Holland v Revenue and Customs & Anor

A natural person who acts only as a director of a company’s corporate director does not, without more, become a de facto director of the subject company. The separate legal personality of the corporate director must be respected.

The individual may become a de facto director by stepping outside that corporate role and acting directly in relation to the subject company’s affairs. Mere participation in the corporate director’s decisions is insufficient.

In obiter reasoning, the majority considered that section 212 of the Insolvency Act 1986 confers a principled discretion over relief. The court may order the amount that is just in all the circumstances after liability has been established.

HMRC brought misfeasance applications against Michael and Linda Holland concerning unlawful dividends paid by 42 insolvent trading companies. Each company’s sole de jure director was another company, Paycheck (Directors Services) Limited. Mr Holland was a director of that corporate director.

The Deputy High Court Judge dismissed the claim against Mrs Holland but held that Mr Holland was a de facto director. The judge found him liable for dividends paid after 22 August 2004, while limiting his contribution to approximately £144,000. The judgment was reported at [2008] 2 BCLC 613 and [2009] Bus L.R. 1.

Mr Holland appealed, principally disputing his status as a de facto director. HMRC cross-appealed concerning the period of relief and the amount recoverable. The central issue was whether conduct undertaken solely as a director of a corporate director could constitute the individual as a de facto director of the subject companies.

1. Appeal allowed and cross-appeal dismissed. Mr Holland was not a de facto director of the composite companies. The orders made against him were set aside.

2. A director of a corporate director does not become a de facto director of the subject company merely by performing duties as a member of the corporate director’s board. The law recognises the corporate director as a legal person distinct from its natural directors. Decisions made through its board remain decisions of the corporate director.

   Something more is required. The natural person must step outside the confines of the corporate role and act directly in relation to the subject company’s affairs. No such additional conduct had been established. Rimer LJ delivered the leading judgment; Elias and Ward LJJ agreed on this dispositive issue.

3. The court rejected the approach suggested in Secretary of State for Trade and Industry v Hall and Nuttall [2006] EWHC 1995 (Ch). Its test could improperly make a natural director personally a de facto director merely because that person procured the corporate director to act. The principles in In re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 pointed the other way.

4. Obiter: Had Mr Holland been a de facto director, the court agreed that the post-August dividends were unlawful and that he had not acted reasonably once the need for specialist insolvency advice was plain. The established remedy for a director’s misapplication of company funds by unlawful dividends is restoration of the money, rather than ordinary compensatory damages assessed by net loss.

5. Obiter majority view: Elias and Ward LJJ considered that the judge could allow a few days for Mr Holland to assess counsel’s advice. They also considered that section 212 of the Insolvency Act 1986 permitted the contribution to be limited to the additional higher-rate corporation tax generated after 23 August 2004. The discretion concerns what relief is just in all the circumstances and is distinct from relief under section 727 of the Companies Act 1985. Rimer LJ disagreed on both points and would have required restoration of all dividends paid after 18 August.

1. Court of Appeal (Civil Division): In [2009] EWCA Civ 625, allowed Mr Holland’s appeal, set aside the orders adverse to him and dismissed HMRC’s cross-appeal.
2. High Court, Chancery Division: The Deputy High Court Judge’s decision, reported at [2008] 2 BCLC 613 and [2009] Bus L.R. 1, dismissed the claim against Mrs Holland but held Mr Holland liable as a de facto director and ordered a contribution based on additional higher-rate corporation tax.