Determining who is a director

Original news

Smithton Ltd v Naggar [2014] EWCA Civ 939, [2014] All ER (D) 118 (Jul)

The claimant company claimed for loss suffered when two client companies defaulted on their obligations to pay margin calls under open-ended contracts for difference (CfD) entered into between the claimant and those two companies. The Court of Appeal, Civil Division, upheld the judge’s determination that the defendant had not been a director or shadow director of the claimant, nor had his conduct constituted a breach of the Companies Act 2006, s 190 (CA 2006).

What is the significance of this decision?

As Lady Justice Arden remarked in this case, the question of whether or not a director of a holding company has become a director of a subsidiary company arises commonly in practice. It is important to bear in mind this is a Court of Appeal decision, governed by the well-established principles of appellate review—in short, to determine the relevant law and to decide if it was correctly applied and, on facts, to determine if the judge was plainly wrong or not when assessing the weight to be attached to various facts.

In terms of significance, it is limited. The Court of Appeal follows, as it must, the leading Supreme Court decision on these issues, Holland v Revenue and Customs Comrs [2010] UKSC 51, [2011] 1 All ER 430. The ruling is a useful summary of case law and statute on these points though.

How did the governance structure affect the court’s decision?

Following the Supreme Court decision [in Holland v Revenue and Customs Comrs], the question is often whether the respondent was part of the corporate governance system of the subsidiary and whether he assumed the status and function of a director so as to make himself responsible as if he were a director. The court has to determine the corporate governance structure to decide, in relation to the business, whether the acts were directorial in nature. However, in this case the respondent did not run that defence—he relied on the fact that he wore different hats at different times and that he was not wearing the hat of a director of the subsidiary regarding the acts complained of. The first instance judge agreed.

The subsidiary was a joint venture company and thus subject to strong shareholder control. Its holding company, of which the respondent was a director, had just over 50% of the voting rights.

The first instance judge found that the subsidiary was run and managed through the structure laid out in the joint venture agreement (JVA). Under the JVA, the respondent was specifically not a director of the subsidiary. Authority from relevant regulatory bodies such as the Financial Services Authority (as it then was) was not sought for the respondent. The judge was very much persuaded that this meant it was not anticipated that the respondent would be a de facto director. The acts the respondent had carried out were either for himself personally or as director of the holding company. The Court of Appeal did not consider there was any error in this finding.

What exactly is a de facto director?

The starting point is—de facto is Latin for ‘of fact’. A de facto director is someone who is a director in fact, whether by legal right or not. In this case, Lady Justice Arden describes a de facto director as someone who has ‘acted as a director on occasions’. CA 2006, s 250 defines a director as any person occupying the position of director by whatever name called. Whether or not a person is a de facto director or not will depend upon the facts in each case.

How did the court approach the issue of de facto/shadow directors in this case?

The Court of Appeal looked at the various points arising from Holland v Revenue and Customs Comrs and earlier cases:

• a person may be a de facto director whether or not there was an appointment, valid or not. The question is whether he has assumed responsibility to act as a director. To answer that question the court may have to determine in what capacity the director was acting
• there is overlap between the concepts of de facto directors and shadow directors
• the court must look at what he actually did and not his job title
• the court must only look at whether or not he acted as a director, to be determined objectively, and not whether he believed he was acting as a director
• the court must look at the acts in context (a single act might lead to liability in an exceptional case)
• the fact that he is consulted about a decision does not make him a director

Having reminded themselves of statute, case law and the above guidelines, the Court of Appeal found that the judge at first instance had not erred in law and was not wrong on her findings of fact. In essence, the appeal was largely a disagreement over her findings of facts which is not a proper ground for appeal.

How did the decision concerning de facto directors inform the court’s reasoning on the CA 2006, s 190 issue?

It didn’t: as Lady Justice Arden says, the s 190 issue relates to the respondent’s position as a director of the holding company and not because he was a de facto or shadow director of the appellant subsidiary (albeit agreeing with the judge at first instance that he was neither).

What should lawyers take from this case?

It provides a good summary of the statutory definitions and precedent case law which helps practitioners determine if a person was a director and thus could be fixed with personal liability or could bind the company. This will always be a fact specific exercise.

Further reading

If you are a LexisPSL Subscriber, click the link below for further information on director duties:

Powers, duties and liabilities of directors  (Subscriber access only)

Director's guide to dealing with a distressed company (Subscriber access only)

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Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.