Are you an accountant or a de facto director of your client’s business?

There are risks and vulnerabilities for practitioners who cross the line

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Looking after your client’s affairs often requires taking on a much more involved role than simply straightforward compliance tasks. Acting as a trusted adviser is likely to influence your client’s strategic business decisions and means they may formally appoint you as a director of their company. Or may ask you to take on a shadow director role.

However, you may also notice your role gradually transforming into areas typical of a company officer, without being officially appointed.

Becoming a director in your client’s business is likely to be onerous and is prohibited for audit clients.

Companies Act 2006 states that a company is required to have at least one director. Whether or not someone is a statutory director is a matter of public record and typically to become a director you would be appointed.

However, it is possible to be a director in law, without being officially nominated. If, based on facts, it is proven that you have assumed the role of a director, wholly or to a degree and irrespective of your intention or belief, you may be deemed a de facto director.

The distinction between an adviser and a de facto director may often be a blurred one, and a thorough analysis of your client relationship is necessary to identify whether your role is still that of a professional accountant and adviser, or you’ve assumed the role of a director.  

A recently concluded, 20-year-long case, John Anthony Popely (2) Andrew Popely v (1) Ronald Anthony Popely (2) Cosmos Trust Ltd (3) Casterbridge Properties Ltd (2019), 13 June 2019, brought to light two often-disputed questions:

  1. When will an individual, due to their authority, qualification and skills, be deemed a director, despite not being registered as such at Companies House?
  2. How do you assess whether your duties and any alleged wrongful acts are carried out in the capacity of a director, or an external accountant?

In Popely and others vs. Popely and others, various family members with interests in multiple family companies in the leisure sector operating in the UK and Cyprus argued over their respective shares of the companies.

The dispute resulted in a claim brought by a younger brother against an older brother (Ronald) relating to three payments totalling over £4m, alleged to have been effected by Ronald, for his own and his family’s benefit, made from a family company Castlebridge Ltd, which was owned 70% / 30% by Ronald’s and his father’s trusts. It was alleged the payments were fraudulent and in breach of the older brother’s fiduciary duty to Castlebridge as a de facto director. 

It was clear that Ronald took important decisions in relation to Castlebridge, including:

  • nomination of a corporate director
  • executing purchasing and selling transactions on behalf of Castlebridge, affecting various payments
  • transferring shares between Castlebridge and other family companies, thereby changing corporate structures
  • issuing instructions to company formation agents to incorporate or wind-up various family companies and transfer shares between Castlebridge and other family companies.

Based on the facts of this and similar cases, the judges established the following facts relating to the concept of de facto and shadow director:

De facto director

  • The modern concept of a de facto director is derived from a 19th century principle that a person whose appointment as a director was defective, but who acted as if properly appointed, could not rely on the invalidity of his appointment to escape his responsibilities as a director.
  • A de facto director is someone who assumes the status of director and is part of a governance structure of a company, as presented and perceived by the company and third parties.
  • There is no definitive one-size-fits-all test for a de facto director.
  • Specific tests should aim to establish precisely whether an individual’s acts in a relevant business context were directorial in nature; it is not sufficient to assess someone broadly as a ‘directing mind’ in a general way.
  • To establish if the acts were directorial and not routine in nature, it is necessary to establish whether only a director can carry out those acts, such as:
    • Could the acts or decisions be made by someone in another capacity? If so, the individual will not be a de facto director
    • For example, in some companies authorising payments must only be done by a director; in other, often larger organisations, authorising a payment may be functional and operational in nature.
  • Acts outside of periods when an individual was said to have been a de facto director may cast light on whether someone was a de facto director in the relevant period.
  • Establishing that a person is involved in the management of the company and exercising a degree of influence will not be sufficient on its own for that person to be deemed a director, unless there is no one else otherwise involved in the management of the company.
  • It is the cumulative effect of actions undertaken and decisions made which matters, although a single act may lead to a liability in exceptional circumstances.  

While the concepts of de facto and shadow director share some common ground based on their influence exercised in the business, they are separate, different in nature and often mutually exclusive.

Shadow director

  • Shadow director is defined in section 251 of CA 2006 as a person in accordance with whose directions or instructions the directors are accustomed to act.
  • The scope of a shadow director’s activities does not have to extend to the whole company but can be centred on specific business aspects. Someone may be a de facto and shadow director at the same time, in relation to different business matters.

Liability of de facto vs. shadow directors

The liability in the case of a de facto and a shadow director has different bases:

  • The liability of a de facto director is a matter of interpretation of common law – the fiduciary duty to act in the best interest of the company will apply if indeed the individual is deemed to have acted as de facto director
  • The liability of a shadow director is a matter of enacted legislation, not of judicial interpretation with the fiduciary duty at the centre of that interpretation. If your role involves instructing nominated directors where they rely on your expertise, you are likely to be considered a shadow director, and become statutorily liable to meet the legal obligations of a director, in accordance with the Companies Act 2006 and in line with Company Directors Disqualification Act and Insolvency Act with regards to wrongful or fraudulent trading.

You may not be able to avoid liability for actions deemed to be directorial in nature even if you show in good faith that you thought you were not acting as a director.

Lessons from the case

The Popely claim ultimately failed due to unreliability of witnesses and deficiencies of evidence. The judge closed the case, concluding:

  • Not all payments made from Castlebridge were directorial in nature
  • Those which were, were caused by Ronald, influencing the corporate director representative, in the capacity of a shadow director, not de facto director
  • The governance structure of Castlebridge was not investigated and could provide no evidence whether actions by Ronald were directorial in nature
  • If payments were made by shadow director, they could not have been made in breach of fiduciary duty of a de facto director
  • Payments were not fraudulent as no dishonesty was involved.

Takeaway points

If you are a shadow or de facto director, you will be responsible for acting in the best interest of the company and/or a wide spectrum of stakeholders, such as shareholders, employees, creditors and authorities, depending on circumstances (in the course of trading, administration, liquidation). This applies particularly if you are the only qualified accountant and hence a professional of sufficient authority and seniority to influence the board.

If you are acting as an accountant and doubts arise whether or not your influence over the client company makes you a de facto director, reputational issues may arise as to why a formal appointment has been avoided.

Sanctions are likely to apply if you are found liable for administrative failings or otherwise unfit for company management. Your ACCA membership is likely to be affected if you are deemed a director and subsequently become disqualified.

A formal appointment – putting in place procedures ensuring you act only on instructions of the board – may help manage the risk if your intention is not to be a shadow director or a de facto director.