UK: England and Wales: on the definition of 'persons discharging managerial responsibility'

The catching-up (also known as "101 ways to avoid marking, number 42") continues with a post to note that the ICLR has published a summary of the High Court decision Allianz Global Investors GmbH v G4S Ltd [2022] EWHC 1081 (Ch): see [2022] WLR(D) 206. The case concerned an issuer's liability under section 90A of the Financial Services and Markets Act 2000 for untrue or misleading statements. Such liability arises only if a 'person discharging managerial responsibilities' within the issuer knew that the statement was untrue or misleading, or was reckless as to whether this was so. The court held (to quote the summary):

The definition in paragraph 8(5) of Schedule 10A of “persons discharging managerial responsibility” was clear and unambiguous and should be given its natural reading. Read as a whole, it clearly stipulated that where an issuer had directors the persons discharging managerial responsibility were the directors (including persons occupying the position of director, by whatever name) and only in a case where there were no directors could a senior executive of the issuer have such responsibility". 

UK: England and Wales: the 'nerve centre' and de facto directors

Mr Justice Edwin Johnson delivered judgment last week in Umbrella Care Ltd v Nisa & Ors [2022] EWHC 86 (Ch). Amongst the matters he considered was whether an individual was a de facto director of a company. 

I note his judgment here because it provides a further illustration of what we might call the 'nerve centre' test: was the individual the nerve centre, or one of the nerve centres, from which the activities of the company radiated?  As the trial judge noted - like HHJ Hodge before him in Ingram v Singh [2018] EWHC 1325 (Ch) - asking if an individual was part of the company's governance structure, an approach endorsed in Holland v HMRC [2010] UKSC 51, may be of less assistance in determining if they are a de facto director where the company's affairs have been conducted informally in the absence of any formal governance structure.

UK: England and Wales: shadow and de facto directorships

Judgment was delivered earlier this week by HHJ Hacon in Popely v Popely [2019] EWHC 1507 (Ch). This first instance decision - concerning a double derivative action - is noteworthy for the discussion it contains of the distinctions between de facto and shadow directorships and whether it is possible for an act to be simultaneously carried out in both of these capacities (no was the judge's answer). Of note, too, is the reliance placed on a decision of Guernsey's Royal Court: Carlyle Capital Corporation Ltd v Conway (Judgment 38/2017; available here for registered users; registration is free).

Australia: directors' duties, distributions and creditor interests

Last week I noted an English decision in which the directors' failure to adopt a dividend policy was regarded as a breach of duty: see here. Today I note an Australian decision - Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2) [2019] FCA 354 - also from last week, but one in which the trial judge (White J.) held that directors had acted in breach of duty in adopting, and failing to review and revise, a distribution policy.

The decision contains a useful review of directors' duties and is noteworthy because of the discussion it contains of the circumstances in which directors are required to consider the interests of creditors. Regarding the latter, the trial judge rejected a narrow interpretation and stated (paras. [209], [708]):

...I do not accept the submission ... to the effect that the directors or officers of a company are required to consider the specific interests of creditors only when their actions are likely, on a balance of probabilities, to lead to the insolvency of the company. That was so, the defendants submitted, because it is only at that point that their decisions are effectively managing assets which belong to the creditors and not to the shareholders. I agree ... that that is one circumstance in which directors and officers of a company will be obliged to consider the interests of the company’s creditors, but the authorities .... indicate that it is not the only circumstance...

.... the authorities ... indicate that test is broader than 'nearing insolvency' or 'doubtful solvency'. They indicate that the duty of directors to consider the interests of creditors is enlivened when there is a 'real and not remote risk of insolvency' and when the objective circumstances require consideration of the interest of creditors".

Note:

Some of the authorities cited by White J. were considered recently at appellate level in England: see BTI 2014 LLC v Sequana S.A. & Ors [2019] EWCA Civ 112, [2019] WLR(D) 68. The Court of Appeal unanimously rejected the view that the creditor interests duty (to adopt its description) should apply in English law where there was a "real risk" of insolvency; the court nevertheless accepted that the duty could be triggered where a company's circumstances fell short of actual insolvency.

UK: England and Wales: de facto directorships and substantial property transactions

The Court of Appeal gave judgment earlier today in Smithton Ltd v Naggar [2014] EWCA Civ 939. At first instance the trial judge held that an individual was not a de facto director or shadow director and that certain transactions were not substantial property transactions for the purposes of section 190 of the Companies Act 2006: see [2013] EWHC 1961 (Ch). The Court of Appeal held that there was no basis for setting aside these findings. Arden LJ (with whom Elias and Tomlinson LJJ agreed) delivered the leading judgment and, with regard to section 190, observed that it:

"... requires an arrangement (which can be a non-contractual arrangement) under which a director or connected person acquires "or is to acquire" an interest in shares. There is no basis for interpreting the words 'is to acquire' as 'may acquire'. The fact that conditional arrangements are permitted does not require this interpretation since even a conditional arrangement must still satisfy the words quoted even if it is conditional" (para. [110]). 

