The De Facto Director

Company directors are the people responsible for the day-to-day running and management of a company. Due to their position of responsibility, directors must be named as a director on the company’s register of directors.

However, there could be individuals who perform or occupy the functions of directors despite not being legally appointed, registered, or qualified as one. This could occur because an individual agreed to be appointed as a director but the appointment turned out to be defective or where an individual who is not formally appointed as a director is held out by the company and performs the duties of a company director.

It could also occur when a former director whose term of office has expired but who has continued to act as the company’s director. These directors are known as de facto directors and can be held to have the same obligations and responsibilities as a usual director.

Essentially, this means that the law can find that an individual is a director of a company even though they are not formally named as a director. This is based on the definition of a ‘director’ in Section 2 of the Companies Act 2016 which states:

““directors” includes any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act and an alternate or substitute director.”

This is further affirmed by the Malaysian Courts which have previously held that “a director is not necessarily defined by his designation as such but rather by the dominant or controlling role he plays in the running of the company”[i].

How Does the Court Define a De Facto Director?

“To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director.

The specific definition of a de facto director can be found in the oft cited English decision of Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180 where it was stated that:

“A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.”

Based on this definition, it is clear that proving that someone is a director is not as straightforward as alleging that someone had acted as a director of a company. Instead, it is necessary to prove that the functions undertaken by the purported de facto director were functions which could only have been undertaken by a director of a company. While this may be easier to do in smaller companies or family-run businesses where only one or two individuals control the affairs of the entire company, it is less clear in mid-sized to large companies where a fully developed company management structure is in place. In such cases, individuals who only undertake tasks performed by management level employees would not fall within the definition of a de facto director.

In a more recent decision of Elsworth Ethanol v Ensus [2014] EWHC 99, the Court held that while there is no single definitive test, there are several factors which would be considered by the Court to determine whether an individual is a de facto director:

1. Whether the said individual was acting with other ‘true directors’ of the company on an equal footing in managing the affairs of the company;
2. Whether the company held the individual out as a director of the company and whether the individual used the title;
3. Whether the individual formed part of the corporate governing structure of the company.

These decisions mean that while there needs to be evidence that the purported de facto director undertook the functions of a director, it is especially important to show that the purported de facto director acted on equal footing with the other director(s) when managing the company’s affairs.

We will now look at several instances where the Courts have applied the 2 main factors in determining whether an individual was acting as a de facto director.

1. Acting as a Director of the Company

The most important element in determining whether an individual is a de facto director is whether the individual acted as a director of the company. This usually involves the question of whether the individual took active part in the management of the business or whether the individual possessed the usual authority or influence of a director in the company.

For instance, if an individual had significant power and authority over the day-to-day running of the company, then it is more likely for the Court to find that the individual was acting as a de facto director of the company. Such power and authority can include the authority to deal freely with the company’s suppliers, and responsibility for contracting with clients.[ii] In other cases, the fact that an individual had access to the company’s accounts as a signatory and thus had control over the company’s finances was viewed as evidence that the individual was in fact a de facto director of the company.[iii]

On the other hand, if an individual does not have any real influence in running the company, it is unlikely that the Court will find that the individual is a de facto director of the company. For instance, in the case of Ravichantiran a/l Ganesan v Percetakan Wawasan Maju Sdn Bhd & Ors [2008] 8 MLJ 450, the Court did not find that there was a de facto director in the company as there was no evidence to show that the purported de facto director had played a controlling or commanding role in the company.

2. Representation as a Company Director

Another factor considered towards determining whether an individual is a de facto director would be whether there was representation that the individual was a director of the company. This means that the Court would consider evidence of whether the individual used the title of director or whether the company had represented to others that the individual was a director of the company.

However, this does not mean that an individual will only be found as a de facto director if there were representations that an individual was a director of the company. In fact, subsequent cases have clarified this issue and diminished the importance of this factor in determining whether an individual is considered a de facto director. Instead, significantly more emphasis is placed on the conduct of the purported de facto directors.[iv]

Do De Facto Directors Owe Any Obligations or Duties to the Company?

If an individual is a de facto director, the said individual would be liable as a director and would be required by law to fulfil all fiduciary duties owed to the company. In short, this means that there will be no distinction in terms of duties and obligations between an ordinarily appointed director and a de facto director of a company. This includes liability for being in breach of a director’s fiduciary duties to the company. We will be addressing the issue of directors’ obligations in a subsequent article.

Conclusion

In conclusion, it is important that individuals are aware that if you act like a director, you will be treated as a director under the law. As de facto directors owe all the usual obligations and fiduciary duties of directors, it is impossible for de facto directors to enjoy the perks of running and managing a company while avoiding its liabilities. As such, individuals should avoid taking on the authority and responsibilities of a director especially when they do not intend to bear the responsibilities imposed by law on directors.