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Court gives guidance on ‘de facto’ directors’ liabilities

Limited companies will welcome court guidance on how to determine whether they have ‘de facto’ directors. De facto directors are individuals not formally appointed as directors, but treated by a court as having fiduciary and other duties to the company as if they had been so appointed – on the basis they have acted like a full director.

In a complex dispute over ownership of a patent, a company claimed that three individuals should have registered the patent in its name rather than that of another company. It said their failure to do so was a breach of their fiduciary duties owed to it as directors of the company.

The individuals argued they had never been formally appointed as full (de jure) directors of the company and did not therefore owe any fiduciary duties. The company, however, argued they were ‘de facto’ directors.

The court held that in determining whether someone is a de facto director, all relevant factors must be taken into account. There is no single test for defining a de facto director. However, the following (non-exhaustive) factors are of particular significance:

  • If an individual is acting with one or more others who are true directors, that he is doing so on an equal footing with them in directing its affairs. This factor is particularly important and there must be clear evidence.
  • Where an individual is held out by the company as a director.
  • Whether he uses the title of director.
  • Taking all circumstances into account, the individual is part of the company’s corporate governing structure – that is to say, the system by which the company is directed and controlled.
  • If an alleged de facto director’s acts could be explained by some other role they hold, such as consultant to the company, they are entitled to the benefit of the doubt. There is no inference that they are a de facto director.

The court concluded that, on the evidence, the individuals in this case were not de facto directors.

Recommendations

Suggestions to ensure you avoid a de facto directorship include:

  • Keeping non-directors out of the company’s corporate governance structure – for example, away from decision-making on corporate policy and implementation.
  • If they do get involved, make sure it is clear that they are not equal with the other directors and not exercising a real influence.
  • Making sure it is clear non-directors are always acting only on instructions from the full directors, and are monitored and reviewed. This can be achieved through proper job descriptions, performance appraisals, regular reporting/monitoring and financial controls (such as setting limits on employees’ spending powers, and not allowing non-directors to act as sole signatories to bank accounts or have sole control over company assets).
  • Avoid running companies with a ‘high degree of informality’ or, if you do, make it a minimum requirement that everyone who is a ‘nerve centre from which the activities of the company radiate’ is formally appointed a director.
  • Avoid job titles implying someone is a de jure director if they are not.
  • Avoid giving non-directors access to confidential board information.
  • Scrutinise situations involving corporate directors carefully.
  • If in doubt, take specialist legal advice.

Case ref: Elsworth Ethanol Company Ltd & Anor v Hartley & Ors [2014] EWHC 99 (IPEC)

 Alex Cook is a Director at Helix. Alex initially trained academically as an unregistered barrister and was a Partner and Head of Civil Litigation at a large firm based in the South East before joining Helix Law. As well as focussing on expanding Helix, Alex specialises in commercial and property related litigation and he has acted for a broad range of clients including offshore property investment funds, small businesses and individual property owners.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]