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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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