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In the current climate, directors are understandably becoming increasingly concerned about potential personal liability in the event of corporate failure. The recent Supreme Court decision in Holland v Revenue and Customs & Anor considered the position of individuals who offer their services through the vehicle of a corporate director. In other words, where an individual is a director of X Ltd which is a corporate director of Y Ltd, can the individual be deemed a director of Y Ltd and therefore held liable for breach of a fiduciary duty to that company?
A brief recap on the law relating to "deemed" directorship. An individual does not have to be formally appointed to the board and registered as a director at Companies House in order to be treated as a director for the purpose of company law. There are, broadly, three types of director:-
- a de jure director - someone who has been validly appointed as a director;
- a de facto director - someone who undertakes those functions of a company which can only be properly discharged by a director, without having been formally appointed. In order to be a "de facto" director, the individual must usually have participated equally with the other directors in running the company, and exerted real influence in that role.
- a shadow director - someone who does not hold themselves out as a director, but "in accordance with whose instructions" the directors are accustomed to act. It must be proved that the majority of the board tended to do as they were told by the shadow director.
De jure and de facto directors tend to be subject to the same legal duties, but the position of shadow directors is more complex and depends on the circumstances. It is usually prudent, however, to assume that they will be subject to the same duties as an actual director.
In the Holland case, the Supreme Court had to consider whether an individual director of a corporate director of another company was a de facto director of that other company, and therefore liable for the payment of an unlawful dividend, when his actions could only be attributed to the activities of the corporate director.
The facts of the case were rather complex, but involved an individual, MH, the sole director of PD Ltd, which in turn acted as the sole director of 42 trading companies ("the composite companies"). Under tax law, the composite companies were treated as associated and therefore subject to higher rate corporation tax (something of which MH was unaware at the outset). The companies were subsequently placed into administration, having declared dividends without having made provision for the relevant tax. HMRC claimed that MH was guilty of misfeasance as a de facto director of the composite companies for allowing them to continue to pay dividends even after HMRC had flagged its view that they were associated.
The existing case law indicated that a director of a corporate director (A) of another company (B) could theoretically be a de facto director of B but not simply because he was a director of A - there would have to be something more, although what this is remained unclear.
In the Holland case, the Supreme Court decided by a majority that MH was not a de facto director of the composite companies - he did not assume the directorship of company B merely because he was a director of the corporate director. The dissenting minority made the point that if a sole director of company A (the corporate director) cannot be deemed a de facto director of company B, it is difficult to imagine any circumstances where a board member of a corporate director can be a de facto director of the subject company. It is difficult to disagree.
The majority, however gave the compelling reason that in the Companies Act 2006, Parliament imposed the requirement for all companies to have at least one director who is a natural person. If they had wanted to prevent individuals from sheltering behind the veil of corporate directorship, they would have required all directors to be individuals.
Individuals can therefore continue to protect themselves against personal liability by using a corporate director structure - however any individual who wishes to do so is unlikely to endear himself to the rest of the board particularly given the requirement for at least on of them to be a director in their personal capacity.