Mark Baldwin of our Insolvency Service team considers what can be done to show that a person has acted as a de facto director.
A person who has acted as if he were a company director, whilst not formally registered at Companies House as a director of a company, is termed a “de facto” director. A de facto director owes the same statutory duties to the company as formally appointed directors and may therefore be sued by the company for breaches of those duties. A de facto director may also be subject to directors’ disqualification action under the Company Directors Disqualification Act 1986.
Accordingly the status of those not formally appointed as directors of a company may become important, particularly after the insolvency of a company.
The courts have, over the recent past, come up with various formulations as to what constitutes a de facto director, but broadly speaking a de facto director is a person who acts on an equal footing with those directing the company’s affairs. So what evidence shows that someone has acted as a de facto director?
1. Holding Out / Job Title
Has the company or the individual represented to the outside world that he is a director? Correspondence/emails/business cards from the company/individual which include the individual being described as a “director” are extremely helpful.
2. Who Holds the Purse Strings
One of the main directorial roles in a business is deciding who gets paid and when. Was the individual on the bank mandate? Did he sign cheques? Who did the bank deal with? Who did the accounting staff take their instructions from in relation to payment? The weight of this evidence will depend on the company’s banking structure as some accounting employees may be on the mandate too.
3. Who Did the Hiring and Firing
Staff management is another directorial function and involvement in the recruitment and dismissal of staff, especially at a high level in the organisation, is indicative of management control. Company-wide emails to staff may also assist in showing the relevant level of control.
4. Who Dealt with the Customers
Negotiating major contracts with customers or dealing with any issues arising with customers may also assist. If customers all identify the individual as their main contact and not the other directors that is a good indicator.
5. Who Dealt with the creditors
The creditors may also be a source of evidence if they have dealt predominantly with the individual and not the appointed directors.
6. Who Dealt with the Company’s Advisers
Another factor to consider is who was the source of the company’s instructions to its accountants, solicitors and other advisers? Again if these emanated from the individual rather than or in conjunction with the appointed directors that is another strong indicator. In an insolvency situation the identity of the people who originally consulted with the prospective insolvency practitioner and who provided information post appointment is another factor that can assist.
7. Pay and Benefits
Another consideration is the level of the individual’s remuneration and benefits when compared to the formally appointed directors. If it is on a par with them and above the general level of staff pay, that is another useful piece of evidence.
8. What Do the Directors Say
This may have to be treated with caution as the directors may have their own agendas in seeking to pass blame to or exonerate the individual.
9. Shareholding
This can go either way, but a majority shareholding may indicate control.
10. Board Meetings
Properly documented board meetings are a rare thing these days, but presence at board meetings and participation in strategic decisions is another factor which may indicate de facto directorship.
Conclusion
The more of the above factors that can be evidenced to show that the individual was on an equal footing with the appointed directors the better, but all cases are fact specific, and the outcome can be extremely difficult to predict.
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