The Principle of Shadow Director: An Indian Perspective

Shreeyash Mittal

20161299

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Introduction

The paper seeks to analyse the principle of shadow director in the Indian law perspective. The
paper will: Firstly, define who is a shadow director; Secondly, identify the problems arising
due to no regulations imposed on the shadow directors; Thirdly and Finally, analyse the
development and necessity of the principle with Indian Law perspective.

What is a Shadow Director?

A Shadow Director is a person by whose directions or instructions the board of directors is

accustomed to act. There are many possible instances where the decisions are regarded as one
made by a shadow director even though he may or may not be a member of the board of
directors of a company.

Instances where decisions may be made by shadow director?

1. The subsidiary – The subsidiary company may have a board entirely distinct that the
board of its holding company but yet the decisions made by the subsidiary are in
accordance with the decision made by the holding company.
In such a scenario, the holding company can be regarded as the shadow director of the
subsidiary.
2. The Founder/The Promoter – India’s businesses are usually family run be it Ambani
and Reliance, Munjal and Hero, Singhal and Bhushan, Jindal of JSW and JSPL are
just a few examples. The board of directors of these companies are usually
accustomed to act in accordance with the decisions of them.
3. The Shell Companies – Some companies set up various shell companies to divert
taxes. The companies may appoint board members who habitually obey the promoters
while the promoters do not occupy any board seat.
The law on Shadow Directors in India is developing at a little pace with only a few
judgements even mentioning the doctrine. This creates a huge loophole in the company law
as it allows these shadow directors to operate without any criminal liability.

The absence of case law developing the doctrine holding them liable along with the directors
accustomed to act by his decisions as long as they are acting in accordance free of coercion.
The loophole allows these shadow directors to circumvent the law and benefit themselves
even though they do not bear any criminal liability due to it.

Shadow Director and Indian Law

The Companies Act, 2016 mentions a director with whom the board of directors are
accustomed to act in accordance with. Even though the companies act fails to name such
form of director it is evident by the definition the act is impliedly mentioning shadow
directors.

Therefore the principle of shadow director is not an alien one to the Indian Law but one not
developed through application in case law. There are only a few cases holding shadow
directors liable.

In the case of Bharadwaj Thiruvenkata Venkataravaraghavan v Raja Arora (2017) [Delhi HC]
the court observed, “Shadow Director: A person, who is not appointed to the board, but on
whose directions the board is accustomed to act, is liable as a director of the company, unless
he or she is giving advice in his or her professional capacity. Thus, such a shadow director
may be treated as an officer in default under the companies act.”

The Delhi High Court judgement clearly states the Shadow Directors must be found liable as
their decision is the board’s decision. The principle will significantly minimise the
exploitation of the loophole by giants.

In a recent case of Bhushan Steel, it was found that the promoter of the company created shell
companies to circumvent tax liabilities and made his employees zero equity directors in these
companies. This was presumably done to prevent criminal liability for himself while his
employees were found liable for his acts. Such is a case of Shadow Directors escaping
liability.

Conclusion
The principle of shadow directors is a necessary one to develop. The principle, even though
impliedly included in the companies act, is not entirely developed in the Indian Law yet.

The failure of the development of the principle creates loopholes for the businessmen to
exploit by appointing a board who habitually obey them and exploit them to make undue
gains without any criminal liability of their own.

The development of the said principle in Indian perspective will allow for implementation of
regulations to curb such evident exploitation.