“But I haven’t been formally appointed!”- Disqualification of de facto and shadow directors

August 7, 2013

The Law

The Company Director Disqualification Act 1986 (“CDDA”) allows for the disqualification of UK directors from future management by either (a) a court order or (b) a voluntary undertaking given to the Secretary of State for the Department of Business, Innovation and Skills.

The form the disqualification takes is somewhat immaterial, as both will result in the director being barred from becoming or continuing to act as a director of a company or being in any way concerned or taking part in the promotion, formation or management of a company for a specified period. The minimum period for disqualification is 2 years and the maximum period is 15 years.

Once disqualified, it becomes a criminal offence for the person to act in contravention of the disqualification order. Should that person do so, they will be held personally liable for all the relevant debts of the company which they are managing.

A very important question is obviously who is caught by this legislation?

The Facts

The case of Secretary of State for Business, Innovation and Skills v Chohan & Ors [2013] EWHC 680 (Ch) concerned the insolvent liquidation of UKLI Limited (which had collapsed owing in excess of £48 million to its creditors pursuant to unauthorised collective investment scheme). The Secretary of State brought disqualification proceedings’ under the CDDA against various directors, five of whom agreed to give disqualification undertakings. A Mr Chohan disputed that he had been a director of UKLI at the relevant time.

The Secretary of State accepted that Mr Chohan was not an actual director at the time, but argued that he was a de facto or shadow director, given that UKLI had been operated pursuant to Mr Chohan’s direction. If further brought evidence for the fact that Mr Chohan had caused UKLI to make unsecured loans exceeding £12 million and caused dividends in excess of £1 million to be declared, (both of which the company could not afford).

The Decision

The court stated that the purpose of a director's disqualification was to protect the public from unscrupulous corporate management and that this objective would be undermined if a person who was actually responsible for such management could escape disqualification by never formally being appointed as a director.

It explained that the CDDA expressly applied to shadow directors (“a person in accordance with whose directions or instructions the directors of the company are accustomed to act”). Previous case law had also extended the scope of section 6 of the CDDA to de facto directors (characterised by presuming to act as a director, being part of the corporate governing structure and directing the company's affairs in relation to the acts or conduct complained of).

The court held that a person could act as both a shadow and de facto director and was ultimately satisfied that Mr Chohan had acted in such capacities. The court further held that Mr Chohan’s conduct constituted a sufficient departure from the standards expected of him to make him unfit to be concerned in the management of a company, and he was given a disqualification order of 12 years.

The Implications

The decision demonstrates that it is important for individuals whose activities are consistent with those performed by a director to have regard to their fiduciary duties to their company. The courts will not shy away from imposing near maximum disqualification orders in serious cases which will have a detrimental effect on the individuals ability to work as a director.

Fox Williams LLP (http://www.foxwilliams.com/) is a business law firm in the heart of the City of London. Janina Blossfeldt is a trainee solicitor in the Start-up Group and can be contacted by telephone on 020 7614 2542  or by email at jblossfeldt@foxwilliams.com.

Related pages:

Corporate more

Dispute Resolution for Professional Services more

Partnership and LLP Team more

Partnership and LLPs more

icons Addthis Print Contact Register

Contact

tel: +44 (0) 20 7628 2000
10 Finsbury Square, London, EC2A 1AF
View map


For more information

 image

Paul Taylor
Partner
Direct dial: +44 (0)20 7614 2512
ptaylor@foxwilliams.com

 image

Janina Gray
Associate
Direct dial: +44 (0)20 7614 2542
jgray@foxwilliams.com

Accreditations

  • Top Ranked Chambers UK 2014 - Leading Firm
  • Ranked in Chambers Europe 2013 - Leading Individual
  • Ranked in Chambers Global 2014 - Leading Firm
  • Legal 500 - Leading Firm
  • The Lawyer UK 200 - Listed Firm
  • The Law Society Excellence Awards 2012 - Shortlisted
  • Investors in People - Bronze