Corporate directors/ de facto directors

Holland v Revenue and Customs

If a company (PD) is made a director of another company (insolvent company) can the acts of PD as a director of insolvent company be attributed in law to a person holding office as a director of PD? The Supreme Court said "no".

The defendants were directors of and set up two new companies: (1) Paycheck (Directors Services) Ltd (PD) and (2) Paycheck (Secretarial Services) Ltd (PS), to act as a corporate director and corporate secretary, respectively, of 42 contracting companies.

The company structure was intended to enable the 42 companies to pay corporation tax at the lower small companies rate. However, Mr Holland was treated by HMRC as being in control of the 42 companies, so the companies were treated as being associated for tax purposes. As a result, the companies were liable for a higher rate of corporation tax and the companies became insolvent.

HMRC brought a claim against the defendants on the basis that they were liable under Section 212 IA 1986 (officer of a company who has been guilty of misfeasance or breached any fiduciary or other duty to the company) to account for dividends paid out by the 42 companies.

As the defendants were directors of PD, the question arose as to what extent they could be construed as de facto directors of the 42 companies. The Supreme Court dismissed HMRC's appeal, holding that:-

The question as to whether Mr Holland was acting as de facto director of the 42 companies should be approached on the basis that he and the corporate director (PD) were in law separate people, with their own separate legal personality and merely acting as a director of a corporate director (PD) was not enough on its own to make Mr Holland a de facto director of the 42 companies.

As long as Mr Holland discharged his duties and responsibilities as a director of the corporate director (PD), it was within this capacity that his acts should be attributed and not as a de facto director of the 42 companies.

This is good news for those that include corporate directors within structures. However, A director of a corporate director must be careful to make sure that his / her acts are within the ambit of the role as a director of that a corporate director and not capable of being construed as being on behalf of the principal company.

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