De facto directors and their liabilities

It is essential to remember that the Companies Act 2006 s.250 states that a director is any person who occupies the position of director, by whatever name called. This is to ensure that the responsibilities and potential liabilities of directorship are not avoided simply by failing to register as a director at Companies House.

For further information on directors duties and responsibilities, see the following IoD briefings:

• Directors’ duties and responsibilities
• Controls over directors powers
• Role of the non-executive director
• Role of the managing director
• Role of the company secretary
• Differences between directors and managers

De jure directors

A de jure director (meaning a director from law) is a director who is properly appointed to the board and registered with Companies House.

De jure directors (also informally known as ‘Companies House directors’ or ‘registered directors’) will be either executive (employed directors responsible for the day to day running of the company) or non-executive (non-executive directors are not employees of the company, they provide independent guidance to the executive directors). Whilst executive directors have the protection of employment law in the same way as any other employee, there is no legal distinction between executive and non-executive directors in terms of their directorships. Consequentially, executive and non-executive directors have the same legal duties, responsibilities and potential liabilities.

De facto directors

A de facto director (meaning a director in fact or in reality) is someone who has not been properly appointed and notified to Companies House as a director but who nevertheless acts as a director and holds themselves out to third parties as a director.  Sometimes (but not always) they will have the word ‘director’ as part of a job title.

The de facto director will usually carry out all the duties of a director and can make the decisions of a director, sign company documents and be treated as a director by de jure directors. It is the role assumed by the individual, rather than the title used that determines whether an individual is a director or not.

The de facto director is also subject to the same legal duties, responsibilities and potential liabilities as de jure directors and will be treated as such by the courts in the case of a dispute.

In the judgement on Re Hydrodam (Corby) Ltd Judge Millett concluded:

“A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.

A de facto director, I repeat, is one who claims to act and purports to act as director, although not validly appointed as such. A shadow director [see next section], by contrast, does not claim or purport to act as director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself. He is not held out as a director by the company.”

In Re UKLI Ltd Secretary of State for Business, Innovation and Skills v Chohan and others [2013] EWHC 680 Ch, Judge Hillyard gave these ten characteristics as being relevant in identifying a de facto director, although not all ten need  be established:

1. A de facto director must presume to act as if he were a director.
2. He must be or have been in point of fact part of the corporate governing structure and participated in directing the affairs of the company in relation to the acts or conduct complained of.
3. He must be either the sole person directing the affairs of the company or a substantial or predominant influence and force in so doing as regards the matters of which complaint is made. Influence is not otherwise likely to be sufficient.
4. Whether the person concerned has undertaken acts or functions such as to suggest that his remit to act in relation to the management of the company is the same as if he were a de jure director.
5. The functions he performs and the acts of which complaint is made must be such as could only be undertaken by a director, not ones which could properly be performed by a manager or other employee below board level.
6. It is relevant whether the person was held out as a director or claimed or purported to act as such: but that, and/or use of the title, is not a necessary requirement, and even that may not always be sufficient.
7. His role may relate to part of the affairs of the company only, so long as that part is the part of which complaint is made.
8. Lack of accountability to others may be an indicator; so also may the fact of involvement in major decisions.
9. The power to intervene to prevent some act on behalf of the company may suffice.
10. The person concerned must be someone who was more than a mere agent, employee or advisor.

Recommendations

De facto directorship can be avoided by following these suggestions:

• Keeping non-directors out of the company’s corporate governance structure – for example, away from decision-making on corporate policy and implementation.
• If they do get involved, make sure it is clear that they are not equal with the other directors and not exercising a real influence.
• Making sure it is clear non-directors are always acting only on instructions from the full directors, and are monitored and reviewed. This can be achieved through proper job descriptions, performance appraisals, regular reporting/monitoring and financial controls (such as setting limits on employees’ spending powers, and not allowing non-directors to act as sole signatories to bank accounts or have sole control over company assets).
• Avoid running companies with a ‘high degree of informality’ or, if you do, make it a minimum requirement that everyone who is a ‘nerve centre from which the activities of the company radiate’ is formally appointed a director.
• Avoid job titles that include the word ‘director’ or imply someone is a  director if they are not.
• Avoid giving non-directors access to confidential board information.
• Scrutinise situations involving corporate directors carefully.
• If in doubt, take specialist legal advice.

Case ref: Elsworth Ethanol Company Ltd & Anor v Hartley & Ors [2014] EWHC 99 (IPEC)

Shadow directors

A shadow director is ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’ (Section 251 The Companies Act, 2006). Note the reference to ‘person’ as opposed to ‘individual’ meaning that a company can also be seen as a shadow director.

A shadow director cannot carry out these acts themselves and probably acts behind the scenes as there is a reason that they cannot be appointed formally.  A body corporate will not usually be regarded as a shadow director of its subsidiaries but a ‘dominant individual’ at the parent company could be. Advice given in a professional capacity (for example by lawyers or accountants) is not sufficient to make a person a shadow director but banks looking to protect loans made to a company or a ‘company doctor’ working on a corporate recovery plan could potentially be shadow directors.

A claim of misfeasance or breach of duty cannot be brought against a shadow director (but it can be brought against a de facto director) under section 212 of the Companies Act 2006 but a claim of wrongful trading can be brought against shadow directors as well as de facto directors (Insolvency Act 1986).  A shadow director can also be disqualified under the Company Directors Disqualification Act 1986.

The Small Business, Enterprise and Employment Act 2015 will ensure that shadow directors have legal duties (as set out in section 170-177 of The Companies Act 2006) on the same basis as individual directors.

Corporate directors

A company is a separate legal entity or ‘person’ and it is therefore possible for a company to be appointed as a director of another company. However all companies must have at least one director who is a ‘natural person’, to ensure that there is an individual who can be held accountable for the actions of that company. Provided that this is the case a company can appoint a corporate body (i.e. another company so not a ‘natural human’) as a director (section 155, The Companies Act 2006).

A potential risk is that if a director of the corporate director regularly attends board meetings they could be held to be a de facto director of the company on whose board the corporate director sits.

The Small Business, Enterprise and Employment Bill 2014-15 has prohibited the use of corporate directors with effect from October 2015 – with limited exceptions to be brought in by Regulations.

Nominee directors

Occasionally circumstances will arise where a group of people with an interest in a company (for example shareholders or less frequently a creditor)  wish to appoint a representative or ‘nominee’ to the board of directors.  The right to make such appointments will sometimes be found in a company’s articles of association or in a shareholders or investment agreement. The vital point for such a nominee to remember is that whilst they are on the board of directors as the representative of the group that appoint them they are bound by law to act within their fiduciary and statutory duties in the same way as any other director.  This means that they must consider the interests of the company and at all times act in such as way that is most likely to be in the best interests of the company and to promote the success of the company.

Alternate directors

An alternate director is someone who attends, speaks and votes at board meetings and can otherwise act in all respects to stand in the place of the appointed director when he or she is unable to do so.

The Companies Act does not make any provision for alternate directors but they can be appointed if the company’s articles allow for this. If the company’s articles does not allow for alternates then directors may not appoint them, unless the articles are amended. The appointment of alternate directors is also usually subject to approval by the board and the appointment can be revoked at any time by the appointing director. If the appointing director ceases to hold office, so does the alternate director.

An alternate director is treated in the same way as any de jure director and their appointment is to be notified to the Registrar of Companies at Companies House.

Related resources and courses

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