De facto directors: Holland v Revenue and Customs & anor [2010]

A recent Supreme Court judgment in Holland v Revenue and Customs (HMRC) [2010] has considered the status of de facto directors and, on a 3-2 split decision, limited the applicability of the concept. The decision is controversial because it will provide a defence in certain circumstances for persons controlling companies who are not officially directors of them against claims by liquidators and other parties interested in the winding up of those companies.

In Holland, HMRC claimed against Michael Holland under s212 of the Insolvency Act 1986 (as amended by paragraph 17 of Schedule 17 of the Enterprise Act 2002) (the 1986 Act) following the liquidation of several companies. Holland was not a director of the companies but he was the only person in control of them.

Section 212 provides that the court may, on application of the official receiver, liquidator or of any creditor or contributory, examine the conduct of any person who is or has been an officer of the company. It compels that person to repay, restore or account for any money or property of the company, or compensate the company where that person has misapplied that money or property, or been guilty of any misfeasance or breach of fiduciary or other duty in relation to the company.

It was common ground that de facto directors fall within the jurisdiction of s212. The question, therefore, was whether Holland was, by his actions or otherwise, a de facto director of the companies such that he might be made liable to HMRC under s212.


The factual background was complex. Holland’s business involved managing the administration of the business and tax affairs of independent contractors, the majority in the IT sector. Each contractor became an employee and shareholder in one of 42 service companies set up by Holland. They received a salary and dividends through that company. The contractors’ services were provided to their clients via the companies. This structure was intended to provide the tax benefits that the contractors would have received from setting up their own service companies.

It was vital to the scheme that each of the companies operated within the small companies’ rate of corporation tax regime, which amounted to between 19% and 21% during the period in question. To achieve this, the companies had to keep their individual profits below the £300,000 threshold for higher rate corporation tax (HRCT) and avoid being ‘associated’ companies under s416 of the Income and Corporation Taxes Act 1988. If they were ‘associated’ companies, their amalgamated profits would count towards the £300,000 threshold and take them over it.

The first requirement was satisfied simply by limiting the number of shareholders in each company. Unfortunately, the second requirement was not so easily satisfied and, notwithstanding the input of several professional advisers and the complex structure adopted by Holland, HMRC eventually took the view in mid-2004 that the companies were ‘associated’ with each other. This resulted in their combined profits breaching the £300,000 thresholds, and they were all liable for HRCT at rates of between 30% and 33% during the period in question.

The companies’ liability for HRCT rendered them insolvent and, on HMRC’s application under s212, the High Court at first instance determined that dividends paid out by them to their shareholders at Holland’s direction from 18 August 2004 were unlawful as a result of Holland’s knowledge of the state of affairs at that date and his failure to reserve funds sufficient to meet the companies’ tax liabilities.


The governance of the companies was carried out by Holland. He alone was wholly in control of their activities, management and administration, albeit he took professional advice and guidance. It was his decision that led to the companies paying out dividends to their contractors and shareholders without reserving for their HRCT liabilities, in the knowledge that those HRCT liabilities existed.

However, Holland was not a director of any of the companies. The sole director of the companies was itself a company (as permitted at that time) called Paycheck Directors Ltd and Holland was the only active director of Paycheck Directors. Accordingly, there were no natural persons controlling the companies other than Holland. As a matter of law, Holland and Paycheck Directors were separate persons, it not being alleged by HMRC that Paycheck Directors was a shell or façade.


De facto directors are persons who assume or carry on the role of a director of a company without being duly appointed. Originally the concept existed in law to provide a mechanism for validating the acts of directors who had been invalidly appointed or who had continued acting beyond the term of their appointment. De facto directors were a feature in Foss v Harbottle (1843), where it was held that the illegal constitution of the board of directors following the disqualification of three of them did not have the automatic consequence of invalidating the acts of the board.

However, the concept was extended very significantly in the case of Re Lo-Line Electric Motors Ltd [1988] to include persons who had never been appointed, whether validly or not, but had assumed or carried on the role of director by their acts of management of the company concerned. In that case a person managing two companies while not a director was held to be just as liable to the disqualification regime under the Companies Act 1985 as an appointed director because they were acting as a director.

As an aside, it should be noted that de facto directors are not necessarily the same as shadow directors. Shadow directors are generally defined as persons who control the actions of the actual directors while de facto directors are more frequently characterised by an open assumption of the role through their management or direction of the company. Section 251 of the Companies Act 2006 (the 2006 Act) provides a statutory basis for shadow directors as a person in accordance with whose directions or instructions the directors of the company are accustomed to act.


In practice Holland was wholly and solely in control of the companies but he was not a director of them. Instead he was director of the corporate director of the companies.

In HMRC’s case and in the opinion of the two dissenting Supreme Court judges, Lords Walker and Clarke, his controlling position in connection with the management and control of the companies was such that he had to be treated as a de facto director. In Holland’s case and in the majority decision of Lords Hope, Collins and Saville, all of his actions in connection with the companies were capable of being interpreted by reference to his position as a director of Paycheck Directors. Holland’s actions could not therefore be taken to be an assumption of the role of director of the companies, so that he was not a de facto director of them.

The Supreme Court closely examined the judgment of Millett J in Re Hydrodam (Corby) Ltd [1994] because it also questioned whether the activities of directors of a corporate director of a company made them de facto directors of the company.

