De facto directorships

The recent case of Re UKLI Ltd brings clarity to the concept of de facto directorships.

The Secretary of State for Business, Innovation and Skills brought disqualification proceedings against the directors of UKLI Ltd under the Company Directors Disqualification Act 1986 (CDDA) on the grounds that the company, who operated a land bank scheme, had committed serious breaches of Financial Services and Markets Act 2000.

Six directors of the company signed a Directors’ Disqualification Undertaking (DDU) pursuant to the CDDA. A seventh individual did not sign a DDU, claiming that he had not been formally appointed as a director (he was already disqualified from acting as a company director in a prior case).

The Secretary of State claimed that this individual was a de facto director of this company – a director who has not been validly appointed to the company’s board of but who is deemed to be a director because of his conduct and position within the company. A de facto director can be liable for breaches of directors’ duties under the Companies Act 2006 and is subject to other associated provisions such as directors’ disqualification and wrongful trading.

The Judge in this case made the important point that the purpose of the disqualification provisions is to protect the public from unscrupulous corporate management and that this purpose should not be frustrated by a lack of formality of appointment of someone who has been acting in the capacity of a director.

In this case the Judge found that the individual concerned met the criteria determining whether someone is a de facto director, which included him presuming to act as if he were a director. His conduct as a director in this case was found to be unfit pursuant to the CDDA and he was disqualified for a period of 12 years.

Anyone involved in the running of a company, whether formally appointed to the board or not, should therefore be aware that they may, if they meet the criteria, be deemed to be a de facto director of that company and will therefore be expected to comply with the duties of directors as set out in the Companies Act 2006 and potentially be subject to disqualification under the CDDA and to personal liability in the event of wrongful or fraudulent trading, for instance.

Please contact our Company & Commercial solicitors for further advice.