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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Shepherds Investments Ltd & Anor v Walters & Ors  EWHC 836 (Ch) (12 April 2006)
Cite as:  IRLR 110,  2 BCLC 202,  EWHC 836 (Ch),  FSR 15
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Strand, London, WC2A 2LL
B e f o r e :
| Shepherds Investments Limited
Shepherds (Financial) Limited
|- and -
Assured Fund Limited
Policy Selection Limited
Iain Quirk (instructed by Eversheds) for the First, Third, Fifth and sixth Defendants
Toby Kempster (instructed by Spring Law) for the Second Defendant
Hearing dates: 21, 22, 23, 24, 27, February, 2, 3, March 2006
Crown Copyright ©
|Preparations for a competing business: breach of fiduciary duty, the obligation of fidelity and express contractual terms||
|Diversion of business opportunity||57|
|Misuse of confidential information||58-61|
|Did Mr Simmons owe fiduciary duties?||73-81|
|Was there a breach of duty in setting up a competing business?||82-132|
|Diversion of maturing business opportunity||133-135|
|Express terms of employment contracts of Mr Walters and Mr Hindle||136-142|
|Misuse of confidential information||143-145|
|Account of profits||162-163|
Mr Justice Etherton :
The Manager [i.e. Investments] hereby appoints the Adviser [i.e. Financial] and the Adviser hereby agrees with effect from the date hereof (subject always to the overall policy and supervision of the Directors [i.e. the directors of SSF]) to advise the Manager as to the investment and reinvestment of the assets of the Company [i.e SSF] in traded endowment policies ("TEPs") and traded life policies ("TLPs") in accordance with the provisions of the Memorandum and Articles of Association of the Company, this Agreement, any Offering Document, the laws of the Isle of Man and any other applicable laws or regulations for the time being in force … within the investment policy from time to time laid down by the Directors until its appointment shall be terminated as hereinafter provided.
Without prejudice to the generality of Clause 2 the Adviser shall:
3.1 advise the Manager concerning all actions which it appears to the Adviser would be advantageous to the Company in implementing the TEPs and TLPs investment policy of the Directors in relation to the Company...;
3.2 evaluate the opportunities for possible investment in TEPs and TLPs by the Company and communicate its advice to the Manager;
3.3 keep constantly under surveillance and review the Assets for the time being of the Company comprising TEPs and TLPs and recommend, as circumstances may require, changes in such Assets;"
You shall not, except as authorised or required by your duties under your employment contract, use for your own benefit, gain or divulge to any persons, firms, company or other organisation whatsoever, any confidential information belonging to the company or relating to it's affairs or dealings which may come to your knowledge during your employment. This restriction shall cease to apply to any information or knowledge which may subsequently come into the public domain other than by means of unauthorised disclosure.
All confidential records, documents and other papers, together with any copies or extracts thereof, made or acquired by you in the course of your employment shall be the property of the company and must be returned to the company on the termination of your employment.
Confidential information shall include all information which has been specifically designated as confidential by the company and any information which relates to the commercial and financial activities of the company. The unauthorised disclosure of which would embarrass harm or prejudice the company. It does not extend to information already in the public domain unless such information arrived there by unauthorised means.
Restrictions on other Business Activities
You will devote the whole of your time and attention during business hours to your duties as an employee and will not, at any time, without the written consent of the company, be directly engaged, concerned or interested in or connected with any other company, business or concern (except as the holder of shares, stock debentures or debenture stock in any other company quoted or dealt with on any recognised stock exchange)."
"Policy Selection Limited (PSL) is a young company. Formed this year by core members of what was the management team of Shepherds (Financial) Limited – arguably the U.K.'s leading Traded Endowment Policy (TEP) market-maker and the first U.K. asset management company to offer retail investors the opportunity to benefit from the returns generated by a portfolio of U.S. Second Hand Insurance Policies (SHIPs). As such, the team behind PSL is the most experienced team in the U.K. in the SHIP market.
Having identified significant improvements that could be made to the Shepherds model, but being unable to have Shepherds adopt the various measures, PSL was formed to take the exciting concept of SHIP portfolios forward into the U.K. and International market in a transparent, ethical and diligent fashion."
"The objective of the SHIP share class is to invest shares in Assured PLC a Luxemburg domiciled investment fund scheme.
Assured PLC will invest in second hand insurance policies issued by American life assurance companies, scoring at least B+ in the A M Best rating (equivalent to A rating on S+P) with the aim of delivering capital growth.
The attraction of the investment is a fixed payment that is free from equity market volatility and interest rate fluctuations.
The capital growth is the difference between the market price of the second hand life policy and the death benefit. If a life assured should unfortunately die earlier than expected then there will be an accelerated payout, but equally if a life assured should outlive their expected lifespan there will be a lower annualised return to the investor. The Assured Fund by investing in a portfolio of policies can reduce this variation, producing a low risk, high return medium.
