De Facto Directors: Assume Responsibility, Accept the Risks
A de facto director is an individual who is assumed to act as if they are a director, even though they have never been formally appointed as such. As the Companies Act 2006 states, a director is “any person occupying the position of director, by whatever name called”.
This is significant because if a person inadvertently acts, or is treated by the company, as a director, the individual owes the same legal duties and responsibilities as an actual, legally appointed director. They are also at risk of criminal sanctions and personal liability in the same way as a director.
An individual recently found this out to his cost. The court found1 that a director of a holding company became a de facto director when he became significantly involved in the affairs of a subsidiary company (a company which provided audiology services).
Increasing involvement
J was one of two directors of a holding company which acquired the subsidiary’s shares. The subsidiary also had two directors, but J was not one of them. A shareholders’ agreement regulated how the holding company and the subsidiary would conduct their business.
Over time, J became increasingly involved in the business activities and daily affairs of the subsidiary, to the extent he convened and held managements meetings - sometimes in the absence of both directors; and instructing solicitors and negotiating on the subsidiary’s behalf.
When the subsidiary went into administration, claims were made against the two directors for breach of duty. At issue was whether J was a de facto director; and if so, had he breaches his fiduciary duties? J resisted the argument that he was a de facto director, claiming that he simply took decisions in his capacity as a director of the holding company pursuant to the shareholder agreement which provided for it to oversee the subsidiary.
The court concluded that the role J had played in directing the subsidiary’s affairs following the conclusion of the shareholder agreement was consistent only with him being part of the corporate governance structure, if not the key and principal element of the corporate governance structure. Further, he had assumed the status of functions of a company director performing functions that could only properly be discharged by a director of the subsidiary.
As a de facto director, J was also found to have breached his fiduciary duties in, for example, causing various payments to be made out to others; and by transferring certain valuable assets of the subsidiary without payment at the time it went into administration.
Key takeaways
Companies need to be clear who, other than formally appointed directors, may be representing the company and potentially acting as a de facto director. They would also be prudent to check if the terms of their insurance policy covers liabilities created by de facto directors – and if so, to what extent.
Similarly, individuals who play a significant role in the operation and day-to-day running of a company need to understand the risk of being treated in law as a de facto director. They should ensure their role and the limits of their responsibilities are clearly defined to avoid the risks of being treated for all intents and purposes as a director.
Should it become the subject of a dispute, whether or not the individual is a de facto director will be a question of fact. Resolving a dispute could prove costly – particularly if litigation becomes necessary.
1Aston Risk Management Ltd v Jones and others [2023] EWHC 603 (Ch)
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