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Supreme Court divides over de facto directors

29 November 2010

The Supreme Court has split over the issue of when someone should be regarded as a de facto director.

Three of the five justices agreed with Lord Collins that the law should not be extended in this area without the involvement of parliament.

Lord Walker, supported only by Lord Clarke, warned that this would make it easier for “risk-averse individuals to use artificial corporate structures” to avoid responsibility.

Giving judgment in Holland v HMRC [2010] UKSC 51, Lord Hope said that Holland and his wife were alleged to be the de facto directors of 42 insolvent companies of which HMRC was the only creditor.

It was also alleged that the Hollands were guilty of misfeasance and breach of duty in causing the payment of dividends to the companies’ shareholders when the companies had insufficient distributable reserves to pay their creditors.

The court heard that orders were sought requiring them to contribute sums in excess of £3.5m to the assets of the insolvent companies by way of compensation.

Lord Hope said the Hollands administered the business and tax affairs of contractors, particularly those working in IT. Each contractor was taken on as an employee of one of 42 companies, given a non-voting share and paid a salary and dividends.

An agency provided the contractors’ services and paid the parent company. The Hollands set up a company called Paycheck Directors to act as director of the 42 companies.

The High Court ruled that the Hollands were de facto directors of the 42 companies and answerable to HMRC’s claims. The Court of Appeal allowed Holland’s appeal.

Lord Collins said there was nothing to suggest that Holland was doing anything other than discharging his duties as director of Paycheck Directors, the corporate director of the 42 composite companies.

“It does not follow from the fact that he was taking all the relevant decisions that he was part of the corporate governance of the composite companies or that he assumed fiduciary duties in respect of them.

“If he was a de facto director of the composite companies simply because he was the guiding mind behind their sole corporate director, then that would be so in the case of every company with a sole corporate director.”

He went on: “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.”

Lord Collins said that an extension of the law of this kind was a matter for parliament.

Lord Saville agreed with Lords Collins and Hope that HMRC’s appeal should be dismissed. Lords Walker and Clarke dissented.

Lord Walker said the question was one of fact. “There can be no doubt that the decision to pay dividends was a directorial act and not a mere managerial act,” he said.

“It seems to me that, if (as the deputy judge has held) Mr Holland in fact deliberately procured the payment of the dividends by the directors of Paycheck Directors and had the de facto power to do so, he was a de facto director.

“As such, he owed a fiduciary duty to the company and the procuring of the payment of the dividends was a breach of fiduciary duty and, on the deputy judge’s findings of fact, an unlawful act. He is accordingly liable to restore the dividends.”

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