Supreme Court Rules on De Facto Directors

In the case of Holland v HMRC, the Supreme Court split 3-2 on whether Mr Holland was a de facto director of 42 insolvent companies. At stake was £3.5m in unpaid tax which HMRC was seeking to recover from Mr Holland.

A de facto director is a person who acts as a director of a company without having been formally appointed as such. The law imposes numerous duties on directors. It would obviously be too easy to get round the law if an individual could do so by the simple expedient of not being formally appointed as a director. For this reason, the law imposes many of the same duties on a de facto director as it imposes on a duly appointed director.

Mr Holland and his wife were in the business of providing administration and tax services to contractors – many in the information technology industry – who did not want to go to the trouble of setting up their own company. Mr and Mrs Holland set up a complex company structure which had the following features:

• Mr and Mrs Holland owned all the shares in, and were directors of , Company A;

• Company A owned the shares in Company B and Company C. Mr and Mrs Holland were the directors of Company B and Company C.

• Company B and Company C acted, respectively, as the corporate director and the corporate secretary of 42 companies.

This structure was designed to ensure that each of the 42 companies only paid corporation tax at the small companies’ rate. It did not work and the 42 companies went into insolvent administration.

The HMRC brought claims for the unpaid tax against Mr and Mrs Holland on the basis that they had been acting as de facto directors of each company and had breached their duties as directors. The High Court allowed the claim against Mr Holland but dismissed that brought against Mrs Holland. The Court of Appeal allowed Mr Holland’s appeal, a decision now confirmed by the Supreme Court. .The majority ruled that Mr Holland had been doing no more than carrying out his duties as a director of Company B. HMRC could not point to anything he had done which had not have been done by him in his capacity as a director of Company B. It followed that Mr Holland had not been a de facto director of the 42 companies.

Whether or not a person is a de facto director will very much depend on the facts of the case. In this case, Mr Holland did not cross the line between acting as a director of Company B and acting as a de facto director of the 42 companies. However, the case illustrates the importance of maintaining clear and distinct lines of responsibility at all times. Failure to do so may result in an individual incurring an unanticipated liability for a company’s debts.

Note: The precise situation that arose in the Holland case is unlikely tor recur. Section 155 of Companies Act 2006 now requires a company to have at least one director who is an individual. The temporary exemption for companies in existence on 8th November 2006 expired on 30th September 2010.

If you would like to know more, please contact David Dees or Nick Crook.

Filed: 15/12/2010 12:42:34