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

An individual does not become a de facto director of a company merely by directing the activities of its sole corporate director. The court must consider all the circumstances and determine whether the individual assumed the powers and responsibilities of a director of the subject company.

Where every relevant act was performed entirely within the individual’s duties as a director of the corporate director, those acts are attributable to that capacity. Something more is required before fiduciary duties are imposed in relation to the subject company. The separate legal personalities of the individual, the corporate director and the subject company must be respected unless Parliament provides otherwise.

HM Revenue and Customs brought 42 applications under section 212 of the Insolvency Act 1986. It alleged that Mr Holland was a de facto director of 42 insolvent companies and had caused them to pay unlawful dividends without providing for higher-rate corporation tax.

The companies’ sole de jure director was another company, of which Mr Holland was a director. The Deputy High Court Judge held that Mr Holland was also a de facto director of the operating companies and ordered an assessment of compensation: [2008] EWHC 2200 (Ch). The Court of Appeal allowed his appeal and dismissed the applications: [2009] EWCA Civ 625.

The central issue before the Supreme Court was whether an individual who made decisions as a director of a corporate director thereby assumed office as a de facto director of the companies for which the corporate director acted.

1. Appeal dismissed by a majority of three to two. Lord Hope and Lord Collins gave the principal majority reasons. Lord Saville agreed with both. Mr Holland had not been shown to be a de facto director of the operating companies.

2. Whether a person is a de facto director depends on all the relevant circumstances. The inquiry focuses on what the person actually did and whether that person assumed the powers, functions and responsibilities of a director in relation to the company concerned. No single factual test governs every case.

3. Where a company lawfully has a corporate director, the separate legal personalities of that corporate director and its human directors must be respected. The principle in Salomon v A Salomon & Co Ltd [1897] AC 22 remained applicable. An act directed by a corporate director is not, without more, an act undertaken by the corporate director’s individual board members as directors of the subject company.

4. All Mr Holland’s relevant acts were performed within the discharge of his duties as a director of the corporate director. Although he made and implemented the relevant decisions, there was no conduct attributable to him personally as a director of the operating companies. Imposing fiduciary duties on that basis would amount to an unjustified judicial extension of de facto directorship. Any wider rule was for Parliament.

5. Section 212 of the Insolvency Act 1986 is a procedural remedy. It applies to an officer, including a de facto director, but does not extend to a shadow director. A claimant must establish an independent misfeasance, fiduciary duty or other duty. Because Mr Holland was not a de facto director, the remaining issues concerning unlawful dividends and remedies were academic.

6. Lord Hope nevertheless considered that the better view was that a director who caused unlawful dividends to be paid was strictly liable, subject to relief under section 727 of the Companies Act 1985. The established remedy was restoration of the dividends. Section 212(3) permitted the court to reduce the amount to reflect the creditor’s actual deficiency, but not to extinguish established liability altogether.

7. Lord Walker and Lord Clarke dissented. They considered that capacity was not decisive and that a person could act simultaneously as director of the corporate director and de facto director of the subject companies. On the facts, Mr Holland’s control of every important decision constituted the necessary assumption of directorial responsibility. They would have allowed the appeal and restored liability for the full dividends.

1. United Kingdom Supreme Court: By a majority of three to two, dismissed HMRC’s appeal and affirmed the Court of Appeal’s conclusion that Mr Holland was not a de facto director: [2010] UKSC 51.
2. Court of Appeal: Allowed Mr Holland’s appeal, dismissed the originating applications and dismissed HMRC’s cross-appeal because its issues no longer arose: [2009] EWCA Civ 625.
3. High Court, Chancery Division: Held that Mr Holland was a de facto director, found him liable for unlawful dividends paid during the final period and limited his contribution to the higher-rate corporation tax deficiency: [2008] EWHC 2200 (Ch).