Elsworth Ethanol & Anor v Hartley & Ors (2014)

In this case, the High Court gives useful guidance on when individuals may be found to be “de facto” directors.

The claimants (Elsworth and Bookless) alleged that three individuals were de facto directors of Elsworth at the time of a patent application but that they had wrongly made the patent application in the name of a different company (Bioconversion). In light of that, the claimants sought transfer of the title of the patent from a third party purchaser (Ensus). The key issue that fell to the High Court to determine was whether the three individuals were in fact de facto directors of Elsworth and were in breach of their fiduciary duties as de facto directors.

The High Court held that there “is no single test by which a de facto director may be defined”, but that there were a number of relevant factors, all of which the Court should take into account. These included whether the person in question was acting on an equal footing with the true directors in directing the company’s affairs, whether there was a holding out by the company of the individual as a director and he used the title, or whether he was part of the corporate governing structure i.e. the system by which the company is governed and controlled. If it is unclear whether a person’s acts were referable to an assumed directorship or to some other capacity such as a consultant, the Court warned that a de facto directorship should not be inferred.

In this case, although the individuals attended meetings  to discuss the subject matter of the patent application, these were not board meetings of Elsworth. None of the three represented themselves to be directors of Elsworth, nor were they so represented by others. The corporate governance of Elsworth was at all times within the sole control of another individual, Mr Bookless. Accordingly, the three individuals were never de facto directors of Elsworth and so it followed that they could not have been in breach of their fiduciary duties.