Last year the Supreme Court passed down its judgment on a matter regarding de facto directors.
De facto directors are those who were either appointed defectively or were not appointed at all. Holland deals with this latter type of de facto director in trying to address when one can be classed as a de facto director.
To give a simplified version of the facts Mr Holland was part of a group of companies. He was a sole de jure director (formally appointed) of one of the companies. That company itself was a sole de jure director (corporate director) of a composite company - something which is now unlawful under s155 Companies Act 2006 which requires one human director, but events here happened pre-2006 and sole corporate directors were perfectly lawful since the decision in Bulawayo Market and Office Co Ltd [1907] 2 Ch 458.
Her Majesty's Revenue and Custom brought a claim against Mr Holland trying to make him liable for breach of fiduciary duty under s212 of the Insolvency Act. They claimed he was in breach of duty and misfeasance for causing the unlawful payment of dividends to shareholders when the composite company did not have sufficient reserves to pay its creditors, which is unlawful under what is now s830 CA 2006. Since s212 only applies to directors, and Mr Holland was only a de jure director of the corporate director, HMRC tried to claim Mr Holland was ultimately a de facto director of the composite company.
It was held that Mr Holland was not a de facto director as it was demonstrated that he was merely discharging his duties as de jure director of the corporate director. The judgment focused primarily on how one can determine a de facto director. Lord Collins provided a precedent based line of reasoning showing that one has to assume the status and functions of a director. This was supported by Lord Hope.
Watts however wrote that Lord Collins' precedent line of reasoning fails to furnish a rationale. He states that there can be aberrations in precedent-based argument, as counsel or judge will not grasp the principles. However, it is submitted, with respect, that Watts has failed to grasp the thrust of the case and Lord Collins is, at points, at pains to stress his rationale, which in fact had little to do with how you determine who is a de facto director.
To elaborate further, modern case law on de facto directors has developed to include not only those with a defective appointment but also those never appointed at all (see Lo-Line Electric Motors Ltd, Re [1988] Ch 477). Although people have attempted to devise specific tests, determining who a de facto director is has been decided on a factual basis. A judge must ask themselves whether an individual has assumed the status and functions of a director. This may include looking at whether one has held themselves out as a director; whether they are on equal footing with the other directors; or if they have "real influence" in the corporate governance structure. Thus for Mr Holland to be a de facto director of the composite company he would have had to assume the status and functions of a director in that composite company. However, it had already been accepted that this was not the contentious issue in the case. It was clear that Mr Holland had merely been discharging his duties as a de jure director of the corporate director.
The question for Lord Collins (at [96]) then was not whether Mr Holland had assumed the status and functions of a de facto director but whether an 'individual director who made all the significant decisions of a corporate director is to be regarded as being taken as if they were directors of the company of which it is the corporate director'. To put it another way could the judicial extension of de facto directors to include those not appointed at all encompass an individual director of a corporate director? He answered in the negative.
Lord Collins provided three reasons (rationale) for why Mr Holland could not be a de facto director:
1) The rule in Foss v Harbottle - A company is its own separate legal personality and distinct from its directors
2) The company structure was perfectly legitimate - Since the decision in Bulawayo it has been possible for there to be individual corporate directors.
3) Legislative interference - in the form of s155. Lord Collins did not believe it was the place of the court to interfere. s155 was intended to insure that there could be at least one natural person for which responsibility could be attributed to. If Parliament wished to legislate there could be no corporate directors, or all directors be natural persons, it would have done so.
Thus, a factual assessment will still take place when trying to determine if someone is a de facto director. The case of Holland was merely an "incidental issue" as described by Lady Justice Arden in Mumtaz, Re [2011] EWCA Civ 610, which supported the 2008 decision in Gemma Ltd, Re [2008] BCC 812 both of which proceeded on a factual assessment. The notion suggested by Watts that Lord Collins distinguished between a factual assessment and whether one assumes the status and functions of a director holds no weight. They are one in the same.
To conclude Lord Collins did not need to provide a rationale on what was meant by assuming the status and functions as it was clear Mr Holland had not done so. Lord Collins was merely demonstrating that that is what is necessary for someone to be a de facto director and the concept could extend to those not appointed at all. However, extending de facto directors to include those serving as sole directors of individual corporate directors would be beyond the powers of the court and the law.
