In Breach of Fiduciary Duty

Misfeasance regarding de facto director’s duty leading to Insolvency

The above statement explains that the decision of the Supreme Court in Holland V The Commissioner of Her Majesty’s Revenue and Custom concludes whatever Mr. Holland does not suffice that he was a de facto director and that he was in breach of fiduciary duty.

The main question and a issue that arises in this particular scenario is that when is a person considered to be a de facto director of a company, so that he can be responsible for the payments of unlawful dividends as in the same way that the he is formally appointed as a director. [1] It was a case of a breach of fiduciary duty when the company goes into insolvency under the s (212) of the Insolvency Act (1986) [2] Re paycheck which was joint in the appeal and that the court compels the “Officer” of the company to pay sums in respect of the misuse of the powers, where it was accepted that the use of word “officer” was indicted as a director. [3] According to leading majority of the case, it is the opinion that the mere fact of acting as a de facto director of a corporate director will not be enough for an individual to become a de facto director of a company, and whatever Mr. Holland did was in the ambit of being a sole director, however there was a contradiction as well from the minority that the a person making all the important decisions affecting a company to see they were carried out well is the considered to be a director of the company. [4] However agreeing to the point that Mr. Holland is to be considered to be a de facto director of the company as he was a important organ of the management of the company.

FACTS AND REASONING

It was alleged that the and Mr. and Mrs. Holland owned their company from 1997 till 1999 named Paycheck services limited whose function was to administer the business and tax affairs of contractors who did not want to go to the trouble of setting their own businesses. They automatically became employee for the company and had non-voting rights and can receive dividends .Under the income tax the person need not had to exceed 300, 000 pounds for Small Corporation. In the mean while they tried to increase the business. Under the structure Mr. and Mrs. Holland were appointed as directors of two new further companies like Paycheck director services limited and Paycheck secretarial. They were de facto directors of the 42 insolvent companies of which HMRC was the creditor and that they had been guilty of misfeasance and breach of duty in causing the payment of dividends to the companies. [5] ‘Rimer’ LJ stated “The s 13(3) of

the ICTA (1988) limited the benefit of the small company’s rate. [6] However from 1999 to 2004 the company went into liquidation.

The main issue that arises is the one that is Mr. Holland a de facto director of the composite companies. Related to that was he liable for the unlawful payments of dividends and is it necessary to show that he was negligent and in a breach of his duty, under the S (212) of the Insolvency law (1986). [7]

This case was dealt by 3 by 2 majorities, the decision by the majority in Supreme Court was with reference to, Lord Hope agreed with Rimmer LJ in Hydrodam [8] that it has not been shown that Mr. Holland was the de facto director of the composite companies so as to make him responsible for their assets. [9] The expression “de facto director” can be found in cases going back a very long way: Lord Collins instances Mangles v Grand Collier Dock Co (1840) 10 Sim. 519 [10] , where individuals whose formal appointment had not been proved were referred to as “directors de facto”. [11] The de facto director should be the one who only do things which the director should do. [12]

Company is of course an artificial entity but is operated by the humans and all the decision are effected by them. [13] Those duties of a company main objectives and important decision making is done by the directors , the main management of the company S ( 250) defines directors and their general duties applies to all shadow and de facto directors as well. [14] The directors can become fiduciary, if they do not fulfill their duties properly or they have been negligent or conduct an unlawful act then they can be accountable for their acts. [15] As S (212), explains the term misfeasance, in which the proceedings may be commercial in circumstance a director is in breach of any of his corporate duties. In accordance Lord Hoffman stated in Re D’ Jan [16] “any indicative of the provision’s applicability to both a breach of fiduciary duty conflict of interest.” [17]

In Re Lo-line [18] Sir Nicolas Browne-Wilkinson stated that the de facto directors are also covered in the S (212) Insolvency Act as well as amended in the Enterprise Act (2002).he states that the this is to ensure that the person with real directorial control but who, for whatever reason, lack a formula appointment are held responsible in law for their conduct of the affairs of the company. [19] `Lord Hope’ who was the first judge gives the reasoning that the In the case of Hydrodam Millett J which states that ” the de facto is a director who assumes to act as a director, he purport to be a director although never been appointed to establish that the person is a de facto director of a company it is necessary to prove that he undertook functions in relation to the company which could properly be discharged only by a director, It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manger.” [20]

In Re Lon-line electric case Millet J stated that the mere fact that attendance of board meetings and voting, does not constitute the person as a de facto director. [21] According to the Re Kaytech International Plc [22] in which it was said that the company’s director will only be responsible for his act done and nothing else and the authorities that support that is Hydrodam and Halls Case [23] ,Lord Millett J said in Hydrodam was that “He see no reason why a director of a corporate company director who is doing no more than discharging his duties as such should hereby become a de facto director of the subject company” the problem with Mr. Holland case was that he was just merely discharging his duties and whatever he was doing was under the umbrella, thus cannot be held liable. [24] Other than that unlawful act of giving the dividends e.g case of Re County [25] in which the director is not liable until he ought to know about his misapplication e.g. the case of Re city fire insurance. [26] Where the strict liability was mentioned but however S (727) a relief can be given in effect of the strict liability.

