High Court ruling means that someone may be considered a director of a company even if they have not been formally appointed as such

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

The High Court has held that a director of a holding company who became significantly involved in the affairs of a subsidiary company, should be regarded as a de facto director of the subsidiary i.e. subject to all the duties and liabilities of a director of the subsidiary, even though he had not been validly appointed as a director of its board.

What did the Court decide?

The Judge said that the role the director (“LJ”) had played in directing the subsidiary’s affairs was consistent only with him being part of the subsidiary’s corporate governance structure, if not the key and principal element of it. He had assumed functions of the company that could only properly be discharged by a director.

In practice, LJ took a very active role in the subsidiary’s operations, often leading negotiations for it and issuing instructions on its behalf. The judge gave examples of behaviour that demonstrated LJ’s involvement in the subsidiary’s affairs: he had held meetings to discuss the management of the subsidiary, either without the subsidiary’s two directors being present or with only one of them being present; he had taken the lead at management meetings of the subsidiary; he had previously referred to himself as a ‘partner’ in the subsidiary; he had taken the lead in discussions between the subsidiary and its counterparties, including a substantial customer of the subsidiary; and he had formally instructed legal advisers on behalf of the subsidiary in connection with its potential entry into administration.

Furthermore, the Judge found that in reality, LJ was the ‘dominant personality who effectively drove the required decisions and ensured that he got what he wanted’. The Judge also found that one of the directors of the subsidiary was prepared to go along with whatever LJ wanted, and the other director of the subsidiary had little (if any) role to play in the subsidiary’s decision-making or day-to-day affairs.

What should you take-away from this case?

A person may be considered a director of a company even if they have not been formally appointed as such. How likely this is to happen depends on the extent to which the person has become involved in the company’s day-to-day affairs and assumed the responsibilities of a director.

It is never desirable for a company to have de facto directors, as this increases uncertainty over the entity’s corporate structure and muddies reporting lines and authorities.

In the case, the subsidiary had entered into administration and questions arose over whether the subsidiary’s directors had been in breach of their duties to the subsidiary. As part of this, it was alleged that, even though LJ had not been formally appointed as a director of the subsidiary, because of his close involvement in its affairs, he had become a de facto director of the subsidiary and was therefore liable for any breach of duty.

This sort of scenario can be avoided by creating (and following) a clear corporate governance structure.