What did you call me?  The implications of being a de facto director

Firstly, what is a de facto director?  In Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, Millett J said:

“A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.”

The Risks

While some may covet the title and relish increased management responsibility, de facto directors often do not realise that, even without an official appointment to the board, they would expose themselves to the increased risk of personal liability with no distinction between them and actual board members.

For example, de facto directors also owe statutory duties to the company and are subject to director’s disqualification and wrongful trading legislation, to name a few. Therefore, they can be held personally liable for breaches, just like directors.

While it is appreciated that the term “director” is used often, particularly in some industries, whether a “sales director” or a “financial director” are de facto directors will depend on the actual roles themselves but the additional status conferred by the title brings with it associated risks for both the individual and the company.

For example, non-directors who hold themselves out as directors in dealings with third parties may be liable for breach of authority but not be afforded the protections available to members of the board (such as insurance or corporate indemnities).  Conversely, if an employee is held out by the company as a director, the acts of an agent generally bind a principal where the agent has actual authority (whether express or implied by virtue of the agent’s position) or where the agent has ostensible (or apparent) authority.

In summary

It is crucial for companies and individuals to understand the implications of de factor directorships. It would therefore be worth considering whether an employee having the title of “director” is being held out as such, to avoid legal consequences.

If you would like to discuss any of the matters raised in this article please contact Sing Li.