The Fund differs to other funds in its asset class due to the transparency of the commission that is received from market makers selling the assets and the amount reinvested back into the Fund for the benefit of the shareholders, which will further enhance their return. The Fund will also receive an independent medical report from a UK resident medical practitioner confirming the life expectancy given by the medical practitioners in the US are reasonable.
Using a sophisticated investor model on a sample of a 1,000 policies the portfolio returned over 12% per annum. The Fund will target policies with a life expectancy of 3-5 years due to research showing that the maturity of the policies where in fact on average earlier than the life expectancy which would enhance the return to the Fund."
Preparations for a competing business: breach of fiduciary duty, the obligation of fidelity and express contractual terms
Diversion of business opportunity
Misuse of confidential information
Did Mr Simmons owe fiduciary duties?
"…. these duties, except in so far as they depend on statutory provisions expressly limited to directors, … apply equally to any officials of the company who are authorised to act on its behalf, and in particular to those acting in a senior managerial capacity."
That passage is repeated in the latest (the 7th) edition of Gower & Davies' Principles of Modern Company Law by Professor Paul Davies, at p.379.
"The distinction taken between agents and servants of an employer is apt here, and I am unable to appreciate the basis upon which the Ontario Court of Appeal concluded that O'Malley and Zarzycki were mere employees, that is servants of Canaero rather than agents. Although they were subject to supervision of the officers of the controlling company, their positions as senior officers of a subsidiary, which was a working organisation, charged them with initiatives and with responsibilities far removed form the obedient role of servants. It follows that O'Malley and Zarzycki stood in a fiduciary relationship to Canaero, which in its generality betokens loyalty, good faith and avoidance of a conflict of duty and self-interest."
"A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level."
Was there a breach of duty in setting up a competing business?
"41. I prefer to base my conclusion in this case on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company. This duty of loyalty is the "time-honoured" rule: per Goulding J in Mutual Life Insurance Co of New York v Rank Organisation Ltd  BCLC 11,21. The duty is expressed in these very general terms, but that is one of its strengths: it focuses on principle not on the particular words which judges or the legislature have used in any particular case or context. It is dynamic and capable of application in cases where it has not previously been applied but the principle or rationale of the rule applies. It reflects the flexible quality of the doctrines of equity. As Lord Templeman once put it "Equity is not a computer. Equity operates on conscience…" (Winkworth v Edward Baron Development Co Ltd  1 WLR 1512, 1516.)
42 Professor Robert C Clark Corporate Law (1986), pp 34 and 141, has described the fundamental nature of the duty of the loyalty in these terms:
"The most general formulation of corporate law's attempted solution to the problem of managerial accountability is the fiduciary duty of loyalty : the corporation's directors… owe a duty of undivided loyalty to their corporations, and they may not so use corporate assets, or deal with the corporation, as to benefit themselves at the expense of the corporation and its shareholders. The overwhelming majority of particular rules, doctrines, and cases in corporate law are simply an explication of this duty or of the procedural rules and institutional arrangements involved in implementing it. The history of corporate law is largely the history of the development of operational content for the duty of loyalty. Even many cases that appear to be about dull formalities or rules of the road in fact involve disputes arising out of alleged managerial disloyalty … Most importantly, this general fiduciary duty of loyalty is a residual concept that can include factual situations that no one has foreseen and categorised. The general duty permits, and in fact has led to , a continuous evolution in corporate law.
43 Although Professor Clark was writing about the duty of loyalty in the United States, his observations seem to me to express qualities of the duty of loyalty applying equally to the law of England and Wales."
" It is a fundamental duty of the director of a limited company to 'do his best to promote its business and to act with complete good faith towards it': see Scottish Co-operative Wholesale Ltd v Meyer  3 All ER 66 at 88,  AC 324 at 366 per Lord Denning. It is also his duty not to embark on a course of conduct in which his own interests will conflict with those of the company: see Parker v McKenna (1874) LR 10 Ch App 96 at 118 per Lord Cairns LC. He is also, like an employee, under a duty of fidelity to his company: see Hivac Ltd v Park Royal Scientific Instruments Ltd  1 All ER 350 at 353,  Ch 169 at 174 per Lord Greene MR. On the face of it, therefore, one might think it a simple proposition that a director would be under a duty to alert his fellow board members to a nascent commercial threat to the future prospects of the company, and that the duty would be all the greater (and certainly no less) when he himself was planning to be part of that threat."
