Last year the Supreme Court passed
down its judgment on a matter regarding de facto directors.
De facto directors are those who were either appointed defectively or were not
appointed at all. Holland deals with this latter type of de facto director in
trying to address when one can be classed as a de facto director.
To give a simplified version of the facts Mr Holland was part of a group of
companies. He was a sole de jure director (formally appointed) of one
of the companies. That company itself was a sole de jure director
(corporate director) of a composite company - something which is now
unlawful under s155 Companies Act 2006 which requires one human director, but
events here happened pre-2006 and sole corporate directors were perfectly
lawful since the decision in Bulawayo Market and Office Co Ltd  2
Her Majesty's Revenue and Custom brought a claim against Mr Holland trying
to make him liable for breach of fiduciary duty under s212 of
the Insolvency Act. They claimed he was in breach of duty and
misfeasance for causing the unlawful payment of dividends to shareholders
when the composite company did not have sufficient reserves to pay its
creditors, which is unlawful under what is now s830 CA 2006. Since s212 only
applies to directors, and Mr Holland was only a de jure director of the
corporate director, HMRC tried to claim Mr Holland was ultimately a de facto
director of the composite company.
It was held that Mr Holland was not a de facto director as it was demonstrated
that he was merely discharging his duties as de jure director of the corporate
director. The judgment focused primarily on how one can determine a de facto
director. Lord Collins provided a precedent based line of reasoning showing
that one has to assume the status and functions of a director. This was
supported by Lord Hope.
Watts however wrote that Lord Collins' precedent line of reasoning fails to
furnish a rationale. He states that there can be aberrations in precedent-based
argument, as counsel or judge will not grasp the principles. However, it is
submitted, with respect, that Watts has failed to grasp the thrust of the
case and Lord Collins is, at points, at pains to stress his rationale, which in
fact had little to do with how you determine who is a de facto director.
To elaborate further, modern case law on de facto directors has developed to
include not only those with a defective appointment but also those never
appointed at all (see Lo-Line Electric Motors Ltd, Re  Ch 477).
Although people have attempted to devise specific tests, determining who a de
facto director is has been decided on a factual basis. A judge must ask
themselves whether an individual has assumed the status and functions of a
director. This may include looking at whether one has held themselves out
as a director; whether they are on equal footing with the other directors; or
if they have "real influence" in the corporate governance structure.
Thus for Mr Holland to be a de facto director of the composite company he would
have had to assume the status and functions of a director in that composite
company. However, it had already been accepted that this was not the
contentious issue in the case. It was clear that Mr Holland had merely been
discharging his duties as a de jure director of the corporate director.
The question for Lord Collins (at ) then was not whether Mr Holland
had assumed the status and functions of a de facto director but whether an
'individual director who made all the significant decisions of a corporate
director is to be regarded as being taken as if they were directors of the company
of which it is the corporate director'. To put it another way could the
judicial extension of de facto directors to include those not appointed at all
encompass an individual director of a corporate director? He answered in the
Lord Collins provided three reasons (rationale) for why Mr Holland could not be
a de facto director:
1) The rule in Foss v Harbottle - A company is its own separate legal
personality and distinct from its directors
2) The company structure was perfectly legitimate - Since the decision in Bulawayo
it has been possible for there to be individual corporate directors.
3) Legislative interference - in the form of s155. Lord Collins did not believe
it was the place of the court to interfere. s155 was intended to insure that
there could be at least one natural person for which responsibility
could be attributed to. If Parliament wished to legislate there
could be no corporate directors, or all directors be natural persons, it
would have done so.
Thus, a factual assessment will still take place when trying to determine if
someone is a de facto director. The case of Holland was merely an
"incidental issue" as described by Lady Justice Arden in Mumtaz,
Re  EWCA Civ 610, which supported the 2008 decision in Gemma Ltd,
Re  BCC 812 both of which proceeded on a factual assessment. The
notion suggested by Watts that Lord Collins distinguished between a factual
assessment and whether one assumes the status and functions of a director holds
no weight. They are one in the same.
To conclude Lord Collins did not need to provide a rationale on what was meant
by assuming the status and functions as it was clear Mr Holland had not done
so. Lord Collins was merely demonstrating that that is what is necessary for
someone to be a de facto director and the concept could extend to those not
appointed at all. However, extending de facto directors to include those
serving as sole directors of individual corporate directors would be beyond the
powers of the court and the law.
Watts' case comment can be found under the following citation: P Watts, 'De
facto directors' (2011) 127 LQR 162
For more commentary on directors' duties and shareholder litigation,
visit Gibbs: Law
and Life, a blog centering on directors' duties and company law,
particularly on interpretation and practicality of directors' duties in the
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