De Facto Director Or Simply Following Instructions?

Companies and senior figures within the organisation are reminded that if an individual assumes a certain level of management responsibility, they may be deemed a de facto director – accepting the risks as if a formal director. The specialist company lawyers at ParrisWhittaker are experienced in advising companies and directors through the Turks & Caicos Islands on the full range of corporate law. 

What is a de facto director?

A de facto director is an individual who has not been properly appointed to the office of company director, but acts as though they are a director.  For legal purposes, they will be treated as a director – with the risk of personal liability; and potential criminal prosecution for wrongful acts committed by the company. 

Recently, an individual (Mr J) – already one of two directors of a holding company – was found1 to have also become a de facto director of a subsidiary company, having become significantly involved in its affairs.

The holding company acquired 100% of the shares of the subsidiary and a 2014 shareholders’ agreement set out how the business and the affairs of the holding company and the subsidiary would be managed. Mr J was involved from the start in procuring a master services agreement between the subsidiary and his own company (an IT services supplier) and developing an TI infrastructure and systems. 

In a short period of time, Mr J become more heavily involved and the relationship between him and the other directors of the companies broke down. It was alleged that the breakdown in relationship was due to Mr J seeking to take increasing control over the subsidiary’s affairs. He had, for instance, arranged and held various important management meetings and taken the lead in crucial discussions with other parties. He also instructed solicitors on behalf of the subsidiary.

The judge found that during these meetings Mr J “gave every appearance of assuming a role akin to that of Managing Director of [the subsidiary]” (the other directors were not always present). 

The subsidiary eventually went into administration, leading to various claims against Mr J and others – including for breach of fiduciary duties as de facto director of the subsidiary. He defended the claim, arguing that he had taken decisions as director of the holding company as envisaged in the SHA. 

The court concluded that the role Mr J had played in directing the subsidiary’s affairs following the conclusion of the shareholder agreement was consistent only with him being part of the corporate governance structure, if not the key and principal element of the corporate governance structure. The judge said: “He had assumed the status of functions of a company director performing functions that could only properly be discharged by a director of the subsidiary.”

Breach of duties

Having been found to be a de facto director, Mr J had breached his fiduciary duties. He had, for instance, transferred certain valuable assets of the subsidiary without payment at the time it went into administration and had made substantial payments to his own company (and another) without any consideration or “proper commercial justification”. 

He was personally liable to pay a significant amount in damages to the subsidiary’s administrators.  

What does this mean?

Companies need to be absolutely clear who has authority to undertake significant decisions in the affairs of the business. Where any individual without a formal appointment as director nonetheless plays a major role in the management of the business, could they be treated as a de facto director if a dispute was to arise? 

Individuals representing the company also need to be alert to the costly risks associated with assuming increasing levels of management responsibility and decision-making. 

For expert advice on director disputes, speak to the experienced corporate and commercial litigation solicitors at ParrisWhittaker. You can contact us at info@parriswhittaker.com or +1.242.352.6112 

1Aston Risk Management Ltd v Jones and others [2023] EWHC 603 (Ch)