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Case law: Judicial guidance on 'de facto' directors' liabilities

Limited companies will welcome detailed guidance from the Court of Appeal on how to spot whether they have 'de facto' directors.

Legal Alert

This update was published in Legal Alert – September 2014

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

De facto directors are those not formally appointed as directors, but who will be treated by a court as having fiduciary and other duties to the company as if they had, because they have acted like a full director.

In this case, a subsidiary company unsuccessfully claimed that a director of its former holding company had been either a shadow or de facto director of it, and his conduct as such meant he was in breach of his duties as a director of the subsidiary.

The Court said there was no one definitive test to determine whether someone is a de facto director; it was a matter of fact and degree. The question is whether they were part of the corporate governance system of the company and whether they assumed the status and function of a director so as to make themselves responsible as though they were a director.

The Court referred to a number of principles that arose from early authorities, including:

  • The concepts of shadow director and de facto are different but there is some overlap.
  • The court is required to look at what the director actually did, and not any job title actually given to him.
  • A defendant cannot avoid liability simply by showing that he, in good faith, did not think he was acting as a director. The question whether or not he acted as a director is to be determined objectively and irrespective of the defendant's motivation or belief.
  • The court must look at the cumulative effect of the activities relied on, and the acts in their context. The court should look at all the circumstances 'in the round'.

Each company in a group of companies should consider its corporate governance system and whether individuals – particularly directors of their holding company or companies - are part of that system. If so, they should check whether those individuals may be de facto directors of the company.

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Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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