When is a Director Not a Director? The Supreme Court Enters the Fray

When will a director of a corporate director be a de facto director of a subject company? This was the £13 million question for Mr Holland, a director of Paycheck (Director Services) Ltd which was the corporate director of 42 composite companies, because as de facto director of these companies he could be held responsible for the payment of unlawful dividends under section 212 of the Insolvency Act 1986.

Section 212 allows the creditor of a company that has been wound up to request a court to compel an "officer" of the company to pay sums in respect of a misuse of power or breach of fiduciary duty. It was accepted that "officer" includes a de facto director.

Luckily for Mr Holland, the Supreme Court concluded by a majority of 3:2 that he was not a de facto director in Holland v the Comissioners for Her Majesty's Revenue and Customs and another (2010), delivered last Wednesday.

A de facto director is someone who performs the functions of a director and who owes the same duties to the company as a director, but who has not been validly appointed. However, determining whether someone is acting as a de facto director is not an easy one and there are no hard and fast rules. Holland makes clear that the focus of the court will be on what the individual does, not what they are called, and a critical question will be whether the individual is discharging functions that can only be properly discharged by a director.

In relation to the particular issue in Holland: whether a director of a corporate director is a de facto director of the subject company, the majority agreed that the starting point was a recognition that Mr Holland and Paycheck were separate legal persons. The following principles can be drawn from the majority judgments:

The mere fact that the individual in question is acting as a director of the corporate director is not enough. Where everything the individual does was under the umbrella of acting as a director of the corporate director, his acts must be attributed to that role (it was on this basis that Mr Holland...