There is still a misconception that you can only be liable as a director of a company if you are named as a director at Companies House. The recent case of Aston Risk Management Ltd v Jones and other [2023] is a timely reminder that a person can be considered to be a director of a company with all the responsibilities and liabilities of a formally appointed director even if that person is not registered as a director at Companies House.
If a person becomes actively involved in the management and affairs of a company that person is at risk of becoming a de facto director.
In considering whether a person is a de facto director of a company, the courts will look at the substance of the role carried out by that person and the likelihood of a person being considered a de facto director will depend upon the extent of that person’s involvement in the day-to-day affairs of a company and whether that person has assumed the functions and responsibilities of a director.
Often the terms ‘de facto director’ and ‘shadow director’ are used interchangeably but whilst both impose the same responsibility and liability as a formally appointed director, they are different. A shadow director is “a person in accordance with whose directions or instructions the directors of a company are accustomed to act” section 251(1) Companies Act 2006. A shadow director is generally seen as a less visible figure who is the mastermind behind the scenes. On the other hand a de facto director is a person who is actively involved in the management of a company, but like a shadow director, that person is in substance a director in all but name.
In the Ashton case, the High Court held that a director of a holding company had become a director of a subsidiary of the holding company because he had become significantly involved in the affairs of the subsidiary company by taking an active role in the subsidiary’s operations often leading negotiations and issuing instructions on behalf of the subsidiary.
In considering the issue, the court set out the principles that it will look at when determining whether a person is a de facto director and these are:
- The person must be part of a company’s corporate governance structure.
- The person must have assumed the role of a director, when considering this the court looks at the functions being carried out by that person irrespective of job title.
- A person who has ultimate control of the management of a company’s business is likely to be considered a de facto director. However if a person is purely giving permission for business activities then that person is not likely to be considered a de facto director.
- The courts will apply an objective test when considering the issue and if a person holds himself or herself out to be a director and third parties believe that person to be a director then the courts are more likely to consider that person to be a de facto director.
Although most of the above principles were taken from an earlier leading case on de facto directors, it is a useful restatement of the principles and demonstrates the need to create a clear corporate governance structure so that directors are formally appointed and the business of the company is managed by those directors and minuted at board meetings. Decisions taken by the directors of any holding company should be limited to approval and veto rights and any delegated authority should be clearly set out as part of the corporate governance structure.
To the extent that a director of a holding company is required to be actively involved in the affairs of a subsidiary, to avoid that director being considered a director in his or her individual capacity it may be advisable for the holding company to be appointed as director on the board of the subsidiary and for that director to be the person authorised to act on behalf of the corporate director. However, this could still give rise to issues and best practice would still be for that person’s remit to be carefully delineated in the corporate governance structure and ideally limited to approval and veto rights.
As the Aston case demonstrates, companies should avoid creating de facto directors as they give rise to uncertainty and undermine a company’s corporate governance structure and also as in the Ashton case, impose unexpected liability on the person concerned.
Please do not hesitate to contact us if you require any advice on the role and responsibilities of directors.
