De Facto Directors In The Spotlight

A recent case in the UK Supreme Court has drawn attention to the consequences faced by de facto directors of companies.

As a reminder, a de facto director is a person who is not appointed as a director of a company, but who carries out the work of a director and is considered by the board to be a director. The courts have previously described a de facto director as:

"A person who assumes to act as a director....is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such".

This is important because de facto directors owe the same fiduciary duties (such as the duty not to make secret profits and the duty to avoid conflicts of interest) and ordinary duties (such as duty to disclose an interest in company business and the ordinary duty of skill and care) that the appointed directors owe to the company.

Further, if a company becomes insolvent then a de facto director could also face the same penalties that the appointed directors face (for example, disqualification or wrongful trading).

In the recent case, the appellant (Mr Holland) set up 42 separate companies, the shareholders of which were individual contractors who carried out work for him. It was anticipated that these 42 companies would pay corporation tax at the lower 'small business' rate. HMRC, however, assessed that the companies should pay the corporation tax at the higher rate. The companies were unable to meet the higher rate of tax and were placed into administration.

The sole director of each of the 42 companies was a company (B) and their company secretary was another company (C). Mr Holland was a director of companies B and C and their sole shareholder was another company which was owned by Mr Holland.

The argument in the case was that Mr Holland, as a director of companies B and C, was a de facto...