12 February 2014

Normal corporate management structures and legal theory do not always march in step. The reality is that, despite neat legal theory, businesses can be run (or influenced by) individuals who are not legal directors registered at Companies House.

However, individuals who undertake such roles or whose influence or instructions stray across corporate boundaries (including in group structures) need to be aware that the law may choose to treat them as directors even if not legally registered. This has important personal implications for such individuals including in terms of their own liability, director’s duties, exposure to liability for safety breaches by the company, disqualification, status in the event of insolvency of the company, ability to conduct substantial transactions with the company, coverage by insurance (D&O), privilege questions and personal tax treatment. It is also, of course, important for how and whether the individuals bind or represent the company.

The law categorises three types of director who can owe duties to the company (and in some circumstances to its creditors, employees and other stakeholders):

  • De jure director – director at law, registered in Companies House (alternate directors are also de jure and themselves should normally be registered at Companies House).
  • Shadow director – not a de jure director but someone in accordance with whose instructions the board is accustomed to act (not being a professional adviser retained to advise).
  • De facto director – director in fact, not a de jure director someone who behaves and is taken by the company and other directors (if any) to behave as a director.

Elsworth Ethanol v Hartley has recently gone back over the legal definition of a de facto director. It dealt with whether three individuals breached a fiduciary duty to a company by registering a patent in the name of another company. They were not de jure directors (and there was no suggestion they were shadow directors) so could only have such a fiduciary duty if they were de facto directors.

The test for de facto directors was said to be as follows:

(1) There is no single test by which a de facto director may be defined. The court must take into account all relevant factors.

(2) The following, although not constituting an exhaustive list, are of particular significance:

(i) Where the individual (the putative de facto director) was acting with one or more others who were true directors, whether he was acting on an equal footing with those others in directing its affairs.

(ii) Whether there was a holding out by the company of the individual as a director and whether he used the title.

(iii) Taking all the circumstances into account whether the individual was part of the corporate governing structure, that is to say the system by which the company is directed and controlled.

(3) Factor (i) is especially important. For someone to be held to be a de facto director alongside one or more de jure directors there must be clear evidence that he was acting on an equal footing with the other(s) in directing the affairs of the company.

(4) If it is unclear whether the acts of a person are referable to an assumed directorship, or to some other capacity such as a consultant, that person must be entitled to the benefit of the doubt, ie there will be no inference of a de facto directorship.

So, in essence having given her/him the benefit of any doubt – 'is the individual part of the corporate governing structure acting on an equal footing with de jure directors?'

Many corporate structures will have individuals who exert influence but are not registered at companies house (particularly if they are appointees or owners) and it can be worth remembering the obligations/risks they expose themselves to if they do.

The individuals in the above case were not de facto directors.

Ian Tucker comments on emerging issues from a litigation perspective.

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David Hall

David Hall Partner

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