De facto directorship and its implications

If you are involved in the running or management of a company and/or operating on an equal footing with those formally appointed as directors of the company then you run the risk, in the event of the company entering a formal insolvency process, that you will be considered a “de facto” director.

When a company enters an insolvency process, the office holder will examine the directors’ conduct and will identify any potential claims against its director(s) for breach of duty and/or misfeance under Section 212 of the Insolvency Act 1986. If a claim is identified the office holder will seek to recover from the director(s) the loss suffered by the company as a result of the breach of duty. A de facto director owes the same duties to the company as the formally appointed directors and may also be subject to disqualification proceedings under the Company Directors Disqualification Act 1986.

A de facto director (or director “in fact”) is someone who acts as a director whilst not registered as a director at Companies House. There is no definitive test for de facto directorship and all relevant factors need to be taken into account and considered by the Court on a case by case basis. Relevant factors will include whether individual:

• had been held out as acting as a director, including using the title “director” in communications;
• had responsibility for the company’s financial affairs;
• had been involved in the recruitment and dismissal of staff;
• participated in board meetings and strategic decision making;
• negotiated with third parties on behalf of the company;
• provided instructions to the company’s solicitors, accountants and other advisers;
• received remuneration and benefits on a par with the appointed directors and above the general level of staff pay;
• was regarded by other directors and staff as a director of the company;
• held a majority shareholding.

If you are concerned that your role puts you at risk of being a de factor director, you should:

(i)    ensure that you comply with all relevant duties and obligations under the Companies Act 2006, obtaining, if necessary, professional advice as to the nature and extent of those duties;

(ii)   after taking appropriate advice, consider becoming formally appointed as a director so there is no doubt about your position; or

(iii)  seek to minimise the risk by ceasing to act in the ways outlined above or changing the surrounding circumstances by making sure that you only act on the instructions of the other formally appointed directors.

For further information please contact John Bradshaw or Sarah Mower in the Barker Gotelee Insolvency Team.

Please remember that it is important to take specific legal advice in relation to your own particular circumstances.

John Bradshaw is a partner and head of the Business Services department at Barker Gotelee Solicitors.

Suffolk Business Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email [email protected]

(This article first appeared in the East Anglian Daily Times 15th August 2018).