Appeal Court Guidance On De Facto Directors

Keywords: appeal court, de facto directors

Another attempt to have an individual found liable as a de facto director of a company that has sustained losses has failed. In Smithton v Naggar1, the Court of Appeal has agreed with the trial judge that Mr Naggar was not a de facto director of Smithton Limited (formerly called Hobart Capital Markets Limited).

Background to the case

Hobart was a joint venture company in the Dawnay Day group of companies. Dawnay Day International held just over half of the voting rights in Hobart; Hobart's management held the rest. Mr Naggar was a director (and chairman) of DDI and he was also connected to several of Hobart's major clients. He was not, however, named in the joint venture agreement as one of Hobart's directors and he was never named as a director in any of Hobart's applications for regulatory consents and authorisations.

Background to the law

De facto directors are subject to some (but not all) of the provisions regarding directors in the Companies Act 2006. De facto directorship used to be confined to a person who was acting as director but whose appointment as such was invalid for some reason. Nowadays it is accepted that there is no need for there to have been an invalid appointment for someone to be found to be a de facto director. Lady Justice Arden, giving the only judgement in the Court of Appeal, took the opportunity in this case to set out the basis of liability as a de facto director. She said, following HMRC v Holland2, that liability arises from an assumption of responsibility as a director. If there has not been an invalid appointment as director, one must then look at the corporate governance system of the company to see if he or she was doing acts which were "directorial" in nature.

Decision in the case

In this case it was not necessary to look at the corporate governance system of Hobart as Mr Naggar accepted that his acts were directorial in nature, but he claimed that they had been carried out in a different capacity. Essentially, the case came down to a question of "hat identification". Arden LJ held that the trial judge was entitled to take the view that, since the joint venture agreement set out who would be a director, it was unlikely that other parties would take on the role of director. Having considered many actions and decisions taken by Mr Naggar she concluded that there was nothing that "goes beyond the involvement one would expect to see from a person who combined the...