Bramston & Anor v Pye & Anor  EWHC 2473 (Ch) was a misfeasance claim against two respondents, the first as de jure director of the company, the second as de facto director. The company had been wound up by the court for failing to pay a penalty imposed by the Information Commission’s Office for breach of the Privacy and Electronic Communications (EC Directive) Regulations 2003 which regulates telephone marketing. Some of the many complaints against the company alleged that it had preyed on the elderly and/or had given the misleading impression that it was calling on behalf of BT.
ICC Judge Barber’s 251 paragraph judgment covers a great deal of ground, much of it fact specific; but three features are of note: first the decision of the judge to hold the applicants strictly to the relief prayed for in their application; secondly, her summary of the considerations going to de facto directorship; and thirdly her analysis of the meaning of the much used phrase “caused or allowed;” and, related to that, the concept of abdication of a director’s responsibilities to a company in which he holds office.
The application point
At trial, the judge decided that the applicants could not rely on ss. 238 and 239 Insolvency Act 1986 in the alternative to misfeasance as neither section had been mentioned in the application notice, even after two amendments. A passing reference to the provisions had been made in evidence in reply, but the judge rejected that as sufficient: “It is unacceptable to raise such matters…by way of reply evidence; particularly when the application notice was re-amended…(after the reply evidence was served) and made no mention of the same. The Respondents are entitled to know the case they are to meet,” she said.
De facto directorship
Both respondents appear to have acted as fronts for an unscrupulous salesman, who was in reality the moving force behind the company’s activities, but found themselves in the firing line, one presumes, because he was not worth pursuing. Much of the interest in the judgment lies, however, in the judge’s analysis of the legal principles regarding and indicia of de facto directorship.
As to the applicable principles the judge identified the following (primarily by reference to Re Paycheck Services 3 Limited  1 WLR 2793):
(1) There was no one decisive test; the question was one of fact and degree.
(2) All relevant factors must be taken into account, including whether there was a holding out by the company of the individual as a director, whether the individual used the title of director, whether the individual had proper information on which to base decisions, and whether the individual had to make major decisions.
(3) Whether a person was held out as a director and/or claimed to be a director was relevant but not a necessary, factor. What was important was not what the individual called herself, but what she did.
(4) Tests included whether the person was directing the company’s affairs, either alone or with others, and whether the person was part of the corporate governance structure. However, it may be difficult to define “corporate governance”, and to identify activities which were the responsibility of the director or the board.
(5) In Re Mumtaz Properties Ltd  2 BCLC 109, the Court of Appeal found it useful to consider whether the individual was “one of the nerve centres from which the activities of the Company radiated”, a test later relied on in Ingram v Singh  EWHC 1325.
(6) Where a company’s affairs had been conducted informally, a focus on corporate governance was of less relevance and assistance.
The judge then went on to consider the guidance given in Smithton Limited v Naggar  EWCA Civ 939 and HMRC v Holland  1 WLR 2793 from which she derived the following further points:
(7) The concepts of shadow director and de facto were different but there was some overlap.
(8) The court may have to determine the capacity in which the director was acting.
(9) A defendant could not avoid liability by showing that in good faith she thought she was not acting as a director. The question whether or not she acted as a director must be determined objectively.
(10) The court must look at the cumulative effects of the activities relied on.
(11) It was also important to look at the acts in their context. A single act might lead to liability in an exceptional case.
(12) Relevant factors included:
(i) whether the company considered the individual to be a director and held her out as such;
(ii) whether third parties considered that she was a director.
(13) The fact that a person was consulted about directorial decisions or her approval was sought did not in general make a person a director where that person was not making the decision.
(14) Acts outside the period when the person was said to have been a de facto director may throw light on whether she was a de facto director in the relevant period.
Applying those matters to the facts of the case, the judge concluded, for evidential reasons, that the applicants had not made out their case that the second respondent was a de facto director so the case against her was dismissed.
[For a further helpful list of relevant factors see also the judgment of Hildyard J in Re UKLI Ltd; Secretary of State for Business, Innovation and Skills v Chohan and others  EWHC 680 (Ch).]
“Caused or allowed” and abdication of responsibility
The first respondent’s case was that he had had no involvement in the company's affairs and no knowledge of any wrongdoing. He submitted, in defence of conduct he was alleged to have caused or allowed, that to make out a case of “causing or allowing” or “causing or permitting” the applicants had to prove either activity on his part or conscious (i.e. knowing) inactivity; furthermore, to make out a case based on total abrogation of responsibility, the applicants had to (a) particularise what the first respondent ought to have done which would have made any difference to the loss actually suffered and (b) establish what would have happened had the relevant duty been complied with; and that, but for the breach, the transaction or loss would not have occurred.
The judge undertook an analysis of Cohen v Selby  BCC 82, Lexi Holdings Plc v Luqman  EWHC 2652 (Ch), Madoff Securities International Limited v Raven  EWHC 3147, Ultraframe v Fielding  EWHC 1638 (Ch), Walker v Stones  QB 902, Gidman v Barron and Moore  EWHC 153 (Ch) and Neville v Krikorian  EWCA Civ 943.
Having considered the submissions and the authorities she concluded that the correct approach was the following:
(1) To make out a case of “causing or allowing” or “causing or permitting” the transactions complained of, the applicants had to prove either activity on the part of the first respondent or conscious (i.e. knowing) inactivity.
(2) That was subject to the caveat that, where a director knew of an improper practice being perpetrated by those managing a company's affairs, and did nothing about it, he may properly be treated as having permitted not merely those examples of the practice of which he was actually aware, but also the subsequent continuation of that practice, even if not aware of the specific instances of it, where he did nothing to satisfy himself that the practice of which he was aware had come to an end.(3) To make out an alternative case based on abdication of responsibility/failure to supervise, leading to loss, the applicants must identify and establish: (a) what the first respondent knew, or ought to have known, had he performed his duties as a director; (b) what steps he should have taken, consistent with his duties, in light of the knowledge that he had or should have had; (c) what would have happened if he had complied with his duties, and that, but for the breach, the transaction or loss complained of would not have occurred.
(4) What she called “[T]he counterfactual analysis involved in this three-step process” involved considering both evidence and submissions. “As put by Briggs J in Lexi Holdings…at , whilst the causation question which arises from a case of culpable neglect does involve a hypothetical analysis (namely, as to that which would have occurred if the duties breached had been performed), nonetheless, ‘it is an analysis which has to be conducted against a matrix of detailed fact’”.
The case against the first respondent substantially succeeded, but the overall result, it seems, will have been something of a Pyrrhic victory for the liquidators.