Speculative Trading and a Director’s Equitable Duty of Care

Posted: November 6, 2006

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Introduction
Although primarily concerned with complex issues of choice of law as between Russia, England and Guernsey, the Court of Appeal’s decision (Tuckey and Arden L.J.J. and Newman J.) in Base Metal Trading Limited v Shamurin also dealt with the overlapping duties owed by a director to the company at common law and in equity and the choice of law which applies to those duties. By emphasising the fundamental importance of the place of incorporation of the company the decision limits the use of “companies of convenience”. 

The Facts
The interesting background to the case was the collapse of the Soviet Union in 1991, the breeding ground for so many new millionaires. The defender, S and another Russian, Y, both of whom were resident and working in Moscow, saw the opportunity to make money from the export of non-ferrous metal from Russia to Western Europe and the US. They formed a number of Russian companies to invest and trade in metal and their joint venture progressed by the autumn of 1992 to the formation of a foreign company which would make short-term loans to the Russian companies to buy metal in Russia. The metal would then be sold on to the foreign company, taking title outside Russia, and sold to Western companies, allowing the foreign company to generate profits outside Russia in hard currency, to borrow at more favourable interest rates than those available to Russian companies and to attract customers reluctant to become involved in the confused banking, legal and regulatory situation in Russia at the time. S and Y chose the UK as a stable jurisdiction with a clearly defined legal system and the pursuer, BMTL, was incorporated in Guernsey in 1992 with nominee directors and shareholders. The articles provided that BMTL’s business was to be managed by the directors “who may exercise all such powers of the company as are not required to be exercised in general meeting” (Art.80). BMTL's registered office was in St Peter Port but it had tax exempt status because it only carried on business of an administrative nature in Guernsey and the formation documents stated that the central management and control of its business would be in Russia.  Guernsey was, or so it seemed, a convenient offshore location.

S and Y became directors and 50 per cent shareholders and agreed that S would be managing director—there were no formal contracts of employment but it was accepted that both directors were also employees. Y's role was buying the metal in Russia and arranging for its delivery while S sold the metal to the Western purchasers and was responsible for BTML’s activities outside Russia. Before BMTL started physical metal trading S and Y agreed that the company's exposure on its resale price on physical trades resulting from the time-lag between the date of purchase of the metal and the date of its resale would be hedged by means of future trades on the LME and S opened metal trading accounts with three LME brokers. BMTL's business was conducted entirely from Russia where it had an office in Moscow. Its accounts for 1993 showed sales of about $40m and a profit of $6m, with both S and Y drawing $566,000 that year.

S and Y fell out in late 1994 and S left BTML. In due course the company raised proceedings in the High Court in London against S to recover losses of more than $6m made in 1993 and 1994 which the company claimed were the result of S's speculative metal trading on the LME. S’s position was that he accepted that some of these losses were the result of speculative trading, but that each speculative transaction had been discussed with Y. Although the English style of pleadings differs from that in Scotland, the essence of the claim based on contract and delict is clearly set out in BTML’s pleaded case: “As a director of the claimant, the defendant owed the claimant a duty, based on common law and equity to exercise reasonable care and skill in the business he transacted on behalf of the claimant and in his conduct of the claimants affairs. Further, or alternatively, it was an implied term of the defendant's contract of employment with the claimant that he would exercise reasonable care and skill in the performance of the services rendered by him under that contract of employment in repeated breach of the contractual obligation and the duties of care and skill the defendant unreasonably, and without Y's knowledge and consent, repeatedly concluded a large number of futures trades on behalf of the claimant with the LME brokers with a view to speculation, rather than hedging.”

(Continued. For full article please download using link at the top of the page.)