UK: Director Liability: The Use Of Corporate Directors

Commercial Thinking

A company can act as a director of an English company (known as a 'corporate director'). Individuals, who would otherwise be directly appointed as directors, can ring fence their liabilities by acting through a corporate director. The Companies Act 2006 (the '2006 Act') introduced a requirement that at least one director of a company be an individual person. However, any remaining directors can be corporate directors. In Holland v Revenue and Customs & Anor (2010) UKSC 51 the Supreme Court considered whether the directors of a corporate director could be liable to the underlying company for the actions of that corporate director.

The Holland case, decided in February 2011, related to events that occurred before the implementation of the 2006 Act. Following an investigation HMRC had claimed approximately £3.5 million in unpaid tax from a group of related companies. This caused the companies to become insolvent. Each company had the same single corporate director which in turn had two individual directors. The corporate director had allowed distributions totalling £13 million to be made to the shareholders of the group companies when it knew that the HMRC investigation was ongoing.

HMRC claimed that the indirect control exerted by the directors of the corporate director over the group companies was sufficient for them to be deemed to be acting as directors of the group companies even though they had not been formally appointed as such (known as 'de facto' directors). If this was upheld then the individuals would have been liable for allowing the payment of the distributions by the group companies. It was not claimed that the individuals had acted otherwise than within their capacity and authority as directors of the corporate director.

The Supreme Court held that the individual directors had acted solely in their capacity as directors of the corporate director. It is a principle of English law that a company is a separate legal entity from its directors. If any liability arose in connection with the payment of the distributions by the group companies then the corporate director was responsible for this, not its own individual directors. The extension of the liability of 'de facto' directors sought by HMRC was a matter for the government to determine, and it had chosen not to do so when implementing the 2006 Act.

The Holland case does not provide an absolute protection against liability in these circumstances. The Supreme Court noted that it was necessary to examine the actions of the individual directors before reaching their decision. Had any of these actions been found to have caused the individuals to be deemed 'de facto' directors of the group companies then they could have been held liable for the payment of the distributions. This could occur where the individuals had been involved directly in the management of the group companies.

The decision reached by the Supreme Court in the Holland case was not unanimous. There were significant concerns raised that this judgment could enable those acting as directors to avoid or mitigate their liabilities. Two judges believed that the control over the boards of the group companies exercised indirectly by the individual directors, and the fact that they held the companies' only voting shares, was sufficient to deem them to be 'de facto' directors of the group companies. However, these views were not upheld.

Although the separation of the liability of the individual directors from the corporate director in this way may seem artificial, it does uphold a basic principle of English law. The Holland case represents the most recent review of the liability of 'de facto' directors.

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