Holding company directors – potential liability as director of subsidiaries?

The Court of Appeal has recently considered whether a director of a holding company was liable to one of its subsidiaries for breach of fiduciary duties, despite not having been appointed as a director of the subsidiary company.

The fiduciary and other duties which a director owes to the company which appoints him apply equally to someone who has not been formally appointed but who nonetheless acts as a director (a "de facto director"). Company and insolvency law also impose liability on a "shadow director", where the actual directors of a company are accustomed to act in accordance with the shadow director's directions or instructions. In the case of Smithton Ltd v Naggar, the Court of Appeal had to determine whether a director of a holding company was a de facto or shadow director of one of its subsidiaries.

The subsidiary was a joint venture, with the holding company owning just over 50 per cent of the shares and members of the subsidiary's management team holding the balance. There was a shareholders' agreement in place, which provided that the board of directors was to be made up of various members of the management team and three other directors nominated by the holding company. As is usual in joint ventures, the agreement also provided for certain information to be provided by the subsidiary to its shareholders, and for certain matters to be reserved for decision by the shareholders rather than by the board.

In the event, nothing much was discussed or decided at formal board meetings of the subsidiary. Important decisions were in fact taken informally by one of the management team and Mr Naggar, who was a director of the holding company but was not one of the holding company's nominees on the subsidiary's board.

The subsidiary entered into a number of contracts with people connected with Mr Naggar. It made a loss on those contracts, and brought a claim against Mr Naggar, alleging that he owed duties to it as a de facto or shadow director which he had breached in relation to the contracts. When the High Court dismissed its claim, it appealed.

The Court of Appeal referred to the leading case of HMRC v Holland, which concerned a number of trading companies which had another company as their sole director (the corporate director). In that case the Supreme Court decided that Mr Holland, who was a director of the corporate director, was nonetheless not a de facto director of the trading companies. He had acted only in his capacity as a...