrate that the breach sued for was relevantly deliberate.

One can then observe why the breached duty of disclosure reasoning causes an error:

1. If, as in Haysport, a director simply does not consider disclosure, there is a breach of the ‘disclosure duty’ by factual non-disclosure where objectively a reasonable director would have disclosed matters but no suggestion of intentional concealment (or an intentional breach of the duty) neither limb of s 32 will be made out.
2. If on the other hand the director deliberately (ie knowingly) breaches their disclosure duty having given thought to the question of their disclosure obligation the existence of the ‘duty of disclosure’ will not matter, there will be concealment simply because the director has intentionally failed to disclose relevant facts.

Because s 32 is not synonymous with failing to act in accordance with a duty of disclosure the error committed is that identified at para [100] in Canada Square of reducing s 32 concealment to a breach of the ‘disclosure duty.’ In the author’s view the Haysport reasoning does not survive Canada Square.

Concealment Applied

In Haysport there was limited engagement with (i) what Mr Ackerman did not disclose, (ii) to whom, (iii) what facts were concealed, (iv) whether concealment was intentional, and (v) whether the underlying 2005 breaches were relevantly deliberate.

Applying s 32 accurately will require claimants to tackle:

1. Was the underlying breach itself deliberate (s 32(2)), ie did the wrongdoer know they were committing a breach of duty?
2. Was any later concealment intentional (s 32(1)(b)), or merely inadvertent?
3. Who were facts concealed from and how in a small company where co-directors may in fact know of the breach?
4. When, if there was concealment, could the company discover the facts?

Concealment in small companies is likely more challenging than first appears. Firstly, the concealment must be intentional requiring the director’s mindset to be investigated. As noted in Cave v Robinson Jarvis and Rolf (A Firm) [2003] 1 AC 384:

The standard of proof would be the usual balance of probabilities standard and inferences could of course be drawn from suitable primary facts but, nonetheless, proof of intention, particularly where an omission rather than a positive act is relied on, is often difficult.

Second, one must also ask to whom should a fact be disclosed? The only sensible answer is likely the board. Generally, co-directors will know of events, accept or even agree with wrongs and may be in breach of duty themselves but there will then be no concealment. This is of course still more acute in the sole director-member enterprise where there is no one to disclose to or conceal from.

Finally, that a company is being wronged but has no recourse is a consequence of wrongdoer, and potentially also member, control but does not equal concealment. It is insufficient that the director(s)’ knowledge is not attributed to the company. The consequence of that is the company does not know the facts but that is not the first stage of establishing concealment, s 32 does not operate solely on the basis of a claimant’s lack of actual knowledge and the same is true for corporate claimants.

Attribution

Wrongs are committed immediately when the relevant act takes place in breach of duty. The company has a cause of action for which limitation would run unless postponed. It is not a requirement of a breach for the company to know of it, nor is it a preventative of a breach that the company does not know of its occurrence via attributed knowledge.

If, but only if, s 32 concealment is made out does one then move to asking whether (i) the company knows or knew of the facts concealed, (ii) has discovered the concealed facts or (iii) could with reasonable diligence discover said fact(s) and if so when.

Here the law’s policy approach firmly favours wronged companies and their later controllers. The knowledge of the errant director(s) will not be attributed to the company. The company will not know the facts concealed from it: see Attorney General of Zambia v Meer Care & Desai (a firm) [2007] EWHC 952 (Ch). Nor is shareholder knowledge likely to be attributed either, see Julien v Evolving Tecknologies and Enterprise Development Co Ltd [2018] UKPC 2 and the Privy Council’s obiter remarks.

The law also takes a sensible contextual approach to discoverability which may be either impossible or more difficult where the corporate claimant is insolvent: see OT Computers Ltd (In Liquidation) v Infineon Technologies AG [2021] EWCA Civ 501 [2021] QB 1183. An independent board or an insolvency practitioner will be needed before the concealment may be discoverable.

Later Concealment and Fresh Limitation

Insolvency practitioners largely sue in right of the company, as of course do later independent boards. If an immediate breach of duty arises, a cause of action accrues and there is no concealment in accordance with s 32 properly applied it may be that limitation expires before the company ever reaches an insolvency process or before an independent board is ever appointed.

If relevant facts are unknown at that later time and inquiries are made of directors or third parties, which inquiries lead to the deliberate suppression of facts and material such that the investigators cannot plead and pursue a claim then there will be deliberate concealment.

All is then not lost because an entirely fresh limitation period can commence even if a limitation defence has already accrued where there is post-breach relevant concealment such as where investigations lead to later concealment/a lack of cooperation see Sheldon v RHM Outhwaite (Underwriting Agencies) Ltd [1996] AC 102 (HL). The criticism in Re Shahi Tandoori [2021] EWHC 337 (Ch) that the director had provided no positive assistance to the liquidator engaging s 32(1)(b) is one such example.

It is more important than ever to look closely at the questions asked during investigations and the responses provided, or not as the case may be, and whether the impact of stunted disclosure and a lack of cooperation is later deliberate concealment.

The corollary is that where a director or third party does have an accrued limitation defence it is likely to be most prudent to cooperate with investigations and to provide full and frank disclosure so as to avoid inadvertently reviving a claim by way of later deliberate concealment.