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Herbert Smith Freehills LLP

Posted: 27 Jan, 2020

In a recent decision the High Court has held that a financial institution which is alleged to have been a shadow director of its customer will not be liable for breach of fiduciary duty unless the breach is linked to an instruction or direction given by the institution: Standish & Ors v The Royal Bank of Scotland plc & Anor [2019] EWHC 3116 (Ch).

The decision will be of particular interest to financial institutions involved in turnarounds, restructurings and the exercise of control, management or similar rights arising upon default under facility agreements.

Generally speaking, financial institutions will wish to avoid giving directions or instructions to the directors of a borrower company to minimise the risk of being found to be shadow directors. However, because Standish arose in the context of an interim application for strike out, it was assumed that the financial institution would be shown to constitute a shadow director. The decision therefore considered what duties would be owed by the financial institution in those circumstances – would it owe all of the duties that are owed by de jure directors of the company or instead duties which are specific to the directions or instructions given by the financial institution?  The court held that the latter approach now reflects the settled legal position.

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