De facto directors and the consequences

A “director” includes any person occupying the position of director no matter what they are called. This definition appears in both the Companies Act 2006 and Insolvency Act 1986. It is clear then that the reality of any given situation is crucial in determining whether an individual is a director and that you cannot escape liability or accountability by avoiding a formal appointment.

Some individuals prefer not to be formally appointed as a director of a company for a number of reasons but some do so with the intention of avoiding personal liability by distancing themselves and avoiding association with the company, perhaps to avoid their fiduciary duties.

An individual who acts as a director but has never been formally appointed is called a de facto director and there are certain consequences involved if you are found to be one.

In assessing whether someone is a de facto director, there are a number of questions to consider. Is the individual part of the corporate governance system of the company? Did they assume the status and function of a director so as to be responsible as if they were a director? Did they undertake functions which could only be properly performed by a director?

In assessing the above, it is important to be objective and look at the full picture. Did the company hold the individual out as a director and did third parties believe he was one? Overall, whether an individual is found to be a de facto director will be a question of fact and degree.

So what are the consequences?

If found to be a de facto director, an individual will owe the company the same fiduciary duties as if they were a formally appointed director. Further, they can be treated as if they were a formally appointed director under s.212 and s.214 of the Insolvency Act 1986 which covers director misfeasance and wrongful trading. A de facto director could also be the subject of disqualification proceedings.

It is important for your status in a company to be absolutely clear to avoid inadvertently taking on responsibilities, duties and potentially liabilities, particularly on insolvency of the Company. Our Company Commercial team can advise you as to your likely status and give you pragmatic and focussed advice about what you can do to reduce the risk involved.

Please contact Sing Li on [email protected] or Holly Baker on [email protected] if you would like to discuss the matters raised in this article or any other aspect of company or commercial law.