06 SEP 2012
De Facto Directors and their Liabilities
A ‘de facto' director is a person who has not been formally appointed and notified to Companies House as a full ‘de jure' director but is still treated as a director by the courts if there is a dispute, because he has acted like a director and must take legal responsibility for those actions as if he was one.
If a person is a de facto director he is subject to the same duties and liabilities as a de jure director - for example, the general statutory directors' duties in the Companies Act 2006, including the duties to:
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— Act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
— Avoid situations in which his interests conflict, or possibly may conflict, with the interests of the company.
— Disclose personal interests in transactions the company proposes to enter into.
He is also subject to every other statute or law that applies to de jure directors - including the remainder of the Companies Act, the insolvency offences such as the ‘wrongful trading' laws in the Insolvency Act 1986 and the company director disqualification rules.
It's therefore crucial to recognise when someone is likely to be treated as a de facto director by the courts so he can make sure he complies with all the relevant duties and obligations, and the company can formalise the situation by appointing him as a de jure director.
Recognising de facto directorsThere is no definition of ‘de facto director' in the Companies Act, but court decisions have given useful guidance. They show [Secretary of State for Trade & Industry v Hollier  EWHC 1804] that a key characteristic is that de facto directors must participate (or have the right to participate) in collective decision-making on company policy and implementation - that they must be part of the corporate governance of the company, exercise a ‘real influence' and not play a merely subordinate role.
For example, in a case [Gemma Ltd v Davies  2 BCLC 281] in which someone was company secretary but took no part in decision-making, the court ruled the secretary was clearly not a de facto director. It said that the test of whether someone was a de facto director was an objective one, and took into account:
— That he carried out functions that could properly be carried out only by a director.
— That he took part in directing the affairs of company on an equal footing with the other directors, and not in a subordinate role - he was a ‘real influence' in the corporate governance of company.
It also said that someone claiming to be a director was secondary - it was what a person did that counted, not what he was called. Saying you are a director can be important evidence that you acted as a director, but it's not necessary, and it's not sufficient on its own to make you a de facto director.
In a more recent case [Re Mumtaz Properties Ltd  EWCA Civ 610] a liquidator of a company wanted to bring director's misfeasance proceedings against a person who wasn't formally appointed as a director. The liquidator therefore needed to prove he was a de facto director. The court found that the relevant company had been run with a ‘high degree of informality', but that the person being targeted by the liquidator was part of the corporate governance structure. The court said he was ‘one of the nerve centres from which the activities of the company radiated'. He was therefore a de facto director.
Similarly, in another case, the wife of the de jure director had overall control of the company and took all the major decisions. She signed important bank documentation, and described herself as chairman of the company. One of her sons had total control of another company in the same group, and was responsible for its financial affairs. The court ruled that both mother and son were de facto directors of their companies.
However, another son had negotiated a lease of premises for one company and dealt with the solicitors acting for another, but was never part of the corporate governance of either - he was carrying out important transactions, but always on the instructions of others. The court ruled he was not a de facto director.
In other cases [Ultraframe v Fielding  EWHC 1638. Secretary of State for Trade & Industry v Hollier  EWHC 1804] the courts have also taken account of one or more of the following actions by alleged de facto directors:
— Deciding to change the company's suppliers.
— Being responsible for the company's financial affairs.
— Acting as sole signatory to the company's bank account.
— Dealing directly with an asset of the company.
— Having access to, or the ability to access, company information.
— Any family relationships and financial interests with the de jure directors and/or shareholders.
Corporate directorsIf you appoint a corporate director to your board, take care. A director of your corporate director might also be treated as a de facto director of your company. In the leading case [Re Paycheck Services 3 Ltd  EWCA Civ 625 and Holland v HMRC  UKSC 51] the Supreme Court decided there was no de facto director in the particular circumstances but its reasoning was complex, so consider specialist legal advice.
Avoiding de facto directorships
Ways to make sure you avoid a de facto directorship include:
— Keep non-directors out of decision-making on corporate policy and implementation and stop them exercising functions that can properly be carried out only by a director.
— If they do get involved, make sure it is clear that they are not equal with the other directors, and are not exercising a ‘real influence'.
— Make sure it is clear that non-directors are always acting only on instructions from, and subject to monitoring and review by, the directors. Even in smaller companies, this can be achieved through project specs, proper job descriptions, performance appraisals, regular reporting/monitoring and financial controls (such as setting limits on employees' spending powers, not allowing non-directors to act as sole signatories to bank accounts or have sole control over company assets).
— Avoid running companies with a ‘high degree of informality' or, if you do, make it a minimum requirement that everyone who is a ‘nerve centre from which the activities of the company radiate' is formally appointed a director.
— Avoid job titles implying someone is a de jure director if they are not.
— Avoid giving non-directors access to confidential board information.
— Scrutinise situations involving corporate directors carefully.
— If in doubt, take specialist legal advice.