Legal Solutions

for the Public Sector

Shadow Directorships - A Guide
SEPTEMBER 2004
Contents
1
Introduction


2
What is a shadow director?


3
How is shadow directorship determined?


4
What are the consequences of being held to be a shadow director?


5
Conclusion


6
Contacts


LEGAL SOLUTIONS FOR THE PUBLIC SECTOR: SHADOW DIRECTORSHIPS - A GUIDE
1 Introduction
This briefing note examines the concept of the shadow director under English law and
the implications of holding such an office.
3 How is shadow directorship determined?
Whether or not a person is a shadow director is a question of fact, not law, and will always
depend on the circumstances of the case.
A person can only be a shadow director of a company
registered under the Companies Acts. This includes a
company limited by shares or by guarantee. Non-
Companies Act companies such as statutory
corporations or other corporate bodies cannot have
shadow directors.
Any person or organisation or officer of that organisation
could potentially be a shadow director. However, where
a company is found to be a shadow director of another
company it does not necessarily follow that the directors
of the company are also shadow directors. To be liable,
these directors must themselves constitute shadow
directors by their own actions.
2 What is a shadow director?
A shadow director is a person in accordance with whose directions or instructions the
directors of a company are accustomed to act (section 741(2), Companies Act 1985,
section 251 Insolvency Act 1986, section 22(5), Company Directors Disqualification Act
1986). Professional advisers acting in that capacity are exempt from being shadow
directors.
The most recent (and authoritative) statement of the law
in this area is given in the 2001 Court of Appeal decision
of The Secretary of State for Trade v Deverell. This
case related to the disqualification of two individuals who
were alleged to have been shadow directors of a trading
company that went into insolvent liquidation. It
significantly broadens the definition of shadow directors
deciding that a person who exerts real influence over
a companys affairs can be held to be a shadow director
of that company.
The following statements were made in the case about
the definition of a shadow director (in this case given in
the Company Directors Disqualification Act):
the definition should not be strictly construed;
the purpose of the legislation was to identify those,
other than professional advisers, with real influence
in a companys corporate affairs;
this influence did not have to be over the whole field
of a companys corporate activities;
whether a communication was to be classified as a
direction or instruction had to be objectively
ascertained by the court in light of all the evidence;
non-professional advice might come within the
statutory definition;
a person could still be a shadow director even
though the board had not adopted a subservient
role to him or had not surrendered its discretion.
Lord Justice Morritts view was that any need to
describe the board as the cats paw, puppet or
dancer to the tune of the shadow director implies a
degree of control both of quality and extent over the
corporate field in excess of what the statutory
definition requires.
FIELD FISHER WATERHOUSE
Statutory duties
A number of offences under the Insolvency Act 1986 will
apply. A shadow director can commit an offence under
section 206 (fraud in anticipation of winding up), section
208 (misconduct in the course of winding up), section
210 (material omissions from statements on a
companys affairs) and section 211 (false
representations to creditors). These offences attract
criminal liability. In addition, wrongful trading under
section 214 of the Insolvency Act can give rise to civil
liability for the shadow director.
Many provisions of the Companies Act are specifically
stated to apply to shadow directors. These include
section 309 (directors to have regard to interests of
employees), section 317 (disclosure of directors
interests), section 320 (substantial property transactions)
and section 330 (restrictions on loans). A shadow
director is also subject to disqualification under the
Company Directors Disqualification Act.
Common law duties
These duties are wide-ranging and include:
A duty to act in good faith in the
interests of the company
A director must exercise his powers in good faith
and in what he considers to be in the interests of the
company.
A duty to use powers for a proper purpose
A director must exercise his powers only for the
purpose for which they were given, and not for
some unauthorised purpose (such as to enable him
to keep control of the company).
A duty not to exceed powers
A director must not carry out any act which is
unlawful, outside the companys powers or outside
the powers conferred on the directors by the
companys memorandum and articles of
association.
A duty to avoid conflicting interests and duties
A director must not take advantage of his position.
He has a general duty to ensure that personal
interests are not brought into conflict with those of
the company, and to act in the best interests of the
company if a conflict occurs. An example of this is
the duty on a director not to make a secret profit as
a result of his directorship.
A duty of skill and care
A director must perform his duties to an appropriate
standard. The standard of skill is measured on a
subjective basis. A director must exercise the
degree of skill that may reasonably be expected by
a person of his knowledge and experience. The
standard of care required of directors is judged on
an objective basis. A director must exercise the
degree of care which a reasonable person would
exercise on his own behalf.
A detailed commentary on the duties of directors is
contained in our briefing paper The Company Directors
Survival Kit: A Guide to Directors Duties in the UK,
which is available on request.
Registration requirements
The assumption of the role of shadow director should be
notified to Companies House through a form 288a. In
addition, the requisite details of the shadow director
must be recorded in the Register of Directors of the
company.
4
The consequences of being held to be a shadow director are wide-ranging and onerous.
A shadow director is subject to a variety of statutory and common law duties which apply
to normal company directors.
What are the consequences of being
held to be a shadow director?
LEGAL SOLUTIONS FOR THE PUBLIC SECTOR: SHADOW DIRECTORSHIPS - A GUIDE
A wide range of common law and statutory duties and
liabilities apply to shadow directors. Any potential
shadow director should, therefore, consider carefully and
regularly whether or not he is a shadow director and
ensure that he is aware of the risks of being so. If a
person is a shadow director, he must ensure that he acts
in accordance with his duties. If he is not, he may wish
to take steps to minimise the risk of becoming a shadow
director by restricting the influence that he exerts over
the affairs of the company.
This publication is not a substitute for detailed advice on specific transactions and should not be taken as providing legal advice
on any of the topics discussed.
Copyright Field Fisher Waterhouse 2004. All rights reserved
Field Fisher Waterhouse 35 Vine Street, London, EC3N 2AA
t: +44 (0)20 7861 4000 f: +44 (0)20 7488 0084 e: info@ffw.com
www.ffw.com www.thealliancelaw.com
5 Conclusion
6 Contacts
For further advice on any matter, please contact:
Neil Palmer
t: 020 7861 4000
e: neil.palmer@ffw.com
Nigel Taylor
t: 020 7861 4000
e: nigel.taylor@ffw.com