Re IT Protect Ltd (in liquidation) Bramston and another (as joint liquidators of IT Protect Ltd) v Pye and another [2020] EWHC 2473 (Ch)

The case concerned a misfeasance claim against two respondents; a de jure director of the company and a de facto director.

The company was incorporated on 24 October 2013 and commenced trading shortly thereafter as a telephone sales business, selling call-blocking devices to consumers. As a consequence of failing to pay a penalty imposed by the Information Commission’s Office for breach of the Privacy and Electronic Communications (EC Directive) Regulations 2003, which regulates telephone marketing, the company was wound up by the Court.

The case succeeded against the first respondent but failed against the second as the applicants had “not made out their case that the Second Respondent was a de facto director of the Company.”

When considering whether the first respondent abdicated their duties, the Judge took into consideration the following approach adopted by the Court of Appeal in Lexi Holdings -

(1) what the First Respondent knew, or ought to have known, had he performed his duties as a director;

(2) what steps the First Respondent should have taken, consistently with his duties, in light of the knowledge that he had or should have had; and

(3) what would have happened if the First Respondent had complied with his duties, and that, but for the breach, the transaction or loss complained of would not have occurred:

It is also worth noting the principles applicable to ‘De facto directors’.

“(1) There is no one decisive test; the question is very much one of fact and degree: Re Paycheck Services 3 Limited [2010] 1 WLR 2793 at [39].

(2) All relevant factors must be taken into account, including whether there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information on which to base decisions, and whether the individual had to make major decisions: Re Paycheck at [31].

(3) Whether a person is held out as a director and/or claims or purports to be a director are relevant, but not necessary, factors. What is important is not what the individual calls him or herself, but what he or she did: Re Paycheck at [32], [90].

 (4) A number of tests have been suggested, including whether the person was directing the company's affairs, either alone or with others, and whether the person was part of the corporate governance structure. However, it is difficult to define “corporate governance”, and difficult to identify those activities which are the responsibility of the director or the board: Re Paycheck at [91].

(5) In Re Mumtaz Properties Ltd [2012] 2 BCLC 109 at [47], the Court of Appeal found it useful to consider whether the individual was “one of the nerve centres from which the activities of the Company radiated”. This test was later relied upon in Ingram v Singh [2018] EWHC 1325 at [105].

(6) Where a company's affairs have been conducted on an informal basis, without any observed corporate governing structure, a focus on corporate governance is of less relevance and assistance: Ingram v Singh at [105].

'Practical points: what makes a person a de facto director?

33. Lord Collins sensibly held that there was no one definitive test for a de facto director. The question is whether he was part of the corporate governance system of the company and whether he assumed the status and function of a director so as to make himself responsible as if he were a director. However, a number of points arise out of Holland and the previous cases which are of general practical importance in determining who is a de facto director. I note these points in the following paragraphs

34. The concepts of shadow director and de facto are different but there is some overlap.

35. A person may be a de facto director even if there was no invalid appointment. The question is whether he has assumed responsibility to act as a director.

36. To answer that question, the court may have to determine in what capacity the director was acting (as in Holland).

37. The court will in general also have to determine the corporate governance structure of the company so as to decide in relation to the company's business whether the defendant acts were directorial in nature

38. The court is required to look at what the director actually did and not any job title actually given to him.

39. A defendant does not avoid liability if he shows that in good faith he thought he was not acting as a director. The question whether or not he acted as a director is to be determined objectively and irrespective of the defendant's motivation or belief.

40. The court must look at the cumulative effects of the activities relied on. The court should look at all the circumstances “in the round” (per Jonathan Parker J in Secretary of State v Jones).

41. It is also important to look at the acts in their context. A single act might lead to liability in an exceptional case.

42. Relevant factors include:

i) whether the company considered him to be a director and held him out as such;

ii) whether third parties considered that he was a director.

43. The fact that a person is consulted about directorial decisions or his approval does not in general make him a director because he is not making the decision.

44. Acts outside the period when he is said to have been a de facto director may throw light on whether he was a de facto director in the relevant period.

45. In my judgment, the question whether a director is a de facto or shadow director is a question of fact and degree ….'”