Liability creep in England: when can parent company directors be held liable as de facto directors of subsidiaries?

The recent High Court case of Aston Risk Management Ltd v Jones is a salient reminder to all parent company directors of the risk that they can be considered to be (and therefore liable as) de facto directors of subsidiaries if their involvement with such subsidiaries crosses the line.

The case will be of particular interest to investor directors and others who sit on parent company boards, especially where the parent company retains or exercises a high degree of oversight and control over the day-to-day operations of its subsidiaries. 

What is a de facto director?

There is no definitive test of what a de facto director is. Case law has variously described a de facto director, as a person who is “part of the corporate governing structure”, “assumed the status and functions of a company director”, and "who either alone or with others has ultimate control of the management of any part of the company's business".

De facto directors essentially owe the same duties as ordinary directors and can be sued and held liable for any breach of these duties.

Shareholder control in Aston

In Aston, there were two directors of the parent company. A shareholders' agreement provided that the subsidiary would be "overall managed" by the parent company board and that the directors of the subsidiary could only conduct the day-to-day business of the subsidiary within the strict controls and confines of an Annual Business Plan.

The claimants argued that one of the directors of the parent company, Mr Jones, was a de facto director of the subsidiary. Mr Jones, who the judge described as a "very strong personality", conceded that he did take directorial decisions in relation to the subsidiary; however he argued that his actions represented those of the board of the parent company which was exercising its shareholder rights under the shareholders' agreement.

The court disagreed with Mr Jones, finding that the role he played was consistent only with him being part of the corporate governance structure of the subsidiary and that his role was not limited to that of exercising shareholder restraint through his position as a director of the parent company.

The critical feature was that the court decided that Mr Jones acted individually in his activities relating to the subsidiary, rather than as part of the board of the parent company. Mr Jones was the dominant personality of the two directors of the parent company and his actions could not be attributable to those of a properly functioning board of the parent company.

Practical takeaways

The practical takeaway for parent company directors which can be drawn from the case are as follows:

• Keep an eye on your hat. In groups of companies with sometimes complex control structures, an individual can sometimes wear a number of different "hats" as shareholder, director of A co, director of B co, and so on. It is important to remain aware of the context a decision is being made in and of what hat you are wearing at each moment, and to record properly the decision made and in what capacity the decision makers were acting.
• Beware of meddling. Parent company directors should be mindful of the delicate balancing act which needs to be maintained between implementing a strong system of corporate governance within a corporate group (which is generally a good thing) and exercising decision making control over subsidiaries (which may result in liability creep),.
• Act as a board, not an individual. Where the parent company wishes to exercise its rights of control over a subsidiary, it is important that it does so acting through its board as a whole, and not as an individual. This point comes strongly out of Aston. 
• Keep records. While courts will look beyond formal documentation and look at the substance of a matter, proper record keeping, particular of board meetings and decision making can go a long way to protecting those involved in the decisions.

The risk to individuals of acting as a de facto director is that they will potentially be held liable in the same way as registered directors if they have, for example, been involved in a breach of directors' duties or a wrongful trading situation.

Osborne Clarke recently successfully acted for the claimants in a breach of directors' duties claim (brought as a derivative claim) in which the claimants established, in not dissimilar circumstances, that the principal defendant (who was a major shareholder and director of a parent company) was a de facto director. (Boston Trust v Szerelmey Limited (2023)). In that case the court was satisfied that the defendant was "a key decision maker" and "had a decisive influence" over the relevant subsidiary companies.

More commentary and analysis of these issues can be found in our "liability creep" series: this article links through to all the earlier articles in the series