In the case if Smithton Limited v Naggar and Others [2014] EWCA Civ 939 the Court of Appeal was asked to consider a claim against the respondent, Mr Naggar based on an assertion that he was a de facto or shadow director.
Background
Mr Naggar was a director of the appellant’s holding company but not the appellant. Proceedings were brought to recoup losses which the appellant incurred in consequence of transactions with clients introduced to it through Mr Naggar. It sought to recoup its losses by alleging that, although Mr Naggar was not one of the duly appointed directors of the appellant,
he was a de facto or shadow director of it; or, alternatively,
on the basis that he was a director of its holding company and that the arrangements in question infringed Section 190 of the Companies Act 2006 (“CA 2006”), (providing for the avoidance of substantial property transactions) giving rise to a statutory liability on his part to indemnify the appellant.
The claims were for some £4 million.
At first instance, the judge rejected both claims. The Court of Appeal dismissed the appeal for the following reasons.
There was no basis for setting aside the judges conclusion that Mr Naggar had been involved with the appellant’s affairs but that this was in his capacity as a director of its holding company or some other capacity than that of director of the appellant.
Section 190 did not apply to the relevant arrangements whereby the appellant acquired shares in connection with transactions with persons connected with Mr Naggar.
The court helpfully reviewed the current statutory provisions and case law, which are set out below
The statutory definitions of de facto director and shadow director appear in sections 250 and 251 of the CA 2006 respectively.
“250 “Director” in the Companies Act “Director” includes any person occupying the position of director, by whatever named called.
“251 Shadow director”
In the Companies Act “shadow director” in relation to the company, means a person in accordance with whose and directors and or instructions the directors of the company are accustomed to act.
A person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity… ”.
The leading case is HMRC v Holland [2010] 1 WLR 2793 in which Lord Collins sensibly held that there was no one definitive test for determining whether someone was a de facto director. The question is whether he was part of the corporate governance system of the company and whether he had assumed the status and functions of a director so as to make himself responsible as if he were a director. He noted a number of general points that had arisen out of that case and previous cases which he said were of general practical importance in determining who is a de facto director as follows.
The concepts of shadow director and de facto are different but there is some overlap.
A person may be a de facto director even if there was no valid appointment. The question is whether he has assumed responsibility to act as director.
To answer that question the court may have to determine in what capacity the director was acting.
The court will in general also have to determine the corporate governance structure of the company so as to decide in relation to the company’s business whether the defendant’s acts were directorial in nature.
The court is required to look to at what the director actually did and not any job title actually given to him.
A defendant does not avoid liability if he shows that he in good faith thought he was not acting as a director. The question whether or not he acted as a director is to be determined objectively and irrespective of the defendant’s motivation or belief.
The court must look at the cumulative effects of the activities relied on. The court should look at all the circumstances “in the round”.
It is also important to look at the acts in their context. A single act might lead to liability in an exceptional case.
Relevant factors include
Whether the company considered him to be a director and held him out as such;
Whether third parties considered that he was a director.
The fact that a person is consulted about directorial decisions or his approval does not in general make him a director because he is not making the decision.
Acts outside the period when he is said to have been a de facto director may throw light on whether he was a de facto director in the relevant period.
- The question is one of fact and degree.
Summary
Even though the claim was ultimately unsuccessful, the case is a warning to those who are not directors, but who are active within the corporate governance that their conduct may be judged as if it were that of a director. If there is doubt about their position, they should act carefully.