Revenue and Customs Commissioners v Holland [2010] UKSC 51

Mr Holland directed 42 composite companies through a corporate director structure. When the companies became insolvent owing corporation tax, HMRC sought to hold him personally liable as a de facto director. The Supreme Court held that acting solely as director of a corporate director did not make him a de facto director of the subject companies.

Facts

Mr and Mrs Holland established a corporate structure in 1999 involving 42 composite companies designed to provide tax advantages to contractor employees. Each composite company had a sole corporate director, Paycheck Directors Ltd, of which Mr Holland was a director. Mr Holland made all significant decisions regarding the payment of dividends to shareholders. A flaw in the tax planning meant the companies became liable for higher rate corporation tax, and dividends were paid without making adequate provision for this liability. The companies went into administration in October 2004 with a total deficiency of approximately £3.5 million in unpaid corporation tax.

The Corporate Structure

Paycheck Directors acted as the sole director of 42 trading companies. Mr Holland, through his role as director of Paycheck Directors, authorised all dividend payments. The computer-generated documents recording dividend decisions bore Mr Holland’s signature beneath the words ‘for and on behalf of Paycheck (Director Services) Ltd.’

Issues

The central issue was whether Mr Holland was a de facto director of the composite companies when he acted solely in his capacity as director of their corporate director. If so, he would be liable under section 212 of the Insolvency Act 1986 for misfeasance in causing payment of unlawful dividends.

Judgment

The Supreme Court dismissed HMRC’s appeal by a 3-2 majority. The majority (Lord Hope, Lord Collins and Lord Saville) held that Mr Holland was not a de facto director of the composite companies.

Majority Reasoning

Lord Hope stated the guiding principle:

So long as the relevant acts are done by the individual entirely within the ambit of the discharge of his duties and responsibilities as a director of the corporate director, it is to that capacity that his acts must be attributed.

Lord Collins emphasised that this was a question of law and principle, not merely appreciation of facts:

The question is whether fiduciary duties can be imposed, in relation to a company whose sole director is a corporate director, on a director of that corporate director when all of his relevant acts were done as a director of the corporate director and can be attributed in law solely to the activities of the corporate director.

Lord Collins traced the historical development of de facto director law, noting that the extension to persons never appointed as directors was a judicial innovation in Re Lo-Line Electric Motors Ltd [1988] Ch 477. He concluded that extending liability further to directors of corporate directors acting in that capacity would be an unjustifiable judicial extension best left to the legislature.

Minority View

Lord Walker and Lord Clarke dissented, arguing that Mr Holland was both a de jure director of Paycheck Directors and a de facto director of the composite companies simultaneously. Lord Walker stated:

The repeated assertion that everything that Mr Holland did was done in his capacity as a director of Paycheck Directors, and was within his authority as a director of that company, is no doubt not ‘pure sham’ but it is, in my view, the most arid formalism.

Implications

This decision confirms that directors of corporate directors are not automatically de facto directors of subsidiary or subject companies. Something more than acting within the scope of duties as director of the corporate director is required. The decision has been criticised for potentially enabling risk-averse individuals to use artificial corporate structures to insulate themselves from personal responsibility to creditors. However, the majority noted that Parliament had already addressed this concern through the Companies Act 2006, section 155(1), requiring at least one natural person director.

Verdict: Appeal dismissed. Mr Holland was not a de facto director of the composite companies as his acts were done solely in his capacity as director of the corporate director, Paycheck Directors Ltd.

Source: Revenue and Customs Commissioners v Holland [2010] UKSC 51