De facto directors personally responsible for company contempt

Integral Petroleum SA v Petrogat FZE and San Trade Gmbh and others [2020]

In March 2020 the High Court handed down two judgments in this long-running saga arising out of a contractual dispute concerning the sale of oil. These judgments highlight the personal risks for directors and officers (including de facto directors) of companies acting in contempt of court, which may result in prison sentences of up to two years. 

Procedural history

In January 2018 the claimant, Integral Petroleum SA, obtained an injunction against the defendant companies, Petrogat FZE and San Trade Gmbh, prohibiting them from transporting the oil at the centre of the dispute into Iran. The court also ordered the defendants to provide signed letters confirming that the cargo would not to be sent to Iran. No letter was provided. The order was amended, requiring the defendants to sign a letter forthwith. Again, no letter was provided.  Contrary to the injunction, most of the oil was transported into Iran.

The claimant commenced contempt proceedings against two individuals who, although not de jure directors, oversaw the day-to-day business activities of the two defendants, Ms Mahdieh Sanchouli and her father, Mr Halsain Ali Sanchouli. In Integral Petroleum SA v Petrogat FZE and San Trade Gmbh and others [2018] EWHC 2686 (Comm) the High Court had found that the Sanchoulis were both de facto directors and, further, that responsibility for the civil contempt of court by a company extended to de facto directors since they were sufficiently involved with the company to procure its compliance with a court order. Counsel for the Sanchoulis had argued that, since they were not de jure directors, it would be unduly onerous for them to be held personally responsible for the defendant companies’ non-compliance. Moulder J was not persuaded by these arguments. He held that a de facto director does not need to:

However, Moulder J held that there was no policy ground had been made out which would require the court to extend responsibility for corporate contempt beyond de facto directors to the statutory concept of shadow directors. 

The March 2020 judgments

In a reserved judgment, handed down on 12 March 2020, the High Court held that Ms Sanchouli was in contempt of court because she had failed to sign the required letter and, after the court had made its original order, she had taken steps to divert part of the cargo of oil to Iran. Mr Sanchouli was in contempt for taking steps to divert the oil to Iran and for failing to sign the letter forthwith, as required by the amended order. In circumstances where the Sanchoulis had both deliberately breached the orders, committal orders were appropriate.

Subsequently, on 31 March 2020, Ms Sanchouli and Mr Sanchouli were given suspended sentences of two and three months' imprisonment respectively.

Piercing the corporate veil

These judgments should leave senior executives and officers in no doubt of their responsibility to act in accordance with orders of the courts. It is clear that the courts will pierce the corporate veil and hold directors, including de facto directors, personally responsible for failing to action court orders that are made against their companies. While there is no single test to determine whether an individual is a de facto director, there is a wealth of case law concerning this issue. In determining whether senior executives/officers are de facto directors the courts will have regard to whether the individual

• Assumed to act as a director;
• Was held out as a director;
• Undertook activities which could properly be discharged only by a director;
• Acted on an equal footing with other directors in directing the affairs of the company, taking part in board meetings and influencing the decisions made at those meetings;
• Had full access to all information on which to base decisions including management accounts;
• Was responsible for making major decisions;
• Was part of the corporate governing structure.

See Elsworth Ethanol Company Ltd & Anor v Hartley & Ors [2014] EWHC 99 (IPEC). It is also worth noting these words of caution from the judgment of Arden LJ in Smithton Ltd v Naggar [2014] EWCA Civ 939 for senior executives who may assume that they are protected from directorial responsibility by virtue of their own subjective interpretation of their activities: