Carraghyn - Chartered Directors

De Facto Directors in the Firing Line

Most people now understand the term “shadow director” which is defined in company and insolvency legislation as a person "in accordance with whose directions or instructions the directors of the company are accustomed to act". But few appreciate the situation where someone can he held to be a de facto director. Unlike with a shadow director a de facto director does not pull strings from behind the scenes, but acts as though he was himself a director.
Just as a shadow director can be held personally liable for the debts of a company so too can a de facto director.
The question of de facto directorship was recently considered by the English Court of Appeal, in Re Mumtaz Properties Ltd. In this case, a grandson appealed against a decision that he was a de facto director of a family company and liable for its debts. 
In fact there was no actual evidence that the grandson had held himself out as being a director. However, he had a director's loan account on which he could make drawings for his personal benefit, and a company credit card which he was permitted to use for his own personal purposes. 
He also dealt with suppliers to the company and made contracts with local authorities in connection with the company's property. In his tax return, he had originally claimed to be self-employed. However, later he changed his status by ticking the box which showed that he was a director or employee.
The Court of Appeal noted that, on its own, the fact that the grandson dealt with local authorities or with the occasional supplier did not make him a director as opposed to a manager. Similarly, the fact his status in his tax return was changed did not, of itself, amount to an admission that he regarded himself as a director. 
However, the Court of Appeal said the judge was entitled to find that the grandson was a de facto director, on the totality of his findings as to how the company's affairs were run. "The fact was that the judge was satisfied, looking at the evidence as a whole (including, no doubt, the evidence that he had a company credit card, which he was able to use for his own purposes and the fact that, unlike an ordinary employee, he had left monies with the company for investment by him in his own properties at a later date), that he was also part of the corporate governance structure of the company."
In the words of Lady Justice Arden, the grandson was "one of the nerve centres from which the activities of the company radiated". 
The Court also commented on the lack of documentary evidence in the case. The liquidator was not able to point to the company's books and papers to show that the grandson was a de facto director, because the directors had not handed over the necessary documents. However, this did not help the grandson: the evidence of the liquidator established a prima facie case and, given that the books and papers had been in the custody and control of the respondents to the proceedings, it was open to the judge to infer that the liquidator's case would have been borne out by those books and papers.
As Lady Justice Arden commented, those who have conducted the affairs of limited companies with a high degree of informality cannot seek to avoid liability, or to be judged by some lower standard than that which applies to other directors, simply because the necessary documentation is not available.
While the position of individuals standing behind corporate directors is now clear, others who involve themselves in the governance structure of companies should beware. Those who assume to act as directors, whether validly appointed or not, must accept the responsibilities of the office.
Carraghyn are able to advise boards or individual directors on the potential liabilities for directors, be they appointed, shadow or de facto directors either as part of a full board appraisal or in potential insolvency situations – or even on an ad hoc basis. If you wish to discuss this please do get in contact.
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+10 # RE: De Facto Directors in the Firing Linegary newnes 2012-07-13 19:52
A very interesting article which has made me realise I could be in this very position myself. Thanks.
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