The actions we take; the boundaries we cross; the duties we owe…- status of directors

The epitome of a company director in the eyes of the layperson is too often his perceived inflated wallet. No doubt avid newspaper readers will recall the works of cartoonists depicting directors as hoarders of vast sums of money with enormous wallets. However, to coin a often-quoted phrase, “with great power comes great responsibility”. Company directors are under a catalogue of duties, as detailed in Part 10 of the Companies Act 2006, and these are often conflicting and vague. Equally, provisions in the Insolvency Act 1986 and the dangers of lifting the corporate veil for ills conducted by shareholder-directors can both add to the dangers of the job.

It would be thought, then, that the best way of avoiding such dangers is to be an “off-the-records director”. Legally referred to as “shadow directors”, a phrase which refers to “a person in accordance with whose directions or instructions the directors of the company are accustomed to act” (Section 251 CA 2006), the law has ensured such practices do not allow the evasion of liability. Where a person is found to control a company despite not being a de jure director, the law thus sees them as a de facto/shadow director and the liabilities that follow are one and the same. A third category, separate from the fully registered de jure direction, is the de facto director who falls fouls of the legal and procedural requirements to be constituted a de jure director.

A recent decision of the High Court has considered the test for establishing what constitutes a de facto director. Though the test is somewhat vague, we are too aware that company law cannot be confined by the scripts of the legislature or the utterances of the judiciary if it is to remain sufficiently and desirably flexible to accommodate for the contextual changes that are inevitable. The Court in Elsworth Ethanol v Hartley [2014] EWHC 99 stated that the test for a de facto director must consider the following:

   1. All the circumstances of the case; in considering all of the circumstances of the case, the following are important but   consideration need not be limited to them:

a.     Whether the company held the person out as being a director;

b.     Whether this individual made use of the title of director;

c.     Whether the individual was part of the corporate governance structure of the company; and

d.     Whether the individual was acting with other directors and whether he was on equal footing with the other directors.

   
2. If the capacity of the person acting is unclear (whether they act as a director or through some other role) they should be given the benefit of the doubt.

The consequences that follow from being perceived as a director of a company without being registered, be it a shadow or de jure director, can be severely damaging. The exposure can place the individual under an obligation to perform the duties of a direction under Part 10 CA 2006 and the additional liabilities and obligations that follow are of equal concern.

With the above matters in mind, it is submitted that whilst the test of the High Court in Elsworth is appreciable on the grounds that it retains flexibility whilst providing clarity, there is a valid concern that flexibility sacrifices certainty. Some may argue that the “benefit of the doubt” provision helps individuals from undue liability or obligations. However, this author argues that any link drawn between the lack of clarity in the underlying test and a qualification clause to the effect of the “benefit of a doubt” provision is a false analogy as the concern is not sufficiently countered by the qualification.

The writer is a lawyer based in London, with a keen interest in Company, Employment and Immigration law. Previously, he has completed two Masters in Law at the University of Sussex and University College London.  He is currently pursuing his third postgraduate legal qualification, undergoing training at BPP Law School in London on the Bar Professional Training Course and can be reached at: jay@londonlawtutor.com

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