COMPANY LAW – INSOLVENCY – TAX – DIRECTORS’ DUTIES & LIABILITIES
COMPOSITE SERVICE COMPANIES : CORPORATION TAX : DE FACTO DIRECTORS : DIRECTORS’ LIABILITIES : DIVIDENDS : FIDUCIARY DUTY : INSOLVENCY : DIRECTOR OF CORPORATE DIRECTOR : CORRECT APPROACH TO IDENTIFYING DE FACTO DIRECTORS : s.212 INSOLVENCY ACT 1986
In considering whether a director of a corporate director should be considered a de facto director of a company, the guiding principle was that as long as he had performed relevant acts entirely within the ambit of the discharge of his duties and responsibilities as director of the corporate director, it was to that capacity that his acts had to be attributed. Any further extension of the concept of de facto director would be a matter for the legislature.
The appellant commissioners appealed against a decision of the Court of Appeal ((2009) EWCA Civ 625, (2009) 2 BCLC 309, (2009) STC 1639 that the respondent (H) was not a de facto director of a group of composite companies and therefore owed them no fiduciary duty. H had set up a number of companies (the composite companies) which took contractors on as employees, rewarding them by means of salary and dividends. The intention was to provide them with the same tax advantages they would have enjoyed had they set up individual companies, whilst relieving them of the administrative burdens involved. Although the intention was that each company would be liable to pay corporation tax at the small companies’ rate, that aim was not achieved. Their share structure meant that H fell to be treated as being in control of them and that they were associated for tax purposes. As a consequence, each one was liable for higher rate corporation tax and they became insolvent. Their sole director was another company (P) of which H was director. The Revenue was the only creditor of the composite companies and alleged that H was liable, under the Insolvency Act 1986 s.212, to account for dividends paid out by the insolvent composite companies on the basis that they had been misapplied by him or he had been guilty of misfeasance or breach of any fiduciary or other duty in relation to the funds. The issue was whether H was a de facto director of the composite companies so as to impose fiduciary duties upon him.
HELD: (1) (Lords Walker and Clarke dissenting) The question of whether H was a de facto director had to be approached on the basis that P and H had separate legal personalities. The mere fact of acting as a director of a corporate director was not enough for an individual to become a de facto director of a subject company, Hydrodan (Corby) Ltd (In Liquidation), Re (1994) BCC 161 Ch D and Secretary of State for Trade and Industry v Hall (2006) EWHC 1995 (Ch), (2009) BCC 190 considered. The liability under s.212 was imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests. It was necessary to look at what a person actually did to see whether he assumed those responsibilities in relation to the subject company, whether validly appointed or not. H had done no more than discharging his duties as the director of the corporate director of the composite companies. It did 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. A company was at law a different person from its directors and it was the intention of the 1986 Act that that distinction should be recognised. The distinction could not be overcome by simply pointing to the quality of the acts done by the director and asking whether he was the guiding spirit of the subject company or had a real influence over its affairs. As a test, that would create far too much uncertainty. As long as the relevant acts were done by the individual entirely within the ambit of the discharge of his duties and responsibilities as a director of the corporate director, it was to that capacity that his acts had to be attributed. That was the guiding principle unless and until the legislature provided otherwise. It had not been shown that H was acting as de facto director of the composite companies so as to make him responsible for the misuse of their assets (see paras 25, 29, 39-40, 42-43, 94, 96 of judgment). (2) (Per Lords Walker and Clarke) If H deliberately procured the payment of the dividends by the directors of P and had the de facto power to do so, he was a de facto director and as such, he owed a fiduciary duty to the company and was liable to restore the unlawful dividends, just as a de jure director was. Capacity was irrelevant to the question of whether an individual was a de facto director, Standard Chartered Bank v Pakistan National Shipping Corp (No2) (2002) UKHL 43, (2003) 1 AC 959 considered (paras 132, 139).
HOLLAND v REVENUE & CUSTOMS COMMISSIONERS & ANOR (2010)