In this case, the High Court provides useful guidance.
The test on when individuals may be found to be de facto directors is essentially whether the individual has shown to have assumed the role of a director and to have exercised real influence in the corporate governance of the company.
It is the role assumed by the individual, rather than the title used (in this case, the title of “Marketing Director”) that determines whether an individual is a de facto director or not.
Thus, de facto directorships may be avoided by, for example, keeping non-directors out of the company’s corporate governance structure and ensuring that non- directors always act only on instructions from the full directors.
The court also clarified that a de facto director has the right to inspect a company’s accounts, which is a logical extension of the principle that a de facto director is subject to the same legal duties, responsibilities and potential liabilities as a de jure director.
Facts:
The plaintiff sought a declaration that he was a de facto director of the defendant company (“Company”) for the purposes of section 4(1) of the Companies Act. The plaintiff was at one time a de jure director of the Company.
To avoid the possible risk of transactions between the Company and other companies controlled by the plaintiff being regarded as related party transactions and thereby requiring certain disclosure or approvals under the Companies Act, the plaintiff arranged for all the shares he and his wife held in the Company to be held by the Company’s other director at that time (“KP”) pursuant to a Trust Deed.
As a result, KP held 50% of the Company’s shares absolutely, while holding the remaining 50% of the shares on trust for the plaintiff. Following the execution of the Trust Deed, the plaintiff resigned as a director of the Company.
After his resignation as director, the plaintiff continued to play an active role in the financial and operational matters of the Company until he was allegedly shut out of the Company’s affairs by KP, who remained the only formally-appointed director of the Company.
Against this backdrop, the plaintiff sought a declaration that he was a de facto director of the Company. Flowing from such directorship, the plaintiff also sought access to the Company’s accounts so that he could investigate suspected wrongdoings or mismanagement by KP.
Point |
Context/ Reason |
Ruling |
| Plaintiff was a de facto director | The plaintiff was held out as a “Marketing Director” of the Company.
While this is not sufficient in and of itself, this was at least probative of the fact that he was a de facto director.
The plaintiff clearly exercised real influence in the Company and participated in the management of the affairs of the Company on an equal footing with KP, the Company’s only formally-appointed director. Even after his resignation as a de jure director of the Company, the plaintiff continued to participate as a director in almost all aspects of the Company including in the finances, banking, human resource and even client facing business dealings. Further, the plaintiff had access to and could produce the Company’s unaudited accounts from 2010 to 2018.
Crucially, KP had absolutely no issue with formally appointing the plaintiff as a director when the plaintiff so requested. The formal appointment did not however go through as the plaintiff later retracted his request.
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The High Court found the plaintiff to be a de facto director of the Company.
Such accounts would not ordinarily be available to members of the company as section 203 of the Companies Act only entitles members to the audited financial statements of a company. In the court’s view, the fact that the plaintiff was able to produce the unaudited accounts showed he had always been actively involved in the Company’s financial management in his capacity as a de facto director.
In the court’s view, the fact that the plaintiff was able to produce the unaudited accounts showed he had always been actively involved in the Company’s financial management in his capacity as a de facto director.
KP’s readiness to formally appoint the plaintiff as a director strongly suggested that the plaintiff had all along been acting as a de facto director of the Company, such that any formal appointment would not disrupt the status quo.
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| Power of de facto directors to inspect a company’s accounts | Having found on the evidence that the plaintiff was a de facto director of the Company, the High Court referred to various authorities and held that the plaintiff had the right to inspect the accounting records of the Company.
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In particular, the court noted that it is recognised that a director has the right of inspection of any documents such as the accounting and other records of the company and that such right is a concomitant of the fiduciary duties of good faith, care, skill and diligence which the director owes to the company.
The language of section 199 of the Companies Act clearly shows the obligation of a company to allow inspection by its director as mandatory. In the court’s view, the “director” contemplated under section 199 extends to de facto directors, although the burden is on the de facto director to show that he is one. |
| Right to inspect not utilised for purposes unconnected to duties as a director
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On the facts of the present case, the court was satisfied the access to the accounts of the Company would not be misused by the plaintiff. | The court noted that the right of a director to inspect a company’s accounts is not an unfettered one. The burden is on the company, if it resists the application to inspect, to show that such access should not be permitted because there is some abuse of process or privilege that underlies the request, such as when the director intends to use the right to inspect for purposes that are largely unconnected to the discharge of the director’s duties. |
For the reasons discussed above, the High Court granted a declaration that the plaintiff was a director of the Company for the purposes of section 4(1) of the Companies Act.
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