Hiding in the shadows – Shadow directors

Date: May 09, 2014
Document Type: Article

Directors of companies do not only consist of those who are appointed to the position of director. If a third party has the requisite degree of control over a company, they can be regarded as a ‘shadow director’ which can have serious implications.

What is a shadow director?

A shadow director acts as if they were a director (although not officially appointed) and is accustomed to the appointed directors acquiescing to their wishes.

Not everyone who gives advice that is followed by a company will be classed as a shadow director. To be a shadow director it needs to be shown that:

  • There is a pattern of compliance by the board with the third party over a period of time;
  • The third party has the ability to control the board AND actually exercises that control;
  • There is a causal connection between the third party’s instructions and the directors acting upon them; and
  • The appointed directors actually defer their decisions to the advice of the third party rather than weighing it up as a factor of their own decision.

An advisor, such as a financial or management consultant which provides advice in their professional capacity or a secured creditor that indicates their preferences will not necessarily be regarded as shadow directors if the directors maintain their discretion.

What are the implications of being a shadow director?

If you are found to be a shadow a director, you will attract all the legal obligations, duties and liabilities as that of an officially appointed director. This can cause significant liabilities, particularly if the company has engaged in insolvent trading to comply with your directions.

Unlike an officially appointed director who must be a natural person, a company can be a shadow director of another company. Thus acting through a company will not avoid the imputation of shadow directorship.

How can I ensure I am not a shadow director?

If you wield significant influence over another company, such as a having a significant security interest or being the go-to person for certain types of advice, you must be careful you do not ‘control’ the company.

Whilst imposing conditions in commercial dealings or utilising a superior bargaining position will not necessarily cause you to become a shadow director you should be aware of any additional factors that might cause the directors to slavishly follow your commands. At what point this may occur may not always be clear.

As the distinction between shrewd business dealings and acting as a shadow director can be nebulous, we would strongly recommend seeking legal advice if you suspect you may be at risk of shadow directorship.

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