Liability UK Holding Company DirectorsNov 06, 2014
Recently, the Court of Appeal has placed consideration regarding the issue of a UK holding company director who was held liable by one of its subsidiaries for fiduciary duties breach. This happened despite not being appointed as director of the said subsidiary company.
The duties of a director to the company appointing him also apply to an individual who has not been appointed formally, acting as a ‘de facto director’. The insolvency law of a company may also impose liabilities on that director since the actual company directors usually act according to the directions of the shadow director.
The Court of Appeal reviewed the case of Smithton Ltd v Naggar and had to identify whether the holding company director was a shadow director of any of its subsidiary companies. The subsidiary was considered as a joint venture. The holding company owns more than 50% of the shares, with the management team members holding the balance. There was also an agreement among shareholders in place, as long as the board of directors is made up of different members coming from the management team, as well as with three directors chosen by nomination at the holding company.
As of the moment, there was not much discussion yet or decision done during the board meetings at the subsidiary company. Vital decisions were informally taken by a representative on the management team. Mr. Naggar claimed he owed duties as a shadow director which he breached relating to the contracts. It filed an appeal with the High Court dismissed the claims.
The Supreme Court has stated that there is no specific duty definition for a de facto, or a shadow director. The question here is whether he became a part of the governance system within the company, or whether he presumed the function and status of a director in order to give himself the responsibility just like he was a director. It was found out that the subsidiary did not demonstrate that Mr. Naggar, indeed, was a shadow director. Mr. Naggar gave instructions to the employees, but they were explicable either according to Mr. Naggar’s role as the client or as a holding company director.
As conclusion, even though Mr. Naggar did not dispute performing directorial duties, he acted in a different capacity than that of a subsidiary director. Therefore, he was not a de facto director. The decision regarding this issue is a proof that previous occurrences of similar situations are good references when it comes to handing down a conclusion. At the same time, this calls for the need to create a blatant distinction and definition of the roles of a director, including the scope of responsibilities, and decisions that he or she can be accountable of. This is another case that can be used as a reference for further issues related to authority in a holding company in relation to its subsidiaries.