Court of Appeal provides guidance on shadow or de facto directors
Following recent case law the Court of Appeal has now given guidance on how to establish if a person can be classed as a “shadow” or “de facto” director. According to the companies Act a shadow director is “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”.
A shadow director is someone who is not listed as a director but who directs or controls the company. The Court of Appeal stated that it was also essential to look at what the person actually did within the company rather than just their job type, for example:
- Did they assume responsibility as a director?
- Did third parties consider they were a director?
- Did he act in a directorial nature in the context of the company’s business?
- Did the company consider him to be a director?
Of course, it should be noted that if a person is consulted over decisions that seem of directorial nature, that would not necessarily make them a shadow director especially if they did not make or had no control over the final decision.
The Court has reaffirmed that they will consider the activities of persons involved in a company rather than titles.
Whilst it should be remembered that acting as a shadow director is not an offence in itself (unless the person is an undischarged bankrupt or disqualified from being a director), clearly there are risks to those people in senior management and this should serve as a warning especially if the company is, or becomes, insolvent.
Not only would a shadow director raise suspicion that they may be hiding something by managing a company while not being listed as a director, a liquidator could also take the same action against a shadow director as can be taken against the named directors. This would include reporting their conduct under the Company Directors Disqualification Act 1986 (CDDA) which could result in being disqualified as a director for up to 15 years.