What makes a director? De facto directors revisited

We revisit the key factors considered  by the court in determining whether an individual is a de facto director, and how that was applied in the Kids Company director disqualification case.

The provisions of the Companies Director Disqualification Act 1986 (CDDA) cover not only de jure directors, but also individuals who are or were shadow or de facto directors in the last three years of the company’s operation, as “director” is defined as “any person occupying the position of a director, by whatever name called” (s22(4) CDDA).

• De jure directors
  These are individuals who are validly appointed in law as directors under the company’s constitution and whose appointment is registered at Companies House.

• Shadow directors
  Persons “in accordance with whose directions or instructions the directors of the company are accustomed to act”, as defined in section 251 of the Companies Act 2006, which goes on to carve out several explicit exclusions, including advice given by professionals acting in that capacity.

• De facto directors
  Individuals who are ‘in fact’ directors, but not legally appointed as such.  This can arise for individuals who consider themselves directors, but because of a defect in appointment or registration at Companies House is not technically a de jure director; or where they do not necessarily consider themselves directors but objectively are found to have carried out that role. 

Factors considered by the court

One of the key authorities on determining whether an individual is a de facto director is Smithton v Naggar  [2014] EWCA Civ 939, in which Lady Justice Arden summarised points of general practical importance in determining who is a de facto director, paraphrased here:

1. Assumption of responsibility
   Have they assumed responsibility to act as a director - in what capacity were they acting?
2. Corporate governance
   What was the corporate governance structure of the company – were their acts directorial in nature?
3. Actual role
   What did they actually do?  Their job title is not determinative.  What was cumulative effect of the activities relied on, and what were those acts in context? 
4. Good faith irrelevant
   Whether or not they acted as a director is to be determined objectively and irrespective of their motivation or belief.
5. Held out as a director
   Relevant factors include: (i) whether the company considered them to be a director and held them out as such; and (ii) whether third parties considered they were a director.
6. Decision-making
   The fact that a person is consulted about directorial decisions does not in general make them a director if they are not making the decision.

Kids company

Smithton v Naggar was, among a significant number of other cases, considered and applied in the Kids Company case in considering whether its CEO, Camila Batmanghelidjh, was a de facto director: The Official Receiver v Batmanghelidjh & others [2021] EWHC 175 (Ch). We outline the background to the case in our article here.  

As discussed in our article on the failed disqualification proceedings here, in common with the practice of many charities, Kids Company had a board of trustees who were its registered directors (all of whom were unpaid non-executives), and a CEO who was not a registered director (who was paid and had an executive role running the charity on a day-to-day basis).

The judge, Mrs Justice Falk, reviewed Ms Batmanghelidjh’s employment contract, the company’s Financial Procedures Manual and its Articles of Association, which made clear that powers could be delegated and she was accountable to the trustees, but she had a significant level of responsibility as would be expected of a CEO. She was an exceptional fundraiser and had involvement in the strategic plans of the company.

Ms Batmanghelidjh had a significant budget which she was allowed allocate pursuant to the Financial Procedures Manual. She was also able to take loans to benefit the company, and negotiate with HMRC in relation to time to pay.

The main example put forward of Ms Batmanghelidjh holding herself out as a director was in executing a deed in 2010, which should have been signed by a director, and Ms Batmanghelidjh signed next to the pre printed word “director”, but this was neither picked up by solicitors or the accountant who also signed as an error. From then on, she would refer to herself as Chief Executive.

Ms Batmanghelidjh attended Finance Committee Meetings and Board Meetings at the Board’s request but did not attend Governance committee meetings. She seemingly pushed back when she disagreed with the trustees, however this was described as “a conversation between adults”. Ms Batmanghelidjh had significant influence over the board, but she was found not to be able to participate in decision-making at the highest level: that was for the board alone.

The judge noted that Ms Batmanghelidjh was afforded a significant degree of delegated authority, which she used to the full and on occasion may have exceeded. Her views were also accorded significant respect, but that did not put her on an equal footing with the trustees.

The judge found that Ms Batmanghelidjh was not a de facto director: instead, she was accountable to the trustees and subject to their supervision and direction. It was not the case that the trustees were fearful of Ms Batmanghelidjh or felt unable to speak their minds, rather they understood her importance to the charity’s fundraising abilities and reputation. It was clear from the evidence as a whole that the trustees did not treat Ms Batmanghelidjh as one of them, and she did not act as if she was.

Comment

While it may be unusual for a CEO of commercial businesses not to have a place on the board, Kids Company demonstrates that charities operate in quite a different way.  The case serves to show that proving that an individual was a de facto director in a given period is often not straightforward, and is highly fact specific. 

All individuals in senior roles with an executive function (whether or not they are appointed directors) should ideally be clear as to the scope and nature of their role and what responsibilities they may be assuming. Notwithstanding the outcome in Kids Company, that extends to directors of charities too – although it is now clear the court will be slow to reach adverse findings against those prepared to take on trusteeship roles, they still need to be mindful of their duties and the potential risk of disqualification in extreme circumstances.

For more information on this article or connected issues, please contact Olivia Reader in our Restructuring & Insolvency Team.