UK: Upper Tribunal considers meaning of "director"

The meaning of the term "director", as found in section 28(5)(a) of the Goods Vehicles (Licensing of Operators) Act 1995, has recently been considered by the Upper Tribunal in Bradley & Anor (Transport : Traffic Commissioner cases) [2014] UKUT 253 (AAC). The Tribunal rejected the argument that "director" in this context was limited to an individual lawfully appointed as such and appearing on the Register at Companies House. It also held, after considering the meaning of de jure, de facto and shadow directorships, that "... what really matters is whether the evidence shows that the person concerned probably played a part in the corporate governing structure of the company in question. If the answer is that they did, that, in our view, is what matters for the purpose of engaging s. 28(5)(a) of the 1995 Act" (para. [27]).

UK: England and Wales: three cases on directors' duties

The duties of directors have recently been considered in a trio of High Court decisions. In the first, Pullan v Wilson [2014] EWHC 126 (Ch), the court considered the operation of section 176 of the Companies Act 2006, which imposes a duty on directors not to accept benefits from third parties. The case concerned a trustee who had been appointed a non-executive director of several companies in which the trusts had invested. The judge held that section 176 did not apply because the benefits in question were received by the individual in his capacity as trustee; the benefits were not conferred because the individual was a director or doing anything as a director.

In the second case, The Northampton Regional Livestock Centre Co Ltd v Cowling [2014] EWHC 30 (QB), a director was held in breach of duty where he placed himself in a position of conflict by acting for both the vendor and purchaser in a commercial property transaction. The judgment contains some interesting discussion of the operation of section 1157, under which the court has the power to grant a director relief from liability in respect of negligence, default, breach of duty or breach of trust. Finally, in the third case, Elsworth Ethanol Company Ltd v Hartley [2014] EWHC 99 (IPEC), it was argued that that three individuals were de facto directors and that they had acted in breach of duty. The court rejected this argument, finding that the three individuals were not de facto directors of a company.

UK: England and Wales: de facto and shadow directorships

Judgment was given earlier this week in Secretary of State for Business, Innovation and Skills v Chohan & Ors [2013] EWHC 680 (Ch). The case concerned an application by the Secretary of State for the disqualification of a director under section 6 of the Company Directors Disqualification Act 1986. The decision contains interesting discussion of the characteristics of de facto and shadow directorships and provides another example of the court accepting the possibility that an individual could act as both a de facto and shadow director. In this regard the trial judge, Hildyard J., stated (at para. [46]): "It is now, I think, clear that (a) the same sort of evidential indicia are likely to be relevant to establishing both shadow and de facto directorship and (b) a person may act as both, the one in fact shading into the other."

UK: England and Wales: de facto directorship considered by Court of Appeal

Judgment was given yesterday by the Court of Appeal in Re Mumtaz Properties Ltd. [2011] EWCA Civ 610: see here. Lady Justice Arden delivered the only reasoned opinion (with which Aikens and Patten LJJ agreed). The principal issue before the court was whether the trial judge had erred in finding that an individual (Mr Zafar Ahmed) was a de facto director of the company. Arden LJ held that the judge had not erred and stated that Mr Ahmed was part of the company's corporate governance structure and "one of the nerve centres from which the activities of the Company radiated" (para. [47]).

UK: Holland v HMRC judgment given - Mr Holland not a de facto director

The Supreme Court handed down its judgment in Holland v HMRC Commissioners [2010] UKSC 51 shortly before 10 am today: see here (pdf) or here (html). A press summary is available here (pdf). By a majority (3:2) the Court held that Mr Holland was not a de facto director.  There are substantial reasoned opinions from four of the five justices and opinion is strongly divided. The judgment is the leading authority on de facto directorship.

Lord Hope did not accept that Mr Holland had acted as a de facto director of the composite companies (ie., those companies having another company as sole director, this other company being one for which Mr Holland was a director). Lord Collins agreed, observing that "For the court to hold that every significant decision of individual directors of a corporate director is to be regarded as being taken as if they were directors of the company of which it is the corporate director goes considerably beyond the law as it has been developed at first instance and by the Court of Appeal in the modern de facto director cases, and beyond what I would regard as the function of the court" (para. [96]).

