In Smithton Ltd v Guy Naggar and others (2013), the Court of Appeal held that a director of a holding company was not, by virtue of that position, a de facto or shadow director of a subsidiary.
Background and facts
Hobart (now called Smithton Ltd) was a joint venture brokerage company in which Dawnay Day International Ltd ("DDI") was a majority shareholder. The interests and responsibilities of those involved in the running and ownership of Hobart were set out in a joint venture agreement (the "JVA"). Hobart brought a claim against Mr Naggar who was a director of DDI claiming that he was either a de facto or shadow director of Hobart and, as such, had breached his statutory duties. The alleged breaches were in relation to transactions entered into by Hobart with companies connected to Mr Naggar giving rise to alleged conflicts of interest. These transactions were alleged to have been entered into to further Mr Naggar's own private interests.
The two principal issues before the court were:
- Whether Mr Naggar was a de facto or shadow director of Hobart; and
- Whether section 190 of the Companies Act 2006 applied to the transactions entered into by Hobart.
The Court of Appeal judgment analysed these two issues separately and the focus of this article will be the Court's decision in relation to issue (a).
The relevant case law
Section 250 of the Companies Act 2006 defines a director as "any person occupying the position of director, by whatever name called". Consequently, a person occupying the position of director without expressly being called so, is referred to as a de facto director. Section 251 provides that a shadow director is "a person in accordance with whose directions or instructions the directors of the company are accustomed to act".
The leading case on the issue of whether an individual is a de factoand/or shadow director of a company is HMRC v Holland (2010) where the Supreme Court decided that a director of a corporate director (a body corporate which is a director of a company) which was the sole director of several trading companies, was not a de facto director of those companies as he had only acted in his capacity as a director of the corporate director. A key consideration by the Court in reaching this decision was the separate legal personality of the corporate director. The Court also provided that there is no definitive test to determine whether an individual is a corporate director, rather it needs to be considered whether the person had assumed the responsibilities and carried out the functions of a director as part of a corporate governance structure.
In the present case, Hobart claimed that Mr Naggar was a de facto or shadow director because major decisions were rarely made at board meetings and the directors of Hobart on a number of occasions acted on Mr Naggar's instructions in relation to important matters (such as approval of major contracts). Further, Hobart claimed that Mr Naggar exerted control over the daily management of the company as he insisted on receiving weekly reports containing confidential figures relating to the brokerage business.
The Original Decision
The court at first instance found that Mr Naggar was not a de facto or shadow director of Hobart as he was wearing a "different hat" in his acts and dealings in relation to the corporate governance of Hobart; that is, he was not acting in the capacity of a director. In relation to the issue of Mr Naggar's control of Hobart, that he exerted through approvals of major decisions and the continual monitoring of its weekly financial data, the Judge found that this was expected due to his natural concern for the financial position of the group in his capacity as Chairman and director of DDI (Hobart's parent company).
Additionally, the Judge found that given the JVA set out the structure by which Hobart should be governed and that there was no mention of Mr Naggar in the JVA, this indicated that he was not a director of any kind. It was also held to be significant that as a brokerage company Hobart was authorised by the FCA, but it had never reported to the FCA that Mr Naggar was one of its directors.
This decision was appealed by Hobart on the grounds that the Judge had failed to analyse the corporate governance structure of Hobart and whether Mr Naggar had assumed responsibility as a director, but had instead wrongly focused on determining the capacity under which he was acting.
The Court of Appeal Decision
The Court of Appeal upheld the Judge's decision, citing several points raised in the case of Holland in determining who is or is not a de factodirector, namely:
- The fact that a person is consulted about directorial decisions or his approval does not in general make him a director as he is not actually making the decision;
- The court must look at the acts of that person in context and the cumulative effect of the activities relied on;
- The court will need to assess whether the person's acts were directorial in nature having considered the corporate governance structure of the company and what the director actually did (and not any job title actually given to him); and
- Relevant factors also 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 Court of Appeal agreed with Hobart's submissions that the Court should focus on trying to assess which "hat" Mr Naggar was wearing under in his dealings with Hobart rather than ascertaining the corporate governance structure of Hobart. Mr Naggar did not dispute the fact that he performed directorial acts, rather he argued that he had multiple roles due to his directorship of DDI and had acted in a different capacity at all times from that of a director of Hobart; essentially claiming that he was wearing a "hat" other than that of a Hobart director. The Court of Appeal held that the Judge was correct in focusing on identifying the capacity in which Mr Naggar was acting.
The Court of Appeal also considered whether the Judge had made a correct determination in relation to which "hat" Mr Naggar was wearing during his dealings with Hobart. Hobart claimed that if it can be shown that Mr Naggar's acts were within the ambit of acts which a director would normally carry out, then the acts were directorial in nature and Mr Naggar should be deemed a de facto director. The Court of Appeal held that the assessment of the capacity in which a person acts is one of fact and degree. The correct test, therefore, should not be to look at whether it is possible that the acts were those expected of a director, rather the acts themselves should be assessed in context. In this case, the Court of Appeal found that while it is possible that Mr Naggar still could have acted as a de facto director, despite the provisions of the JVA, there was little evidence to show this was the case. Therefore, the Court of Appeal upheld the Judge's initial findings that his involvement did not go beyond that which would be expected from a person who is both a client and chairman of the majority shareholder.
This case provides some useful practical insight into the factors that the English Court will take into account when determining whether an individual is a de facto or shadow director. This is particularly important in the context of group companies where directors of parent or holding companies may have considerable influence on the decisions made by subsidiaries. Although the governance structure of subsidiary companies may be set out in various agreements on their incorporation, the explicit exclusion of an individual from the board may not necessarily preclude him/her from being deemed a de facto director. Rather, their acts and dealings with the company will likely be assessed in context with a view to ascertaining the capacity under which they were acting.