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Safe in the shadows?

Although the law is clear in respect of some of the obligations and responsibilities of shadow directors, the extent to which the general directors’ duties contained in the Companies Act 2006 (“CA 2006”) apply is something of a grey area. A recent case has, however, provided some more guidance on this issue.

What is a shadow director?

CA 2006 defines a shadow director as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”. Unlike a de jure director (ie a validly appointed director) or a de facto director (ie a person who is held out to be, and acts as, a director but is not validly appointed), a shadow director is not formally appointed or held out to be a director. Professional advisers are excluded from the definition.

Application of general directors’ duties

Although the general duties of directors were codified by CA 2006, their application to shadow directors is not as clear as it could be. CA 2006 provides that the general duties “apply to shadow directors where, and to the extent that, the corresponding common law rules or equitable principles apply.” This is not ideal as the common law does not provide clear guidance in this area.

The Ultraframe case

The issue of the application of directors’ duties to shadow directors was considered in the 2005 case of Ultraframe (UK) Ltd v Gary Fielding & Others. In that case the court concluded that a person would not be subject to the same duties as a de jure or de facto director just because he was found to be a shadow director. However, if the acts of a shadow director went beyond indirect influence, he might then be subject to specific duties.

The Vivendi case

The issue has been recently reconsidered in Vivendi SA and Centenary Holdings Ltd III v Murray Richards and Stephen Bloch.

In that case, it was found that Mr Bloch (the sole director) had acted in accordance with instructions from Mr Richards and that Mr Richards was consequently a shadow director. The court held that Mr Richards owed duties to the company and its creditors at least in respect of the directions given to Mr Bloch. The court reasoned that if a shadow director gave directions to a company’s directors which he intended to be acted on, it was fair to say that he had assumed responsibility for the company’s affairs (at least with regards to the directions given) and as such it was fair to impose a duty on him to act in the company’s best interests and in good faith when giving the directions.

Interestingly, the judge was of the view that the Ultraframe case understated the extent to which shadow directors owe duties.

In conclusion, notwithstanding this latest case, the law governing the nature and extent of the duties owed by shadow directors is still not completely certain. Any person who could potentially fall within the definition of a shadow director needs to be aware that he or she may be subject to the general duties in CA 2006 and should take great care when giving directions, instructions or even advice to the board of directors of a company.

 

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Stephen Hardwick

Professional Support Lawyer

I am the Corporate Team’s Professional Support Lawyer. My main responsibilities are preparing and maintaining the team’s precedents and know how, analysing new law and practice, researching legal issues and providing training.