Breakdown of Trust
It is well known that directors owe duties to the company of which they are a director and, in certain circumstances, its shareholders, creditors and employees. Many people believe that if you have not been formally appointed as a director, i.e. you do not appear on Companies House records as a director, you will not owe the usual directors’ duties and, therefore, cannot be in breach of such duties or subject to sanctions for breach.
This is incorrect, as is illustrated in the recent case of Focus 15 Trading Ltd (In Liquidation) sub nom Official Receiver v Howard Duckett (2020). In this case the official receiver obtained a disqualification order for 10 years against a de facto director of an insolvent company.
Focus 15 Trading Ltd (“the Company”) was incorporated in 2015 and had only one director and shareholder at all times, Mr Cooke. In May 2017 the Company was wound up on a petition by HMRC for non-payment of VAT. Subsequent investigations indicated that the Company was a vehicle for missing trader fraud.
The official receiver investigated the Company and the actions of its director, Mr Cooke. These investigations led him to suspect that Mr Duckett was involved in running the Company. Mr Duckett was an experienced businessman and held directorships, but was not formally appointed as a director of the Company. Mr Duckett told the official receiver that Mr Cooke had no business experience or qualifications and was not able to run the Company on his own so, at Mr Cooke’s request, he had helped Mr Cooke to set up the Company; that his involvement had purely been advisory; and that another person, Mr Deere, was responsible for the day to day running of the Company.
A de facto director is a person who performs the functions of a director but who has not been formally appointed as such, this includes someone who acts as a director but does not use the title of director. De facto directors come within the definition of a director in section 250 Companies Act 2006. Any breaches of fiduciary or statutory duties can result in liability, even where the individual has not been formally appointed as a director. The question of whether someone is a de facto director turns on the facts and it is an objective test – it does not matter if the person does not believe they are/were a director.
Because the official receiver regarded Mr Duckett as a de facto director of the Company, he brought directors disqualification proceedings against him, alleging that Mr Duckett had failed to maintain, preserve and/or deliver adequate accounting records in circumstances where proper documentation would have lessened the risk of fraud and enabled it to be detected and thoroughly investigated when it occurred. There was no allegation that Mr Duckett had committed fraud himself.
Under section 6(1) of the Company Directors Disqualification Act 1986 (“CDDA”), a court is required to make a disqualification order against a person where it is satisfied that:
The issues to be determined by the Court in the disqualification proceedings were:
The factors which the Court found supported the finding that Mr Duckett was a de facto director of the Company included:
The judgment goes into some detail about the implausibility of Mr Duckett’s evidence. On Mr Duckett’s own case Mr Cooke, the actual director, did not run the Company or have any knowledge of its trading activities and a Mr Deere acted in the capacity of director. The Court found that Mr Deere was fictitious and it could therefore only be Mr Duckett who had run the Company.
The Court was satisfied that Mr Duckett had failed to ensure that the Company maintained adequate accounting records, that such conduct made him unfit to be a director and, accordingly, the Court was required to make a disqualification order.
Under section 6 of the CDDA the minimum period of disqualification is 2 years and the maximum is 15 years. Prior to these proceedings Mr Cooke had signed a disqualification undertaking (i.e. he voluntarily agreed not to act as a director) for a period of 9 years.
The official receiver submitted that a disqualification in the middle bracket of 6 – 10 years for “serious cases which do not merit the top bracket” was appropriate in this case. The Judge:
This case serves as an important reminder of the risks of being a de factor director. De facto directors owe the same duties as formally appointed directors and will be subject to the same sanctions for breach of their duties, including being liable to contribute to the company’s assets following an insolvency, directors disqualification proceedings and possible criminal liability.
As an individual, if you think that you are acting as a director, even if not formally appointed, then you should make sure that you fully understand, and comply with, your duties. It is important to seek expert advice if you are unsure of your position given the seriousness of the possible consequences.
If you have any concerns or would like advice on any of the issues raised please contact a member of our Shareholder and Boardroom Disputes team.
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