HomeFWJ TakeawayClaims against directorsShadow and de facto directors

A director is defined under company legislation as ‘any person occupying the position of director, by whatever name called’. Our team can help unravel the complexities of being a director and assist in any claims.

The most obvious identifiable director are those registered at Companies House – also known as ‘de jure’ directors.

However, it is possible to be a director without being registered at Companies House and these types of directors are often unaware that they bear the same duties as a registered director. Directors of every type bear the same director duties.

De facto directors

A de facto director is a person who on the face of it acts as a director even though they are not named at Companies House.

  • these types of directors act as if they are a director of the company;
  • they are accustomed to making decisions for the company, and undertake general company director functions, even though they are not registered at Companies House.

A de facto directorship might have arisen from something as simple as an invalid application being made to Companies House to register that director, or it could be as a result of the history of the company. For example, if it is a family business, then one of the members of the family might be actively involved in the running of the company without having registered as a director at Companies House. There does not have to be for a nefarious or illegitimate reason, and it is not necessarily the case that the director or the company are trying to mislead third parties.

A person who is simply acting as a manager in a company will not automatically be seen as a de facto director. It must be clear to most people who deal with them that they are a ‘director’.

  • a de facto director has all the same statutory and common law duties owed to the company as a registered director;
  • this means that they must have follow their legislative and fiduciary duties as a director to the company when the company is solvent, and if the company moves towards insolvency, then be aware that those duties shift towards the creditors.

A de facto director may be subject to directors’ disqualification proceedings and be found unfit to be a director in the same way as a registered director.

Shadow director

A shadow director is defined under legislation as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’.

In contrast to a de facto director, a shadow director doesn’t hold themselves out to be a director.

  • shadow directors sit in the background but have a real influence over the company’s activities and decision making;
  • they don’t have to be in control over the whole of the company’s business, but if they are significantly influential over a part of that business then they may be construed as a shadow director;
  • they are often referred to as a ‘puppet master’ in case law – pulling the strings of the other directors.

This can often arise for example in a family run business, where a senior shareholder family member may exert significant control over the company’s decision making, despite not acting as a director. A shareholder with considerable involvement in the company might also find that they are considered to be a shadow director. This is very common in family businesses and is something that a shareholder should be aware of.

There is some protection for parent companies because a corporate body cannot be regarded as a shadow director of any of its subsidiary companies.

It is not prohibited to be a shadow director, but a shadow director is bound by directors’ duties and responsibilities in the same way as registered directors, unless any of those duties are not capable of applying. This is unfortunately rather vague guidance. The safest route for a shadow director to make sure that they comply with director’s duties in all their dealings.

Shadow directors can be subject to the same company directors’ disqualification claims as registered directors. They may also be subject to the remedies for breaches of directors’ duties in the company as appropriate. It is therefore vital that if you or one of your associates may be acting in this capacity, that they are aware of the potential issues. For more information see also our blog posts: Shadow Directors And Their Increased Responsibilities and Shadow directors and their duties: Instant Access Properties v Rosser and others; Murphy and another v Rosser and others.

Many shadow directors will not recognise themselves as such and so may inadvertently breach these duties. At Francis Wilks & Jones we frequently advise on all aspects of company law including director’s roles and duties. If you believe that you or someone within the company may be acting as a shadow director, please don’t hesitate to contact one of our expert team who can talk you through the issues.

Role of professional advisers

Professional advisers can sometimes become very involved in a company, and may run the risk of being considered shadow directors. However, company legislation provides some protection to professional advisers who give professional advice to the directors, which the directors then act on. For example, a company lawyer providing legal advice to the company which they rely on to make decisions would not be considered a shadow director.

  • However, be aware that if a professional adviser goes beyond providing professional advice, then this protection no longer applies;
  • that person may be at risk of being classed as a shadow director and subject to the duties and potential personal liability risks this brings.

The lines may be more blurred in certain situations. For example, if there is a problem with repayments to a lender, that lender might request that one of their representatives attend board meetings and monitor the company’s direction. Influence on company’s decision making in order to protect the lender’s position is usually acceptable, and common, but if they go beyond this and fully control the direction of the company, they might put themselves at risk of being considered a shadow, with the potential consequences this may bring.

Our team at Francis Wilks & Jones have many years of experience in this area and frequently advise companies on directorship issues. If you are concerned about any of these issues, contact us for a chat to discuss further.

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