Lord Saville, in a short opinion, agreed with Lords Hope and Collins, observing that "it does not follow from the fact that Mr Holland caused the corporate director to make decisions in relation to the composite companies that he was accordingly a de facto director of the composite companies. To suggest that he was is to ignore or bypass the separate legal personality of the corporate director ..." (para. [98]).

Lords Walker and Clarke were in the minority. Lord Walker began his opinion by expressing a fear: that the Court's decision would "make it easier for risk-averse individuals to use artificial corporate structures in order to insulate themselves against responsibility to an insolvent company's unsecured creditors" (para. [101]). Lord Walker added: "The repeated assertion that everything that Mr Holland did was done in his capacity as a director of [the corporate director], and was within his authority as a director of that company, is no doubt not 'pure sham' but it is, in my view, the most arid formalism. In my view Mr Holland was acting both as a de jure director of [the corporate director] and as a de facto director of the composite companies" (para. [115]). Lord Clarke agreed: in his view "Mr Holland was a de facto director of the composite companies on the ground that he in fact made directorial decisions with regard to them" (para. [145].

A summary of the Supreme Court's judgment has been published by the ICLR as part of its WLR Daily service: see here. The Court of Appeal decision ([2009] EWCA Civ 625) is available here and the High Court decision ([2008] EWHC 2200 (Ch)) here.

UK: Supreme Court judgment in de facto director case due this week

The Supreme Court will hand down its judgment in Holland v HMRC Commissioners on Wednesday this week. See here for background information.

UK: Supreme Court hears de facto director case

The Supreme Court begins hearing argument today in Holland v HMRC Commissioners: see here. The court will consider whether the director of a company which acted as a director of 42 companies was a de facto director of those 42 companies. The High Court ([2008] EWHC 2200 (Ch)) held that the director was a de facto director. The Court of Appeal ([2009] EWCA Civ 625) held that he was not.

UK: Supreme Court to hear appeal in de facto director case

A post on the UK Supreme Court blog - a blog about the court with editors from Matrix Chambers and Olswang LLP , which was formally launched last week - informs me that permission has been granted for an appeal to the Supreme Court in Holland v HMRC [2009] EWCA Civ 625, [2009] 2 BCLC 309, [2009] STC 1639. For a summary of the Court of Appeal's decision, see this post. 

UK: England and Wales: a de facto director?

The Court of Appeal gave judgment in Holland v Revenue and Customs & Anor [2009] EWCA Civ 625 last week. The court was required to consider whether a director of a company that acted as a corporate director of over 40 insolvent companies was a de facto director of those insolvent companies. At first instance ([2008] EWHC 2200 (Ch)), the trial judge found that the director was a de facto director of the insolvent companies. A unanimous Court of Appeal disagreed. Rimer LJ observed (para. [74]):

I emphasise that nothing that I have said is intended to suggest that there can never be circumstances in which a director of a corporate director can or will so act as to cause himself to be regarded as a de facto director of the subject company. But something more will be required than the mere performance by him of his duties as a de jure director of the corporate director. On the facts accepted by the judge, there was nothing more in the present case".

Notes: 

[1] The case has been summarised here by the ICLR as part of its WLR(D) service (this summary will be removed should the case be reported in one of the ICLR's series of law reports). 

[2] Section 155 of the Companies Act (2006) provides that "A company must have at least one director who is a natural person". This was brought into force on 1 October 2008 by the Companies Act 2006 (Commencement No. 5, Transitional Provisions and Savings) Order 2007. This Order provides, however, that companies which did not have at least one natural person as a director on 8 November 2006 (the date on which the Companies Act (2006) received Royal Assent) have until 1 October 2010 to comply (see Part 3 of Schedule 4). 

England and Wales: The meaning of 'de facto' director

In Gemma Ltd (in liquidation) v Davies and another [2008] EWHC 546 (Ch), [2008] WLR (D) 89, the High Court explored the circumstances in which an individual would be regarded as a de facto director for the purposes of Section 212 of the Insolvency Act (1986). The judgment, which has not yet been published on BAILII, contains a useful overview of the authorities. The trial judge outlined several principles:

(1) It must be proved that the alleged de facto director performed functions that could only be discharged by a director.

(2) There is no need to prove that a de facto director was held out as a director.

(3) The director must have participated on an equal footing with the other directors and not in a subordinate role.

NB: The Companies Act (2006) does not contain a specific definition for de facto director. Section 250 does, however, define the term "director" (in such a way as to include de facto directors) and Section 251 defines the term "shadow director".