SHADOW DIRECTORS - 12.10.2011

Are there any directors hiding in the shadows?

The Company Act rules

Under the Companies Act 2006, the legal definition of a “director” is clear. It states that a director can be “any person who is occupying the position of director, regardless of whether he is officially named as a director”. That means the Act could catch and impose statutory duties on someone who has not been formally appointed to the board as a “de jure director” in accordance with its articles of association.

Who else does it cover?

For example, the individual may be a “de facto” director. This is a person who holds themselves out to others as a director and is treated by the company as such, but who hasn’t actually been given that position validly, or indeed at all. We looked at the legal status of these roles in some detail in a previous article (yr.12, iss.8, pg.4, see The next step).

Definition of a shadow director

The Act goes on to state that a person can also be a “shadow director” - these are individuals “in accordance with whose directions, or instructions, the directors of a company are inclined to act”. Whilst those the directors approach on a one-off, or occasional, basis for advice won’t be caught by this, those who perhaps act on consultancy basis, or who help out with the running or the internal management of a company, on a regular basis could be tripped up.

Tip. Professional advisors, e.g. lawyers and accountants, are specifically excluded from the definition of shadow director under the Act.

Consequences of shadow acting

Should the court find that an individual is a shadow director and has breached their statutory duties under the Act, for example in relation to wrongful trading, it may hold them personally liable for any monetary losses suffered. What’s more, the shadow director can also be in the financial firing line for any decisions made by other directors and/or senior employees, even where they knew nothing about them!

Adding extra protection

So what can those individuals who risk falling into this category and the companies who use them do to protect their position?

Tip 1. Firstly, where someone attends a board meeting and they are not an appointed director, make sure it’s always recorded in the minutes that they are there as an “observer only”. Furthermore, they must never be drawn into any major discussions and should leave the room before any decisions or votes are taken.

Tip 2. When signing documents for the company, ensure that they don’t sign them in their personal capacity or “for and on behalf of the company”. Either have an appointed director sign or send the correspondence in the company’s name.

Tip 3. Finally, don’t give, use, or let them adopt the title “director” when they’re carrying out work for the company. It gives others the (dangerous) impression that they are on the board.

For a link to the previous article, visit http://companydirector.indicator.co.uk(CD 13.02.02).