Shadow Directors 7 FAQs

Here you can download our What Is a Shadow Director 7 Frequently Asked Questions answered booklet. An example of the useful information you can find in the booklet is featured below.

Introduction

In a conventional Limited Liability Company the business and assets are owned by the Shareholders, subject to all liabilities, but the business of the Company and the management of such assets and income is controlled by the Directors, who run the Company on a day-to-day basis.

Directors have different functions in terms of their role within a Company. For example a Finance Director will oversee the Company’s accounts, taxes and all other financial arrangements (including statutory reporting duties). There may also be Directors with responsibility for Operations, Sales, Marketing of Company products/services and those responsible for legal or regulatory compliance.

Each is registered and recorded as a Director with ultimate responsibility for that department and responsibility for ensuring important issues are reported to the Board of Directors to ensure a delegation of executive control of all arms of the Company’s business. The Board may have executive (or operative) Directors and may have non-Executive Directors, who’s only involvement is in attending Board Meetings, receiving reports on various parts of the Company and ensuring a general supervisory control over the Company’s affairs as carried out by the Directors.

However, there is often a circumstance where the reverse of this situation exists where an individual (or company) acts as a Director but is not registered in the Company’s books and records or at Companies House as such a director. This may be intentional or unintentional, depending upon the circumstances, and the individual (or, occasionally, the company) is often referred to as a Shadow Director.

 

1. What Is A Shadow Director?

Section 250 of the Companies Act 2006 defines a Director as, “Any person occupying the position of Director, by whatever name called.” Section 251 of the Companies Act 2006 defines a Shadow Director as, “A person in accordance with whose directions or instructions the Directors of the Company are accustomed to act.”

These definitions purveyed throughout various corporate legislations and are identical in all legal senses. A Director is somebody who occupies the position of a Director and a Shadow Director is somebody who gives directions or instructions to such a person, the specific titles each are given being irrelevant.

The reference to the word “Shadow” refers to the historic interpretation of such an individual lurking in the shadows of a Company, giving directions to the Executive Management Board.

However the legal interpretation of a Shadow Director has in more recent times applied to any individual who becomes too involved in a Company’s decision-making (such involvement being a matter of public interest) and often extends to Shareholders who may become overly involved in the operations of their investments (something which is strictly forbidden for Shareholders to do in any legitimate sense under the Company’s Articles of Association and the statutory provisions applicable to the regulation of companies in the UK).

2. Are Managers Shadow Directors Of A Company Then?

Generally speaking, depending upon the size of the Company, a manager will not be considered a Director.

An example may be a manager of a shop, a branch manager for a listed bank or a junior manager in a much smaller Company. More senior managers may also be necessary for a Company and will usually not be Directors, dependant on their reporting structure, the business itself, their involvement in decision-making and how their role is supervised by more senior personnel (amongst many other subjective factors).

In professional circles, it is not unknown for an individual to have the title “Director” yet not be a Director for these purposes. As stated above, a Director is one who occupies, “the position of director, by whatever name called”.

However, as described above, it is also important to understand that a Director does not necessarily have to be called a “Director” to be a Director within the statutory definition. A director is a person who occupies that position by whatever name called and if a manager instructs Directors or acts as a Director then s/he will be a Director.

A Shareholder who is overly involved in the management of the Company on a day-to-day basis (which is not unusual in small or family-run companies), even where s/he does not give directions or require Directors to carry out his or her wishes, may be a Director within this legal definition.

Similarly, a Director does not necessarily have to be involved with the Company on a day-to-day basis to be a Director. As described above, Non-Executive Directors rarely have any active role in the Company’s daily affairs yet are still a Director of the Company. Similarly, a person acting in a Non-Executive capacity (for example by attending Board meetings) could be an unregistered Shadow Non-Executive director who will still nevertheless fall within the statutory definition of a Director as a result of this.

A subsequent finding that a Person is a “Director” or “Shadow Director” will have serious consequences for any such individual, as this will make them personally liable in a similar capacity to Directors. Please see our webpage “Claims against Directors” which deal with these risks.

3. What Is A De Facto Director?

A De Facto Director is defined by common law as those who act or hold themselves out as Directors without having been recorded or registered as a Director in the Company’s records. A De Facto Director does not instruct other Directors but is rather more open, acting in the capacity of Director.

This reflects the legal position under Section 250 Companies Act 2006 (see above) which stipulates that a Director is a Director “by whatever name called” but reflects a situation where an individual may perhaps hold himself out as a Director to customers or creditors and make decisions or enter into such agreements in this capacity.

There is no statutory definition of a De Facto Director, unlike Shadow Directors, but it is a long established and well recognised term in Common Law and any liability or duty that a Director possesses will also be extended to those who are De Facto Directors.

Quite often it is the case that individuals are not able to act as Directors or do not want to be publicly known to be a Director but otherwise run a Company, holding out to all customers, employees and other entities connected to the Company that they are a Director. in such circumstances, if you continue to act as a Director you will be found a Director at law (regardless of the fact that you are not registered at Companies House) and will face the risk this may present to you.

It is not uncommon for the terms Shadow Director and De Facto Director to overlap and indeed many individuals may be both.

4. What Does It Mean To Be A Shadow Director Or A De Facto Director?

If you are acting as a Director in a De Facto capacity or as a Shadow Director then this means that you bear the risks and responsibilities of an appointed director in identical situation.

This means that you could be personally sued for a breach of any fiduciary duties you (or indeed Directors of the Company generally) may hold or, if the Company failed, you could be pursued via the insolvency legislation in respect of any transactions the Company entered into (regardless as to whether you were a party).

This is an important risk to bear in mind where non-appointed Directors have substantial personal property assets and are not listed as Director to protect those very assets.

Quite often we see circumstances where majority Shareholders, who are too heavily involved in the Company and are by far the wealthiest individuals connected to that Company, may be pursued for any failings by the Company and its Directors, by reason of their status as a Shadow Director.

IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.

ALTERNATIVELY, CONTACT THE TEAM ON 020 7841 0390

5. What Other Risks Exist As A Result Of The Finding That I Am A Shadow Director?

6. What Defences Exist?

7. What Are The Recent Legal Changes To The Position Of Shadow Directors?

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.