Millett J held that a de facto director:

‘Is a person who assumes to act as a director. He is held out as a director… and claims and purports to be a director, although never actually or validly appointed.’

He also held:

‘The liquidator submitted that where a body corporate is a director of a company, whether it is de jure, de facto or shadow director, its own directors must ipso facto be shadow directors of the company. In my judgment that simply does not follow. Attendance at board meetings and voting, with others, may in certain limited circumstances expose a director to personal liability to the company of which he is director or its creditors. But it does not, without more, constitute him a director of any company of which his company is a director.’

In Lord Hope’s judgment in Holland the words ‘without more’ were important because they indicated that the mere fact of acting as a director of a corporate director is not enough to render that individual as a de facto director of the subject company. While the facts in Holland had been enough to persuade the High Court at first instance that Holland had, through his complete control of the companies, done the requisite ‘more’ referred to by Millett J in Hydrodamsuch that he should be treated as a de facto director of those companies, Lord Hope was of the view that he had not. Lord Hope believed that Holland had, by his actions, done nothing more than discharge his duties as the director of Paycheck Directors, saying ‘everything he had done was under that umbrella’.

However, the difficulty with the ‘without more’ test as applied by Lord Hope is that it appears to be self-fulfilling because any and every action taken by the director of a corporate director of a company in connection with the governance and control of the company may be ascribed to the role as a director of the corporate director even if in reality they relate wholly to the governance and control of the company.

This problem led Lord Walker, in his dissenting judgment to ask:

‘If those facts [Holland’s control of the companies] did not amount to the “something more” referred to in the authorities, it is hard to imagine circumstances that would do so. The repeated assertion that everything that Holland did was done in his capacity as a director of Paycheck Directors, and was within his authority as a director of that company is no doubt not “pure sham”, but it is, in my view, the most arid formalism.’

Lord Walker did not disagree with the Millett J in Hydrodam but took the view that Holland had to be treated as a de facto director given that he was ‘taking all important decisions affecting the relevant company, and seeing that they are carried out’.

Lord Collins approached the question in a different way to Lord Hope but his conclusions were the same. In his view the relevant question was whether, as a matter of principle, fiduciary duties can be imposed in respect of a company on a director of the corporate director of that company, when all of his relevant acts were done as a director of the corporate director. In his judgment, there was nothing to suggest that Holland was doing anything other than discharging his duties as a director of Paycheck Directors and that it did not follow from that that he was personally part of the corporate governance of the companies. Lord Collins continued:

‘If he was a de facto director of the composite companies simply because he was the guiding mind behind their sole corporate director, then that would be so in the case of every company with a sole corporate director.’

He took the view that this was going significantly beyond the law as it stood in the light of existing decisions on de facto directors and, in his view, beyond what he regarded as a function of the court. He noted that the legislature could have required all directors to be natural persons, as was the case in some other jurisdictions, such as Australia and Canada, but that it had not done so.

On the basis of the facts in Holland, it appears therefore that the only way directors of corporate directors of companies might risk being treated as de factodirectors of those companies is through positive actions such as actively holding themselves out as being de jure directors of those companies, either orally or in correspondence. However, the real substance of their activities in governing the subject companies will not put them at risk.

It is startlingly obvious that Holland would have been treated as a de facto director of the companies almost without question had he not been a director of Paycheck Directors; the corporate director of the companies, given the extent of his control of the companies. It follows therefore that his role as a director of the corporate director of the companies created a legal shield against the assumption by him of the liabilities, duties and obligations that a director of a company has under statute and common law.

The effect of the majority decision in Holland is therefore to create a very simple mechanism for persons in control of companies to avoid those liabilities, duties and obligations, by the setting up of an intervening corporate director.

The dangers of this decision have been mitigated somewhat by s155(1) of the 2006 Act, which requires every company to have at least one director who is a natural person (this requirement became mandatory on 1 October 2010). However, it does not solve the problem. The type of person who might seek to organise their corporate affairs specifically to benefit from the shield created by this decision might also have little hesitation in obtaining the services of a useful fool to act as a natural director, to stand alongside the corporate director that retains the real power, to satisfy the requirements of s155(1) of the 2006 Act.

As a Supreme Court decision, Holland will go no further, and it is therefore left to Parliament to legislate and correct the unfortunate effect created by it.

The judgment of Lord Hope also contains a statement that s212 does not apply to shadow directors. He said:

‘Section 212 IA 1986, under which a summary remedy is sought in this case, applies to a person who is or has been an “officer” of the company. It does not apply to shadow directors because, unlike section 214, the statute does not provide for this.’

Unfortunately, this seems to be a glaring error by Lord Hope. It appears from his quote that he believes that only officers fall within the jurisdiction of s212. However, s212 is stated to apply to three separate classes of persons: officers under subsection (1)(a); liquidators or administrative receivers under subsection (1)(b); and persons who do not fall within (a) or (b) but who have been concerned with the management of the company, under subsection (1)(c). There is clearly every possibility that shadow directors might fall within s212 under subsection (1)(c) as they will by definition be persons who have been concerned with the management the company. It remains to be seen whether this aside by Lord Hope is used by persons found to be shadow directors as authority for the principle that they cannot be pursued under s212 also.