When a CEO or "director" in name only is not considered a director - the fall- out from the Kids Company case

read time: 3 mins
09.09.21

Can companies name an individual a ‘director’ when they are not in fact legally appointed? The short is answer: yes, but there may be consequences…

The court considered what makes a director in the director disqualification case following the high profile liquidation of the charity, Kids Company. Like many charities, Kids Company had a board of unpaid non-executive trustees (who were its registered directors), and a CEO who was not a registered director but ran the charity on a day-to-day basis and received a salary.  The Insolvency Service alleged that the charity’s CEO, Camila Batmanghelidjh, was unfit to be involved in the management of a company, applied for her disqualification. 

The court found on the facts that Kids Company’s CEO was not a director, which defeated the disqualification proceedings.  However, the case serves as a cautionary tale for those in senior roles across businesses generally because a finding that they are a director (irrespective of their title) could result in personal liability, and in some cases disqualification and/or criminal sanctions.

What makes a director?

Imagine there is a senior individual in your company who assumes responsibilities of a director and is treated as such – but is not in fact legally appointed. Can they be subject to the same responsibilities (and potential penalties) as appointed directors?  Yes: the Companies Act 2006, Insolvency Act 1986 and Companies Director Disqualification Act 1986 all cover individuals who are appointed under the company’s constitution on Companies House, as well as those individuals who ‘occupy the position of a director’ but may not necessarily be legally appointed or named so, i.e. a ‘de facto director’. 

How does one determine who is a ‘de facto director’?

There are a few elements to consider:

 Firstly, has that individual assumed responsibility to act as a director? In terms of corporate governance, to what extent are their acts directorial? What is their actual role in the company? Objectively speaking, (and irrespective of their motive), have they acted as a director? Has the company and/or other third parties considered them to be a director? Finally, have they made any directorial decisions (or, for example, simply been consulted on them)? These were all factors considered by the court in Kids Company (further detail in our article here).

What can we learn from the Kids Company case?

It is no simple task to establish whether an individual was indeed a de facto director. Actually, it is highly fact-specific. While it is possible for an individual to carry a title such as CEO or director without being deemed to be a de facto director, there is still much reason for companies (and those individuals) to act with caution. Those in senior roles (especially with executive functions) should be mindful of the many legal and fiduciary responsibilities they are potentially assuming,. Senior individuals (whether they are legally-appointed directors or not) must be clear as to their duties and the scope of their role (further detail in our article here).

Contact our Restructuring & Insolvency team for further advice on the issues discussed in this article.

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