"89…. A director's duty to act so as to promote the best interests of his company prima facie includes a duty to inform the company of any activity, actual or threatened, which damages those interests. The fact that the activity is contemplated by himself is, on the authority of Balston's case, a circumstance which may excuse him from the latter aspect of the duty. But where the activity involves both himself and others, there is nothing in the authorities which excuses him from it. This applies, in my judgment, whether or not the activity itself would constitute a breach by anyone of any relevant duty owed to the company… A director who wishes to engage in a competing business and not disclose his intentions to the company ought, in my judgement, to resign his office as soon as his intention has been irrevocably formed and he has launched himself in the actual taking of preparatory steps …"
"In the statement of the overriding principle by Roskill J in the IDC case, namely "that a man must not be allowed to put himself in a position in which his fiduciary duty and his interests conflict," the conflict contemplated must be one with a specific interest of the company (or other body or person) to whom the fiduciary duty is owed, as, for example, a maturing business opportunity, as in Canaero, or the plaintiff's interest in the contract secured by the defendant in the IDC case, or a contract falling within the first class of contracts in Lord Blanesburgh's dichotomy in Bell v Lever (page 194), or the use of some property or confidential information of the company which has come to a director as such (Lord Blanesburgh's qualification of his second class). In my judgment an intention by a director of a company to set up business in competition with the company after his directorship has ceased is not to be regarded as a conflicting interest within the context of the principle, having regard to the rules of public policy as to restraint of trade, nor is the taking of any preliminary steps to investigate or forward that intention so long as there is no actual competitive activity, such as, for instance, competitive tendering or actual trading, while he remains a director.
It follows, in my judgment, that Mr Head was not in breach of his fiduciary duty owed to Balston as a director of the company in not disclosing to Balston his intention to set up a business in competition, whether as a dealer in filter products or as a manufacturer of micro-fibre tubes or in taking such steps as he did to forward that intention prior to 18 April 1986."
"Quite plainly at that stage, i.e. from 8 May onwards, Mr Head was in active competition with Balston, in effect competitively tendering, and successfully tendering, for Clifford Edwards' custom, a customer hitherto and for very many years of Balston, as of course, Mr Head was very well aware. In my view in so doing as an employee of Balston at that time and until 11 July 1986 he was clearly in breach of his duty of good faith as their employee."
"63 Both counsel have addressed the court on the policy reasons for holding that Mr Fassihi was in breach of his duty of loyalty in this case. These are relevant questions. If the approach of the law were overly intrusive, legitimate entrepreneurial activity would be discouraged and this would not be a beneficial outcome. That is not in my judgment the result of holding that a duty of loyalty applies in the present case. This is because, on well-established principles of law, Mr Fassihi's setting up of a new company to which the business of Item would be diverted was not a legitimate entrepreneurial activity."
"It does not, furthermore, seem to me that the public policy of favouring competitive business activity should lead to a different conclusion. A director is free to resign his directorship at any time notwithstanding the damage that the resignation may itself cause the company: see CMS Dolphin Ltd v Simonet  2 BCLC 704 at  per Lawrence Collins J. By resigning his directorship he will put an end to his fiduciary obligations to the company so far as concerns any future activity by himself (provided that it does not involve the exploitation of confidential information or business opportunities available to him by virtue of his directorship)."
"The business model of the Sixth Defendant and the structure of and assets held within the Fifth Defendant are fundamentally different to the Claimants business which the Second Defendant regards as being conducted in an immoral and unethical and sometimes unlawful fashion."
"Mike Simmons was until recently the Sales Director of Shepherds Investments Limited, a member of U.K. financial services group, Shepherds. Shepherds is a leading supplier in the market for UK Traded Endowment Policies (TEPs) and, significantly, Shepherds was the first to promote a fund of SHIPs internationally…."
"Mark Hindle was until recently the Investment Director of the UK Traded Endowment Policy Market Maker, Shepherds (Financial) Limited. Mark was responsible for advising Shepherds Select Funds (an Isle of Man domiciled Open Ended Investment Company) on suitable purchases of both TEPs and SHIPs…"
"The fund differs to other funds in its asset class [my emphasis] due to the transparency of the commission that is received from market makers selling the assets and the amount reinvested back into the Fund for the benefit of the shareholders, which will further enhance their return. The Fund will also receive an independent medical report form a UK resident medical practitioner confirming the life expectancy given by the medical practitioners in the US are reasonable."
"During this period, PSL have been busy ensuring that all the necessary support material and information for Assured Fund is in place to enable us to capitalise on the exciting investment opportunity that Assured Fund represents – the first TOTALLY transparent, properly REGULATED and ETHICALLY STRUCTURED fund in the market capitalising on the safety and consistent returns available from a properly purchased and researched pool of Second Hand (U.S.) Life Insurance Policies (SHIPs) – TLPs as some like to refer to them."
Diversion of a maturing business opportunity
Express terms of employment contracts of Mr Walters and Mr Hindle
Misuse of confidential information
"Having identified significant improvements that could be made to the Shepherds model, but being unable to have Shepherds adopt the various measures, PSL was formed to take the exciting concept of SHIP portfolios forward into the UK and International market in a transparent, ethical and diligent fashion."
Account of Profits