British Virgin Islands: Defining Directorship: 'De Facto' Directors And The BVI Business Company

Last Updated: 15 December 2014
Article by Jerry D. Samuel and Rosalind Nicholson

Section 2 of the BVI Business Companies Act ("the BCA") defines a "director" to include a person occupying or acting in the position of director by whatever name called. For practical purposes, this definition is identical to section 250 of the UK Companies Act, 2006 which defines a director as "any person occupying the position of a director, by whatever name called". Difficult questions often arise in connection with BVI companies where the directors formally appointed are corporate directors provided by fiduciary service providers, while the directors of the corporate directors in turn may also be professional directors.

The effect of section 250 of the UK Companies Act, and the test to be applied in determining whether a person is a de facto director, was recently considered by the English Court of Appeal in Smithton Ltd v Guy Naggar & Others [2014] EWCA Civ. 939 [2014] WLR (D) 306. Given the similarity in wording of the UK and BVI Acts in this respect, this case is persuasive authority in the BVI and provides useful guidance for those dealing with BVI companies about who is to be treated as a director and in what circumstances.

In determining whether a person is a "director" within the above statutory definition, the English Court of Appeal in Smithton suggests that the question to be asked is whether his or its acts are of the quality of directorial acts, tested against the usual split of powers between shareholders and directors. In other words, since the powers of management of the company's business are vested in the directors and the shareholders have limited power to intervene, one must consider the characteristics of the acts performed against this dichotomy. On that basis, a de facto director means a person who either alone or with others has ultimate control of the management of any part of the company's business. In this respect, the English Court of Appeal echoed the Supreme Court in HMRC v Holland [2010] 1 WLR 2793, where Lord Collins said there was no one definitive test for a de facto director, the question being whether the person was part of the corporate governance system of the company and whether he or it assumed the status and function of a director, so as to make himself responsible as if he were a director.

Therefore, the question whether a director is a de facto director is, in every case, a question of fact and degree. The answer requires careful analysis of the corporate governance structure of the particular company and of the role which the person concerned played within that structure. Usefully, the English Court of Appeal in Smithton identified a number of points which are of general practical importance in determining who is a de facto director. These points were not intended as a checklist, since there may be other factors which point to a particular conclusion in any particular case. However, these points provide a helpful framework for determining the question of de facto directorship in each case.

The points are these:

1. The concepts of "de facto" and "shadow" directorship are different but there is some overlap.

2. A person may be de facto director even if there was no invalid appointment. The question is whether he has assumed responsibility to act as a director.

3. Answering the question, whether the person has assumed responsibility to act as a director, may require a determination of the precise capacity the person was acting (as in Holland).

4. The corporate governance structure of the company in general will also have to be determined in order to decide in relation to the company's business, whether the person's acts were directorial in nature.

5. It is necessary to look beyond any job title given to the person and to examine what the director actually did.

6. The fact that a person, in good faith, did not think he was not acting as a director will not determine the issue: the question whether or not someone has acted as a director is to be determined objectively and irrespective of his subjective motivation or belief.

7. The cumulative effect of the activities relied on must be weighed: the circumstances should be considered "in the round" (per Jonathan Parker J in Secretary of State v Jones [1999] BCC 336).

8. It is also important to look at the acts in their context. A single act might in an exceptional case lead to a conclusion that the person is to be treated as having been a director.

9. Relevant factors also include:

(i) Whether the company considered him to be a director and held him out as such; and

(ii) Whether third parties considered that he was a director.

10. The fact that a person is consulted about directorial decisions or his approval does not in general make him a director because he is not making the decision.

11. Acts outside the period when he is said to have been a de facto director may throw light on whether he was a de facto director in the relevant period.

Notably, Section 6 of the BVI Insolvency Act also contains a definition of "director" for the purpose of that Statute. That definition, which is not prescriptive, includes "a person who exercises, or is entitled to exercise or who controls or is entitled to control, the exercise of powers which, apart from the memorandum or articles, would fall to be exercised by the board", which is wholly consistent with the approach of the English Court of Appeal in Smithton. It is likely that in construing Section 2 of the BCA, the BVI Court would take into account the Insolvency Act definition, in the interests of consistency if for no other reason, since it would be an unsatisfactory conclusion for a person who is or is deemed to be a director in the event of a company's insolvency was not considered a director before that point.

In the absence of local case law on the subject, the guidance provided by the English Court of Appeal in Smithton Ltd v Guy Naggar & Others is highly persuasive authority and offers a useful practical framework which may be applied by those considering whether or not a person is properly to be considered a director of a BVI company.

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.

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