Claimant law firms are working hard to develop routes for holding parent companies and their boards responsible for trading activities carried out through subsidiary companies. The recent decision in Aston Risk Management v Jones and others provides clarity on when a registered director of a parent company can be found to be a de facto director of an operating subsidiary. The finding is fact specific, but shows that where a senior individual holds themselves out as a director and is acutely involved in the day to day running of a company, the legal duties required of a director can be imposed upon them.
Brief Background and Arguments
The litigation focussed on breach of director and trustee duties following the administration of Audiological Support Services Ltd ("ASS"). ASS was a company which specialised in the provision of short form audiology reports for use in medical negligence cases. Following a series of substantial contract wins and changes in personnel, ASS came to be directed (at least on paper) by Clinton Jones and Professor Lutman (the directors de jure).
ASS was a subsidiary of Audiological Support Group Ltd ("ASG"). The directors of ASG were, at all relevant times, Clinton Jones and Lee Jones ("Mr Jones"). The allegations we are interested in focus on Mr Jones and whether his actions were sufficient to make him a de facto director of ASS. In support of the position that Mr Jones was a de facto director of ASS, the Claimants argued the Mr Jones:
- acted as a CEO by asking for day to day business sensitive calls to be directed to him;
- held himself out as the Chief Technical Officer of ASS. This was evidenced by an email from Mr Jones in which he referred to himself as the CTO, a shareholder and confirmed that he had taken over an important project from a technical perspective;
- assumed the right to approve and veto payments from the bank accounts of ASS;
- acted on behalf of ASS in negotiations with major clients and in HR matters; and
- took a central role in the day-to-day management and operation of the business of ASS, including at a micro level.
Mr Jones accepted that he took some directorial steps in relation to ASS. However, his case was that his actions were not by him as an individual, but the actions of the Board of ASG in accordance with a Shareholders Agreement.
Legal Principles
In reaching its decision, the court pointed to various relevant authorities, summarised as follows:
- 250 of the Companies Act - defines a director as, "any person occupying the position of director, by whatever name called";
- Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 - when alleging that an individual was a de facto director of a company, you should plead and prove that they undertook functions in the company that could only be discharged by a director of that company;
- Secretary of State for Trade & Industry v Tjolle [1998] BCC 282 - the central question which the courts seek to answer is whether the individual was: “part of the corporate governing structure”; and
- Smithton Limited v Naggar [2014] EWCA Civ 939, [2015] 1 WLR 189 – "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."
Finding
The Court concluded that Mr Jones was a de facto director of ASS. Mr Jones was a key part of ASS' corporate governance, assuming and discharging functions that only a director of ASS could perform.
The Court focussed on whether Mr Jones' actions could be categorised as him acting individually, or alternatively whether they should be viewed as a director of ASG taking proper decisions in respect of a subsidiary. The court concluded that Mr Jones was acting individually. In reaching this decision, it was highlighted that:
- This was not a case were Mr Jones and Clinton Jones were providing oversight from ASG. Mr Jones was acting as a director of ASS and was intimately involved in its affairs. The court placed significance on Professor Lutman, a de jure director, having little actual role to play;
- Mr Jones was the dominant personality who drove the decisions and ensured he got what he wanted; and
- Mr Jones role in ASS was so fundamental that it was not confined to clearly identified areas, but extended to day-to-day decisions that it is difficult to categorise as being those of the Board of ASG.
Comment
This judgment provides clear guidance as to the circumstances in which the director of a parent company can be found to also be the de facto director of a subsidiary. It is part of a trend in a developing area of English law where liability exists for directors who might believe they have structured the business to minimise the risks of such liability. The finding is fact sensitive, but in reaching a conclusion, consideration should be given to:
- Who is making the business management decisions on behalf the company;
- Whether senior individuals are holding themselves out as directors;
- Who is involved in the high level day-to-day business of the company; and
- What role the registered directors play in the company.
Where the answers to these questions point to individuals outside of the registered directors running the company, it may be that such individuals have assumed legal responsibility as de facto directors.
