The UK Court of Appeal has recently released its judgment in a case concerning the issues of de facto and shadow directorships. The concepts of de facto directorship and shadow directorship are well established in company law and are enshrined in the UK Companies Act 2006. A "director" under that Act is defined as "a person occupying the position of director, by whatever name called" (namely, a "de facto" director) and a shadow director is defined under the same Act as "a person in accordance with whose directions or instructions the directors of a company are accustomed to act".

In the Court of Appeal case, Smithton Ltd v Naggar [2014] EWCA Civ 939, the appellant company, Hobart, a joint venture brokerage operation, brought a claim against Mr. Naggar who was a director of its former holding company (Dawnay Day International Ltd). Hobart sought to reclaim losses incurred as a result of transactions with clients introduced to Hobart by Mr Naggar. Hobart claimed that Mr Naggar was a de facto or shadow director of Hobart and that he had infringed his duties as a director. It was also claimed that some of the transactions involved a conflict of interest as they were with companies connected to Mr. Naggar and were furthering his own interests. The High Court had previously rejected these claims and Hobart appealed against that ruling.

The Court of Appeal, in upholding the High Court ruling and rejecting Hobart's claim, made the following comments:

  • The court in deciding what makes a person a de facto director, will have to determine the corporate governance structure of the company so as to decide, in relation to the company's business, whether the defendant's acts were directorial in nature;
  • The court is required to look at what the director actually did and not any job title actually given to him;
  • A defendant does not avoid liability if he shows that he in good faith thought he was not acting as a director. The question whether or not he acted as a director is to be determined objectively and irrespective of the defendant's motivation or belief;
  • The court must look at the cumulative effect of the activities relied on and all the circumstances "in the round";
  • It is also important to look at the acts in their context; a single act might lead to liability in an exceptional case;
  • Other relevant factors include whether the company considered him to be a director and held him out as such, and whether third parties considered that he was a director;
  • The fact that a person is consulted about directorial decisions or his approval does not in general make him a director because he is not making the decision; and
  • Acts outside the period when he is said to have been a de facto director may throw light on whether he was a de factodirector in the relevant period;

Hobart claimed that the High Court had erred in its original ruling because the judge had failed to analyse the corporate governance structure of Hobart and take it into account. However, since Mr. Naggar had not disputed that he had performed directorial acts but relied instead on the "hat identification" defence, the Court of Appeal held there was no error of law by the High Court in not analysing the corporate governance structure.

Mr. Naggar's "hat identification" defence was that he had multiple roles and that he had a hat for each office he held and the question to be determined by the court was which hat he was wearing at any particular point in time. The Court of Appeal upheld this approach by the High Court.

On the issue of shadow directorship, the Court of Appeal upheld the finding of the High Court that, because he was protecting his or other's interests in some other capacity and was therefore not a de facto director, Mr. Naggar was not a shadow director either.

This case is a useful examination of the complex issue of de facto and shadow directorships and would be of persuasive authority in Ireland.