Pinpointing the de facto director—Re Sports Management Group Ltd (in liquidation)

Pinpointing the de facto director—Re Sports Management Group Ltd (in liquidation)

What are the difficulties when identifying the de facto director after a company has gone into liquidation? Gemma Witherington, barrister at Hardwicke, explores the issues faced by Registrar Derrett when trying to determine the de facto director of Sports Management Group Ltd and highlights the lessons that can be learnt from the judgment.

Original news

Re Sports Management Group Ltd (in liquidation); Green (as liquidator of Sports Management Group Ltd) v Marston and another [2016] Lexis Citation 55, [2016] All ER (D) 208 (May)

The Companies Court held that, on the facts, the second respondent had been a de facto director of Sports Management Group Ltd (in liquidation). Accordingly, he had no defence to the liquidator’s claim in respect of various payments made when the company was insolvent and would not be granted relief for a director’s breach of duty.

Briefly, what were the facts of this case?

The company called Sports Management Group Limited (SMG) operated in a number of areas one of which was creating magazines for the sports industry. It was involved in providing sponsorship deals for individuals and large organisations, like Formula One teams. SMG went into liquidation and owed significant amounts of money to a range of creditors, including HMRC.

The liquidator appointed was Elliott Green, the applicant in this case. Considering the records of the company, he noted that Richard Marston was a de jure director of SMG. He alleged that Wayne Lochner was a de facto director. As the first respondent, Mr Marston accepted that he was a director of SMG. He claimed he was not a man of means and so early on he settled the claim against him. The case then proceeded against the second respondent, Wayne Lochner only. He was not listed as a director of the company at Companies House so a key question in the case was whether or not he was a de facto director of SMG when looking at all of the circumstances of the case.

What were the main legal arguments used by both parties and what was the decision of Registrar Derrett?

The case really turned on the facts and on determining if the second respondent was a de facto director of SMG. Mr Lochner held himself out as a director of the company on his business cards and in the media, and on social media sites like LinkedIn and was therefore proactively calling himself a director of the company. While he was not involved in the management of the company’s bank accounts, it was alleged that he did make decisions about staff.

Mr Lochner denied he was a de facto director of SMG and argued he was only engaged as a contractor by the company and was not involved in any key decisions made in the management of the company. He maintained that he had a number of business interests and that he was only helping out SMG, although he did have a desk in the SMG offices. After taking all these factors into account, Registrar Derrett found that Mr Lochner had a high level of involvement in the company and was therefore a de facto director.

An appeal has just been filed and since this is an insolvency case, it will be reviewed by a High Court judge.

To what extent is the judgment helpful in clarifying the law regarding de facto directors?

While this was a very fact-specific case and does not develop the law on the subject, it provides a very useful appraisal of the law in this area. The registrar was persuaded by the fact that Mr Lochner held himself out as a director of the company. Although the law says that this is not conclusive in determining if someone is a de facto director or not, it is nonetheless very persuasive. The judgment provides a good outline of the law on de facto directors and how it can be applied. Key cases in the law on the subject, like Ultraframe v Fielding and others [2005] EWHC 1638 (Ch), [2005] All ER (D) 397 (Jul) and HMRC v Holland and another [2010] UKSC 51, [2010] All ER (D) 255 (Nov) are referred to.

What practical lessons can those advising take away from this case?

It emphasises the importance of having witnesses to support your case. This was a key issue. Mr Lochner argued that he was told to use the title of director—however, he only had one witness in support of his defence. Calling key witnesses, business associates and customers may help in proving the role of a person in a business.

Getting hold of a copy of all the company documents and information early on is another practical tip that stands you in good stead. Mr Marston settled his case early on given he had no funds to fight the dispute. In that sense it’s a good idea sometimes to take a commercial view and settle early on in some circumstances.

Interviewed by Diana Bentley.

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

Further Reading

If you are a LexisPSL subscriber, click the links below for further information:

A summary procedure under section 212 of the Insolvency Act 1986 and the process for bringing a misfeasance claim

Directors and insolvency—roles, powers and duties

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.