Watts' case comment can be found under the following citation: P Watts, 'De facto directors' (2011) 127 LQR 162
De facto directors are those who were either appointed defectively or were not appointed at all. Holland deals with this latter type of de facto director in trying to address when one can be classed as a de facto director.
To give a simplified version of the facts Mr Holland was part of a group of companies. He was a sole de jure director (formally appointed) of one of the companies. That company itself was a sole de jure director (corporate director) of a composite company - something which is now unlawful under s155 Companies Act 2006 which requires one human director, but events here happened pre-2006 and sole corporate directors were perfectly lawful since the decision in Bulawayo Market and Office Co Ltd [1907] 2 Ch 458.
Her Majesty's Revenue and Custom brought a claim against Mr Holland trying to make him liable for breach of fiduciary duty under s212 of the Insolvency Act. They claimed he was in breach of duty and misfeasance for causing the unlawful payment of dividends to shareholders when the composite company did not have sufficient reserves to pay its creditors, which is unlawful under what is now s830 CA 2006. Since s212 only applies to directors, and Mr Holland was only a de jure director of the corporate director, HMRC tried to claim Mr Holland was ultimately a de facto director of the composite company.
It was held that Mr Holland was not a de facto director as it was demonstrated that he was merely discharging his duties as de jure director of the corporate director. The judgment focused primarily on how one can determine a de facto director. Lord Collins provided a precedent based line of reasoning showing that one has to assume the status and functions of a director. This was supported by Lord Hope.
Watts however wrote that Lord Collins' precedent line of reasoning fails to furnish a rationale. He states that there can be aberrations in precedent-based argument, as counsel or judge will not grasp the principles. However, it is submitted, with respect, that Watts has failed to grasp the thrust of the case and Lord Collins is, at points, at pains to stress his rationale, which in fact had little to do with how you determine who is a de facto director.
To elaborate further, modern case law on de facto directors has developed to include not only those with a defective appointment but also those never appointed at all (see Lo-Line Electric Motors Ltd, Re [1988] Ch 477). Although people have attempted to devise specific tests, determining who a de facto director is has been decided on a factual basis. A judge must ask themselves whether an individual has assumed the status and functions of a director. This may include looking at whether one has held themselves out as a director; whether they are on equal footing with the other directors; or if they have "real influence" in the corporate governance structure. Thus for Mr Holland to be a de facto director of the composite company he would have had to assume the status and functions of a director in that composite company. However, it had already been accepted that this was not the contentious issue in the case. It was clear that Mr Holland had merely been discharging his duties as a de jure director of the corporate director.
The question for Lord Collins (at [96]) then was not whether Mr Holland had assumed the status and functions of a de facto director but whether an 'individual director who made all the significant decisions of a corporate director is to be regarded as being taken as if they were directors of the company of which it is the corporate director'. To put it another way could the judicial extension of de facto directors to include those not appointed at all encompass an individual director of a corporate director? He answered in the negative.
Lord Collins provided three reasons (rationale) for why Mr Holland could not be a de facto director:
1) The rule in Foss v Harbottle - A company is its own separate legal personality and distinct from its directors
2) The company structure was perfectly legitimate - Since the decision in Bulawayo it has been possible for there to be individual corporate directors.
3) Legislative interference - in the form of s155. Lord Collins did not believe it was the place of the court to interfere. s155 was intended to insure that there could be at least one natural person for which responsibility could be attributed to. If Parliament wished to legislate there could be no corporate directors, or all directors be natural persons, it would have done so.
Thus, a factual assessment will still take place when trying to determine if someone is a de facto director. The case of Holland was merely an "incidental issue" as described by Lady Justice Arden in Mumtaz, Re [2011] EWCA Civ 610, which supported the 2008 decision in Gemma Ltd, Re [2008] BCC 812 both of which proceeded on a factual assessment. The notion suggested by Watts that Lord Collins distinguished between a factual assessment and whether one assumes the status and functions of a director holds no weight. They are one in the same.
To conclude Lord Collins did not need to provide a rationale on what was meant by assuming the status and functions as it was clear Mr Holland had not done so. Lord Collins was merely demonstrating that that is what is necessary for someone to be a de facto director and the concept could extend to those not appointed at all. However, extending de facto directors to include those serving as sole directors of individual corporate directors would be beyond the powers of the court and the law.
Watts' case comment can be found under the following citation: P Watts, 'De facto directors' (2011) 127 LQR 162
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