De Facto or De Jure Director?
Limited companies will welcome guidance from the court on how to determine whether they have ‘de facto’ directors – and what that means for companies.
A de facto director is an individual who has not formally been appointed as a director in accordance with company law but who is effectively a director for all intents and purposes. That is to say, a de facto director owes fiduciary and other duties to the company concerned as if it was a formally-appointed – ‘de jure’ – director.
If an individual is found to be a de facto director there are important implications for both the individual and the company, including liabilities.
What’s the background?
The proceedings1 flowed from a sad and complex dispute between two brothers spanning more than two decades, various jurisdictions and involving alleged fraud. There was also a company involved in which the two brothers were the shareholders.
A key feature of the claims was that one of the brothers (Ronald) was a de facto director of the company which gave rise to a fiduciary duty to the company equivalent to that of a de jure director; and that the alleged acts were done in fraudulent breach of his fiduciary duty. At issue in this hearing was whether or not Ronald was a de facto director.
The High Court set out useful guiding principles, as established by existing law, to determine whether an individual is a de facto director:
· The overall question when determining whether an individual is a de facto director is whether they were part of the corporate governing structure of the company and whether they assumed a role in the company which imposed the fiduciary duties of a director
· This is a question of fact and degree, to be assessed objectively by reference to all the relevant evidence
· Merely being involved in the management of the company or exercising a degree of influence over its decision making is not in itself enough
· An act will qualify as an act done in the capacity of a de facto director if the corporate governance of the company requires that an act of that nature can be done only by someone having the capacity of a de jure director
· In general, the corporate governance of the company will have to be investigated in order to know whether the act in issue was directorial in nature.
· If the individual enjoyed some other capacity in which he could properly have done the act, it will not have been done as a de facto director
· It is possible for an individual to be simultaneously a de facto director and a shadow director. The capacity in which he acts in relation to the company will depend on the nature of the act.
· An act cannot be simultaneously carried out both in the capacity of a shadow director and a de facto director
· An act which takes the form of directions or instructions to de jure directors will be an act done in the capacity of shadow director
Applying these principles to the facts and, particularly, to Ronald – the court rejected the claim against him. It ruled that the acts/payments complained of were not made in the capacity of a de facto director or in breach of any such duty.
What does this mean?
Companies and their directors need to be alert to the role played by other individuals involved in the company. Non-directors have an important role to play in a company’s business. Ronald, for example, was the company signatory for its bank account but, as the court pointed out, this didn’t help the case against him for the simple reason that such a signatory need not be a director.
This judicial guidance represents a useful reference point where there any doubts as to the whether or not an individual is a de facto director.
1Popely & Popely v Popely and others [2019] EWHC 1507
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