The High Court has recently handed down judgment in a case that provides useful guidance on two questions fundamental to coverage on many D&O notifications (1) Is the individual a Director, despite not being registered as such at Companies House; and (2) How do you assess whether the alleged wrongful acts were carried out in the capacity as a Director?

(1) John Anthony Popely (2) Andrew Popely v (1) Ronald Anthony Popely (2) Cosmos Trust Ltd (3) Casterbridge Properties Ltd (2019) 13 June 2019.

BACKGROUND

Family members with interests in various companies in the leisure industry were in dispute as to their respective shares of those companies.

A dispute between two brothers was first instigated in 2001 and has been the subject of actions in England and Wales, St Vincent and the Grenadines, France, Ireland and Gibraltar.

In the 90s, one brother established a number of resort based businesses, namely golf clubs and hotels in Kent and holiday resorts in Northern Cyprus. The company structure of these resorts was complex and included a number of companies involved in the selling of time shares and marketing. This included Casterbridge Properties Ltd, which was set up to buy and sell time shares. The dispute between the brothers included an alleged oral agreement made between them in 1997 which entitled their respective trusts to 70% and 30% of the company.

The Claim brought by the younger brother in the English high court concerned three payments by the older brother totalling £4,194,397 alleged to be for the benefit of himself or his family. The action was framed as a derivative claim which alleged the payments were fraudulent and in breach of fiduciary duty to Casterbridge (as a de facto director). The claim ultimately failed due issues with limitation, the unreliability of witnesses, deficiencies with the pleaded case and problems showing the alleged loss.

However, HHJ Hacon dealt with issues which frequently arise under claims notified under D&O policies. When is someone a director if they are not expressly appointed as such? How should it be determined whether an act is carried out in the capacity of a director?

ANALYSIS

What is a de facto director

It is of course a matter of record whether an individual is a statutory director registered with Companies House. However other individuals may, as a matter of fact, be directors despite not being appointed and registered as such. Drawing on previous authorities in Carlyle, Holland, Smithon, Hydrodam and In Re Mea Corp Ltd, HHJ Hacon stated the principles he considered relevant in establishing what makes a de facto director. They are:

a. The overall questions to consider when determining whether an individual is a de facto director is whether th individual was part of the corporate governing structure of the company and whether they assumed a role in the company which imposed the fiduciary duties of a director

b. This is a question of fact and degree, to be assessed objectively. Reference should be made to all relevant evidence

c. Merely being involved in the management of the company or exercising a degree of influence over its decision making is not enough in itself;

Once it is determined whether an individual is in fact a director, the associated question must be asked: are the alleged wrongful acts carried out by the individual in their capacity as a director? The judgment, in this case, clarifies the approach to be adopted to this question:

a. An act will qualify as an act done in the capacity of a de facto director if the corporate governance of the company requires that the act can only be done be someone having the capacity of a director;

b. The corporate governance of the company will have to be investigated to establish whether the act in question was directorial in nature; and

c. An act which takes the form of directions or instructions to an officially appointed director will be an act done in the capacity of a shadow director.

COMMENTARY

The position of de facto director can be a blurry one, with those carrying out senior management roles arguing that they fall within the definition. Many D&O wordings will contain definitions of an insured person which include senior managers. Once it has been established whether an individual falls within such a definition, this decision provides some very useful guidance on the question whether particular acts in question represent activities properly covered by a D&O policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.