When does a parent company director become a de facto director of a subsidiary?

The High Court has held that non-executive directors of a parent company did not become de facto directors of a subsidiary merely because matters relating to the subsidiary were discussed at group board meetings: Garden House Software Limited v Marsh and Ors [2026] EWHC 2184 (Ch).

Directors of group holding companies will welcome the decision’s demonstration of the limits of de facto directorship, particularly when matters relating to subsidiaries are discussed at holding company board level. 

The judgment is also a useful reminder that negligent or inadequate performance of a non-executive role will not be sufficient to establish dishonest assistance in an executive director's breaches of duty, or for unlawful means conspiracy. It particularly highlights that in order to establish the mental element for “blind eye knowledge”, as the basis for a finding of dishonesty, the court must be satisfied that the director took a conscious decision to refrain from taking steps to investigate a suspicion. Merely failing properly to supervise the company’s affairs will not be sufficient. The Court of Appeal has also recently confirmed this point in the context of a claim against solicitors – see our blog post on that decision here.

Background

Serisys Limited (the "Company") was a software development company and a wholly-owned subsidiary of Serisys Group Ltd ("SGL"), a holding company responsible for financing the businesses of its subsidiaries.

In August 2017, the Company assigned all of its intellectual property in the "Adypt" cloud-based financial services software to Serisys Asset Holding Limited ("SAHL"), a newly incorporated Hong Kong company also wholly owned by SGL. In return for the assignment, the Company was granted a one-year non-exclusive, non-assignable licence to use the software. The Company was compulsorily wound up in March 2019.

The claimant brought claims as assignee of the Company, alleging that the assignment of the Adypt software was a transaction at an undervalue, a transaction defrauding creditors and a breach of the Company's directors' duties, on the ground that very valuable IP had been assigned for consideration of no real value to the Company. 

In addition to the claims against the Company's executive directors, Mr Rowlands and Mr Marsh, who were also directors of SGL, the claimant pursued claims against three non-executive directors (“NEDs”) of SGL, who were present at the SGL board meeting at which the proposed assignment was discussed but who held no formal office in the Company. Each had been appointed because of their contacts in the financial markets world, to assist in the promotion of Adypt and in raising funds for the group; none had been recruited to perform a traditional non-executive function.

The claimant alleged that the NEDs were liable as de facto directors of the Company or, alternatively, for dishonest assistance in the executive directors' breaches of duty or for unlawful means conspiracy with them. 

Decision

The High Court (Fancourt J) found that the assignment had been made at a substantial undervalue, in clear breach of the duties owed by the Company's executive directors, and in order to put the asset beyond the reach of creditors. However, it dismissed all of the claims against the NEDs.

De facto directorship

The court noted that there is no statutory definition of "de facto director" in the Companies Act 2006. The Supreme Court in Revenue and Customs Commissioners v Holland [2010] UKSC 51 held that a (de jure) director of a corporate director of certain group companies was not, without more, acting as a de facto director of the group companies. It said that, so long as the relevant acts were within the ambit of their duties and responsibilities as a director of the corporate director, they must be attributed to that role —rather than being treated as acts of a different role, such as de facto director of a subsidiary.

The court in the present case referred to Arden LJ's summary of the relevant principles in Smithton Ltd v Naggar [2014] EWCA Civ 939, including that: the court must look at what the defendant actually did, not any job title given to them; it must assess all the circumstances in the round, including the corporate governance structure of the company in question; and the fact that a person is consulted about directorial decisions or their approval does not in general make them a director because they are not making the decision. Further, the court noted Jacob J’s observation in Secretary of State for Trade and Industry v Tjolle [1998] BCLC 333 that the consequence of holding someone to be a de facto director is that they are then liable as fiduciaries and may be statutorily liable where the company becomes insolvent. Accordingly, they should not be liable for events over which they had no real control.

The court rejected the claimant's case that, because the affairs of the Company, as a subsidiary of SGL, were regularly considered at SGL board meetings, those present were acting as directors of the Company. That approach conflated acting as a director of the parent — which was directing and considering strategic matters across the group — with personally assuming the functions of a director of the subsidiary. The fact that, as was admitted, SGL board meetings also acted as a decision-making forum for its subsidiaries did not advance the case that any of the NEDs had personally assumed the responsibilities of Company directors. At best, that would show that SGL itself was a de facto director of the Company, as well as its sole shareholder, or that Mr Marsh and Mr Rowland were taking decisions on the Company's behalf, with the approval of the other directors of SGL. The court closely considered whether any decisions which were properly for the Company’s board of directors, such as amount of salary increases or bonuses, were taken by SGL and found they were not. 

Notably, the NEDs did not receive the Company's monthly management accounts — they received only the group financial statements produced for the SGL board. Responsibility for the Company's operational affairs was taken by Mr Rowland, with Mr Marsh's agreement, and on pre-audit questionnaires it was Mr Rowland, not the NEDs, who was identified as responsible for operations, dealings with HMRC and the auditors.

The court concluded that none of the NEDs had assumed the responsibility of making directorial decisions for the Company. They were acting in a different capacity — as not very assiduous NEDs of SGL. The assignment was authorised by Mr Marsh and Mr Rowland as the Company's de jure directors. The de facto directorship claim accordingly failed.

Dishonest assistance and "turning a blind eye"

The claimant also alleged that the NEDs dishonestly assisted the commission of breaches of trust by Mr Marsh and Mr Rowland (including their approval of the assignment). This was on the alleged basis that the NEDs knew that the Company would be transferring a valuable asset for no consideration, and they knew that the Company was insolvent or bordering on insolvency. 

The court noted that, on the authorities, a defendant dishonestly assists a breach of trust if its conduct makes the breach easier than it would otherwise have been: Group Seven Ltd v Nasir [2019] EWCA Civ 614. There is no reason in principle why a failure to act cannot amount to assistance, if it in fact facilitates the breach to more than a minimal standard (Nasir). 

The court applied the two stage test for dishonesty in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67: first determining the defendant's actual state of knowledge or belief as to the facts, and then whether, by the objective standards of ordinary decent people, the defendant's conduct was dishonest. 

For these purposes, the court noted that blind-eye knowledge counts as actual knowledge. Such knowledge has two elements: a subjective suspicion that certain facts may exist, and a conscious decision to refrain from taking any step to confirm them. It is not sufficient that a defendant failed to investigate — the defendant must have harboured a genuine suspicion and made a deliberate choice not to pursue it.

The claim against the NEDs failed on dishonesty. The court was satisfied that they did not know, and did not turn a blind eye to, the facts necessary to support an inference of dishonesty — in particular, the proposed terms and accounting treatment of the assignment, the prohibited purpose of the executive directors, or the absence of relevant legal advice. More broadly, none of the NEDs abstained from asking questions because they suspected the truth about the assignment; they had little time for SGL’s affairs and, accordingly, it came as a genuine shock when, at the end of October 2017, it emerged that the Company could not meet a monthly rent payment of approximately £4,100.

The court drew a careful distinction between whether the NEDs were performing their roles competently and whether they knew or turned a blind eye to facts making it dishonest to acquiesce in the proposed assignment.