`Lord Collin’ points out that whether fiduciary duty can be imposed or not, he states that the Mr. Holland is that as de facto director of the composite companies he was in breach of his fiduciary duty not to misapply their funds by passing unlawful dividends that is now seen in S (830) of the Companies Act (2006) e.g. Bairstow case. [27] In Lord Collin opinion that “Mr. Holland was not doing anything other than discharging his duty, it did not follow from the fact that he was doing anything which would impose fiduciary duties. He stated if he was a de facto director of the composite companies simply because he was the guilty mind behind their sole corporate director.” [28]

The Court decided that the mere fact of acting as a director of a company, which was in turn a director of another company, will not be enough for an individual to become a de facto director of that other company: what a person actually did must be looked at to see whether the responsibilities of the office of director were assumed. Everything Mr Holland did fell within the ambit of being the director of a sole corporate director. Parliament, by virtue of the Companies Act 2006, ensures that there is a natural person to whom responsibility is attributed so it is not possible for individual directors to completely shield themselves through complicated corporate structures. The majority judges also agreed that the extension of the concept of a de facto director is a matter for Parliament and not for the Supreme Court. [29]

`Lord Saville’ reasoning behind the judgment was that “It does not follow that the Mr. Holland caused the corporate director to make decisions in relation to the composite companies. To suggest that he was is to ignore or bypass the separate legal personality of the corporate director and instead to treat Mr. Holland as though he, rather than the corporate director, was the legal personality running the composite company.” [30] Lord Saville said that Holland was the natural person who decided that the company should pay the dividends in question, but he did so in the course of directing, not by acting or purporting to act as a composite director of the composite companies. [31] Lord Walker and Lord Clarke disagree with the majority’s reasoning and consider Mr. Holland to be the de facto director of the company.

The Turning Point

As it is said that Mr. Holland was therefore not the de facto director of the company as he has was just simply discharging his own duties and what he did was under the umbrella. But Agreeing with the minority of this judgment that the by not accepting what Mr. Holland did would make a artificial corporate structure and he would be lead to insolvency of the company which can lead to infringing the rights of the unsecured creditors, since they are the ones who are always not given a proper right, and by giving the director a way to do whatever they want , not being liable for their acts , it can be very unfair was the creditors in general specially unsecured creditors. Important point of discussion in secretary of the state for trade and industry v Tjolle [32] in which Lewison J said “ In considering whether a person assumes to act as a director is what is important is not what he calls himself , but he did”. [33] A de facto director is not formally invested with the office but he actually takes all the important decision and see to it that they are carried out well, it makes no difference that he is acting as a active de jure director of the company .Mr. Holland was the single director for his company hence conducting all the important decision. As under the reasoning of the standard and chartered bank v Pakistan national shipping corp. [34] if Mr. Holland was a de facto director he would be liable because as a matter of fact, he has done a unlawful payment of dividends so he cannot obtain relief under the S (727).According to Lord Clarke as well as Mr. Holland was conducting every possible act which all the directors do including the distribution of the dividends like all the directors , he should be liable for breach of his fiduciary duties. [35] The majority decision was rightly decided in light of the view that unfortunately there is not much said in the statute about the de facto directors, but the parliament should put more light on role of the de facto and shadow directors, regarding their actions so that, people do not get a way by doing fraud, and not being liable for their actions, this can have a very bad effect on the society as a whole. It will give an easy way to all of people creating problems in the corporate world.

Separate legal personality which is only departed from in extreme circumstances. Mr. Holland will be well advised to note the requirement that the director of the corporate director should not step outside his role as director of the corporate directors’ board so as to link him directly with the subject company. [36] From the Case the HRMC appeal as to the public policy protection in case of un lawful distribution of the dividends , Rimer J stated that the legislature should meet the policy as S ( 155)(1) of companies act ( 2006), that requires a personal directors is trying to fill in the gap. [37] And under S (212) of the company’s act the person is liable if he is validity acting as a de facto director, he will be liable for his actions.

The position of the director is very risky and a very important, the parliament should put more spot light of the position of the de facto director , so that people cannot just get away with just because they are not properly appointed and that the doing things under the umbrella, a person who is rightly exercising all the acts which a director would do for his company should be held liable for his actions so that it is not unfair on the shareholders and creditors when the company goes into liquidation.

However from the case it concludes that “The decision of the above case suggests that individuals who exercise a major influence upon the affairs of a company involved in a risky venture can utilise a corporate director to create a firewall to protect themselves against the risks incurred by that company and from any personal liability, the liability being incurred by the corporate director instead. Such a corporate structure is now impossible because section 155(1) CA 2006 requires that each company must have one natural person as a director who can be held to account for the company’s actions.

Nevertheless the decision illustrates that the courts will generally uphold the principle of separate legal identity between a company and its directors. That said, the possibility of a court imposing liability for those who act as de facto directors remains very real in circumstances where the behavior exhibits all the hallmarks of a de facto director. As a word of caution, if you exercise real influence over a company’s affairs, there is a risk that you will be considered to be a de facto or shadow director of the company and be subject to the duties and liabilities of a director”. [38]

BIBLOGRAPHY

Books:

Gower and Davies “principles of modern company law, 8th Edition, Para 7-1 (2008)

Len Sealy and Sara Worthington, “Cases and material in company law”, 8th Edition, Oxford University Press (2008)

Saleem Sheikh, “A guide to the companies Act ( 2006)” , Routhtledge Cavendish , (2008)

Stephen Griffin, “company law fundamental principles”, 4th Edition, Pearson Longman Press (2006)