Acting As A De Facto Or Shadow Director

The Companies Act 2006 (CA2006) simply defines a director as including any person occupying the position of director, by whatever name called. However, general principles have been established in case law, including the recent Court of Appeal case of Smithton v Naggar ([2014] EWCA Ci 939).

A de-facto director (or director ‘in fact’) is someone who acts as a director but who has not been formally appointed (a person who has been formally appointed being a ‘de jure’ director or ‘director in law’). The matter is determined on an objective basis and irrespective of the person’s motivation or belief.

Relevant factors include:

• whether there were other persons acting as directors • whether the individual has been held out as acting as a director, including using the title ‘director’ in communications, or has been considered to be a director by the company or third parties
• whether the individual was part of the corporate governing structure • in what capacity the individual was acting.

A de-facto director is subject to the same duties and liabilities as a de jure director under the Companies Act 2006 (CA2006) and certain other legislation, including the Company Directors Disqualification Act (CDDA).

Acts of a de-facto director can include:

• accepting responsibility for the company’s financial affairs
• acting as sole signatory for the company bank account
• negotiating with third parties on behalf of the board
• recruiting and appointing senior management positions

A person may be a shadow director or a de facto director, depending upon the circumstances surrounding the role and there is some overlap between the two concepts

A shadow director is someone who is not appointed as a director but who gives directions or instructions that the directors of the company are accustomed to act upon.

A person however is not regarded as a shadow director solely because the company directors act on the advice given by that person in a professional capacity. There are various exceptions in relation to directors of a subsidiary acting on direction or instruction of its parent. Whether or not a person is a shadow director is a question of fact and dependent upon all of the relevant circumstances.

The question of whether or not a person is a shadow director may arise in a wide variety of contexts, for instance for management consultants (subject to the exception for professional advice), lenders and creditors of a company or a joint venture shareholder.

Many of the CA2006 provisions applicable to de-jure directors apply also to shadow directors. The small business, enterprise and employment bill 2014 provides for the CA2006 to be amended so that the general duties of directors will apply as far as possible. The Bill also contains provisions to restrict the use of corporate directors by companies.

A shadow director is also subject to a number of other legislative provisions that apply to de jure directors; in particular, a shadow director may be liable for wrongful or fraudulent trading under the Insolvency Act 1986 and to disqualification provisions of the CDDA.

Both de-facto and shadow directors may be liable for offences under other legislation, including the Insolvency Act 1986 and criminal sanction where applicable.

Anyone who was a director or shadow director of a company at any time in the three years before the start of an insolvency may be disqualified under CDDA if found to be unfit to be concerned in the management of a company.

Matters which may result in a finding of unfitness include serious offences such as conviction for an indictable offence concerning the promotion, management or liquidation of a company or fraud in the winding up of a company, including fraudulent trading. However administrative failings, including failure to keep proper accounting records or to prepare and file accounts or submit annual returns to Companies House can also result in a finding of unfitness.

Following a report from an insolvency practitioner the Insolvency Service decides whether to take disqualification proceedings. If found unfit to be a director, the Court will disqualify the individual for a period of between two and 15 years. In addition, the individual may be ordered to pay the Insolvency Service’s costs, as well as their own.

The Insolvency Service may accept an undertaking from the person concerned that they will not act as a director for a specified period of between two and 15 years in lieu of Court proceedings.

A disqualification order against an individual will mean that the individual cannot:

• be involved, either directly or indirectly, in the promotion, formation or management of a company
• act as a member of an LLP
• sit on the board of a charity, school or police authority
• be a pension trustee
• become a registered social landlord
• sit on a health board or social care body
• act as an insolvency practitioner

A register of individuals disqualified by court order or undertaking is maintained by Companies House and can be accessed through its website, free of charge

Where a Director is disqualified or provides an undertaking the Insolvency Service can apply to the court for a compensation order on behalf of the Secretary of State for Business, Energy & Industrial Strategy. The court can make a compensation order if the director is subject to a disqualification order or undertaking and their conduct has caused a quantifiable loss to one or more creditors of an insolvent company.

Where an individual has been a director for some time is also a shareholder and intends to exert some influence over the direction company is intending to take, simply resigning as a director does not remove the potential exposure to risk. There is a real chance that by being involved in decision making or as is more likely the case being involved in policy making the individual concerned is likely to be classified as either a “de facto” or “shadow” director in any event, rendering the decision to resign as a director simply moot.

Acknowledgement: Thomson Reuters online resource Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org