Who is a Director? Who to Sue?
Outside of insolvency, it seems that breach of statutory duty claims may be brought against both de facto and shadow directors, as well as de jure (or registered) ones. See section 170(5) Companies Act 2006 (‘CA’).
However, in an insolvency, the preferred view seems to be that breach of duty and Misfeasance claims under section 212 Insolvency Act 186 (‘IA’) can only be brought against de jure and de facto directors but not shadow directors, see Paycheck Services 3 Ltd UKSC 51 and Mumtaz Properties Ltd v Saeed Ahmed (3.8.2010).
By comparison, claims under section 214 IA (i.e. for Wrongful Trading) can be brought against shadow directors (section 215(7)).
Who is a Shadow Director and Who is a De Facto Director?
A ‘Shadow director’ is defined in section 251 IA, section 251(1) of the Companies Act and section 22 Company Directors Disqualification Act 1986.
The decided case of re UKLI Ltd EWHC Ch680 is helpful. In that case the Court decided that whilst the concept of a shadow director is entirely a creature of case law, the concepts of shadow director and de facto director are not mutually exclusive and there may be some overlap.
The same sort of evidential pointers are likely to be relevant to establishing both shadow and de facto directorship and a person may, depending on the facts, act as both.
The real question that the Court looks at is the nature of the activities undertaken and not the label to be attached to the person undertaking them.
The critical feature of the de facto director is that he has assumed the functions of and assumes to act as a director, and is held out at such; See re Paycheck Services 3 Ltd UKSC 51.
Working out whether someone is a de facto director is as case law shows, a fact sensitive exercise. Per Jacob J in DTI v Tjolle BCC 282 at 290:
“I think what is involved is very much a question of degree. The court takes into account all the relevant factors (emphasis added). Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual has proper information (e.g. management accounts) on which to base decisions, and whether the individual has to make major decisions and so on. Taking all these factors into account, one asks ‘was this individual part of the corporate governing structure?’, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question… There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.”
For a more recent example of a de facto director being held liable (indeed with a de jure director) for misfeasance/breach of duty, see re Idessa (UK) Ltd (In Liquidation) EWHC 804 (Ch), per Lesley Anderson QC (sitting as a Deputy Judge):
“Having considered all of the circumstances, it is my view that Dr Morrison did act as a de facto director of the company and did so from incorporation until its liquidation for the following reasons…”
In summary, the reasons included the following factors:
- A draft shareholders agreement indicated that it was always intended that M should be a director and shareholder.
- M was a de jure director of other companies with which Idessa had a ‘close relationship’ which would not have worked if M had not been a director of all the companies.
- M received the same salary as O, the de jure director.
- M and P’s authority was sought in respect of the company’s payroll.
- M had the same access as P to the company bank account and to the laptop containing company financial information.
- M saw and scrutinised the management accounts.
- Company staff liaised with both M and P with regard to budgeting issues and the provision of financial information.
- Whilst M had denied in his evidence that he was responsible for financial transactions, he did ‘not otherwise deny that he exercised control in a more general sense’.
- M was held out as promoter and director in the business plan.
- The company produced a business card for M with his name and the title “Director” and “although there is no reference to “Idessa (UK) Limited” only “Idessa” it bears the company’s address and telephone number”. The Deputy Judge rejected the suggestion that they were never used.
- M had a company credit card, like P.
- M was held out as a director to BMW in a proposal document, as was P, in relation to a company car.
- M operated a loan account.
The Deputy Judge therefore concluded:
“Having regard to all of the above circumstances, I am satisfied that Dr Morrison was exercising real influence over the company’s affairs and that he was acting on an equal footing with Mr Povey such that he is fairly to be regarded as part of its corporate governance.”
A word of caution: a shadow director is not necessarily subject to the same duties as a de jure or de facto one. It is necessary to look at the particular role which the person has undertaken and assess his liability accordingly (Ultraframe (UK) Ltd v Fielding EWHC 2343 (Ch)).