UK: De-Facto Directors: Case 1: Re Snelling House: Directors’ Misfeasance

Last Updated: 14 June 2012
Article by Sinéad Lester

The law allows any person to be treated as a director even though that person has not been formally appointed as a director. Such directors are known as de-facto directors. By contrast, a de jure director is a person who has been validly appointed as a director.

The recent case of Re Snelling House Ltd (In Liquidation) [2012] EWHC 440 (Ch) serves as a useful reminder to consider possible claims against de-facto directors who may be acting under the wrong impression that they are beyond reprehension.

The facts

The applicant liquidators (L) applied for relief against, inter alia, an individual who was said to be a consultant (R2) of the company (C). R2 was married to the sole de jure director (R1) of C. R2 was subject to a disqualification undertaking in relation to another company which meant that he was prohibited from acting as a director of any company. He had also served a period of imprisonment following a conviction for dishonesty. Both R1 and R2 had a history of 'bad corporate behaviour'.

The sole asset and business of C related to Snelling House in Cardiff. On the evidence, the only substantial dealings on behalf of C were carried out by R2. In 2003, receivers appointed by C's mortgagees sold the property and returned the surplus to C. Part of this surplus consisted of monies which the purchaser had paid to the receivers as it was believed that VAT was payable on the sale. HMRC subsequently ruled that no VAT was payable and therefore, this money was repayable to the purchaser. The money was not returned to the purchaser and instead, R2 removed substantial assets from C for the benefit of himself and his family. C then went into creditors' voluntary liquidation at which point, C had insufficient funds to pay its unsecured creditors.

L claimed relief for, inter alia, the misapplication of C's monies arising out of (1) various payments made to R1, R2 and to a company owned by R1 (R4) and (2) the payment of dividends to R1 at a time when there were insufficient distributable profits.

The decision

The court held R2 to be a de-facto director for various reasons which included the following: he had been involved in the day-to-day running of C; he was a signatory on C's bank account; he had full power under  the bank mandate to act in all material respects, including the ability to withdraw C's money without limit; he was unpaid which would be 'very odd' for a consultant; he dealt with the VAT issue on the property by giving all the instructions to C's accountants and stalled repayment to the purchaser until the insolvency proceedings; he signed VAT returns generally; and he signed several cheques payable to himself for substantial amounts. Given R2's activities and the absence of any evidence that he was a consultant, the only reasonable inference was that he was a de facto director and was the person conducting C's affairs.

Where directors cause their company to dispose of assets, the onus is on them, as trustees to justify those payments, particularly where those payments are made to themselves or their family members. As there was no credible  explanation provided to explain the payments made, the court had 'no hesitation in finding...that these were misfeasances.'

In relation to the dividends, the court held that since R1 was the sole director, she must be taken to have known about the lack of distributable profit and of the failure to comply with the statutory requirements pertaining to the distribution of dividends. Furthermore, as R2 was a de-facto director, the court inferred that he either authorised or joined in R1's removal of unlawful dividends, since he dealt with the financial matters in respect of C and communicated with the accountants on its behalf. The court also inferred that R2 knew the relevant facts constituting the unlawful dividends. For these reasons, both R1 and R2 were found liable in misfeasance in respect of the dividends.

Conclusion

The decision shows the court's disdain for the way R1 and R2 had conducted C's affairs. It is clear that directors, as trustees, must be able to provide a credible explanation as to what has happened to a company's assets since if they are unable to do this, the liquidators can assume that there has been misfeasance. It is worth noting that for such misfeasance claims, there is no need to show that the company was insolvent at the time the assets were transferred.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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