Holland v The Commissioners for Her Majesty’s Revenue and Customs and another

The Supreme Court dismissed HM Revenue and Customs' appeal. The central legal question was whether Mr Holland, a natural person and director of a corporate director (Paycheck Directors), was a de facto director of 42 trading companies and therefore liable under section 212 of the Insolvency Act 1986 for payments of unlawful dividends. The majority held that he was not a de facto director: his acts were performed within the ambit of his duties as a director of the corporate director and must be attributed to that capacity. The court emphasised the separate legal personality of the corporate director and held that an individual director of a corporate director will not be a de facto director of the subject company unless he has, by his own conduct, undertaken functions which could properly be discharged only by a director of the subject company.

The judgment discusses and applies the principles in Re Hydrodam and Re Lo-Line and addresses related issues including the nature of liability for unlawful dividends, the appropriate remedy (restitution of the dividends as the established remedy), and the interaction with the Companies Act 1985 section 727 discretion to relieve. Because the court concluded that Mr Holland was not a de facto director, the substantive orders against him under section 212 were not upheld.

Background and procedural history:

• HMRC issued 42 originating applications under section 212 Insolvency Act 1986 against Mr and Mrs Holland seeking contributions in excess of £3.5m, alleging they were de facto directors of 42 insolvent companies and had caused unlawful dividend payments.
• The Deputy High Court Judge (Mr Mark Cawson QC) found Mrs Holland not liable, found Mr Holland a de facto director for a limited period (23 August to 19 October 2004) and ordered assessment limited to higher-rate corporation tax (HRCT) shortfall; he allowed a short period of grace for an earlier interval and limited the contribution ordered.
• The Court of Appeal allowed Mr Holland’s appeal and dismissed HMRC’s originating applications: [2009] EWCA Civ 625. HMRC appealed to the Supreme Court.

Nature of the claim and relief sought: HMRC sought orders under section 212 IA 1986 to make Mr and Mrs Holland repay, restore or contribute sums to the companies’ assets by way of compensation for misfeasance or breach of fiduciary duty arising from unlawful dividend payments made when distributable reserves were insufficient.

Issues framed:

1. Whether Mr Holland was a de facto director of the composite companies.
2. Whether liability for causing unlawful dividends is strict or requires fault.
3. Whether the remedy is restitution (restoration of dividends) or damages/equitable compensation.
4. The scope of the court’s discretion under section 212 IA 1986 to limit or reduce any award.
5. Whether relief under Companies Act 1985 section 727 should have been granted (including a short period of grace).

Court’s reasoning and conclusions:

• The majority (Lord Hope, Lord Collins, Lord Saville) concluded that Mr Holland was not shown to be a de facto director of the composite companies. Their central principle was that where a corporate director (Paycheck Directors) acts, the acts of an individual director of that corporate director are to be attributed to his capacity as director of the corporate director unless he has, by positive conduct, assumed the status and functions of a director of the subject company.
• The court relied on the modern line of authorities (in particular Re Hydrodam (Corby) Ltd) to require proof that an individual undertook functions in relation to the subject company that could properly be discharged only by a director of that company; mere participation in decisions as a director of a corporate director is not, without more, sufficient.
• The majority recognised the remedies applicable where unlawful dividends are paid (the established remedy is to account to the company for the amount paid), but because it held that Mr Holland was not a de facto director, it did not impose substantive liability on him under section 212. The majority observed that section 212 gives a discretion as to the order made once liability is established but that discretion does not extend to avoiding all orders where liability exists.
• A dissenting minority (Lord Walker, Lord Clarke) would have found that Mr Holland did assume the responsibilities and made the directorial decisions in practice and so was a de facto director liable to account for wrongful dividends; they would have restored the deputy judge’s order except for the deputy judge’s specific limitation on the amount.

Wider context: the court discussed the doctrinal limits on extending the de facto director concept and noted the tension between protecting creditors and respecting separate corporate personality. The majority indicated such an extension of liability is principally a matter for Parliament.

Appeal dismissed. The majority held that HMRC had not proved that Mr Holland was a de facto director of the composite companies: his conduct was performed in the capacity of director of the corporate director (Paycheck Directors) and, absent evidence that he undertook functions which only a director of the subject companies could properly discharge, he was not liable under section 212 IA 1986. The court emphasised respect for the separate legal personality of the corporate director and required "something more" than the mere taking of decisions through the corporate director before imposing directorial fiduciary duties on an individual.

Originating proceedings in the Chancery Division before Mr Mark Cawson QC: [2008] EWHC 2200 (Ch). The Court of Appeal allowed Mr Holland’s appeal: [2009] EWCA Civ 625. HMRC appealed to the Supreme Court which delivered this judgment: [2010] UKSC 51.