Better off apart? The Importance of Separation Between Group Companies

Howard Kennedy LLP recently acted for the successful Defendant in the case of Bishopsgate Contracting Solutions Ltd v O’Sullivan [2021] EWHC 2103 (QB), which provides a stark reminder to those involved in the ownership and management of large corporate structures of the importance of maintaining proper corporate governance and true separation between the companies within the group.

The court in this case found that "there was no corporate governance structure to speak of" and that the aim of the corporate structure "was to create the impression of separateness" whilst the CEO of the Claimant company, Mr Philip Munnelly, "conducted and operated the business and remained in charge". 

Background

The Defendant was a former employee (financial controller) of a company called Munnelly Support Services Limited ("MSSL"). This company forms part of the "Munnelly Group", a substantial labour supply, logistical support and waste management business operating within the construction sector on a national scale.

Whilst working at MSSL, the Defendant had been involved with setting up and developing a number of companies, including the Claimant, known as the "Bishopsgate Group", which was designed to be distinct from the Munnelly Group, but in reality was not.

The case focused on significant losses suffered by the Claimant, as a result of its decision to extend credit to one of its clients, G-Force Groundworks Limited ("G-Force"). Credit had been extended over a period of time and when G-Force entered administration, the Claimant lost approximately £500,000.

The Claimant sought to impose directors duties and personal liability upon the Defendant for these losses, by alleging that he had been the Claimant's de facto director and/or agent and that he had acted in breach of his resulting duties to the Claimant under s.172 and s.174 Companies Act 2006. It was further alleged that the Defendant had been given strict instructions from Mr Munnelly (the ultimate beneficial owner of the Munnelly Group and Bishopsgate Group) not to extend credit to G-Force.

Decision

The court dismissed all claims against the Defendant and made a number of adverse findings against the Claimant and its witnesses. As a result, the Claimant has been ordered to pay the Defendant's costs on the indemnity basis.

The court found that no instruction had been given to the Defendant to not extend credit to G-Force. In addition, the court found that there had been no negligence on the part of the Defendant (as had been alleged or at all) and, perhaps more interestingly, that the Defendant was not a de facto director. Even if he was, he did not breach s.172 and s.174 Companies Act 2006.

De facto director

Even where the Defendant had held himself out as 'Managing Director' of the Bishopsgate Group to external parties (for example, in his email signature), he was found not to be a de facto director. A key reason for this was the fact that the court identified the lack of separation between the companies in the Munnelly and Bishopsgate Groups; control of which was ultimately maintained by Mr Munnelly. It was found that the Bishopsgate Group was essentially a division of the Munnelly Group.

It was clear that Mr Munnelly retained the right to tell the Defendant what to do and veto his decisions (for example, Mr Munnelly told the court that the Defendant did not have authority to extend credit to G-Force) and no board meetings took place in respect of the Claimant company. The Defendant was allowed by Mr Munnelly to manage the day-to-day running of the Claimant company (which the court found to be akin to the role of a senior manager) but he was ultimately answerable to Mr Munnelly. Also, all documents signed on behalf of the Claimant company were signed by its only de jure director, rather than the Defendant. This would give third parties the impression that the Defendant was not a director of the Claimant company.

It was also relevant that the Defendant had an employment contract with MSSL and was found to perform his employee functions in accordance with that employment contract. Companies should therefore note that the existence of an employment contract can, on its face, mean that the individual concerned may not be considered a de facto director.

Practical takeaways 

Some practical steps that companies should consider might include:

• Maintaining clear lines between entities in its groups of companies
• Choosing directors and appointing them formally
• Holding regular board meetings in respect of each individual company in the group
• Set out the employee's functions clearly in a formal employment contract
• Key documents binding the company should only be signed by statutory directors
• Ensure everyone within the company understands their role and authority

This case is an illustration of some of the pitfalls of not maintaining a clear corporate governance structure. An expensive and arduous litigation might have been avoided had a clearer corporate structure and reporting lines been maintained.