Update on Directors’ Duties – Shadow Directors

Posted on: January 2nd, 2014

Often individuals who are associated with companies and have day to day involvement with them do not actively choose to become directors (in the sense of being registered at Companies House). This can be for a number of reasons, but the Courts have confirmed that such people can owe fiduciary duties in the same way as if they were formally appointed.

The concept of a shadow director is defined in the Companies Act 2006, which states that a shadow director is a person “with whose directions or instructions the [appointed] directors of the company are accustomed to act”.  It is easy to see how such individuals are all too common, particular in a “family” company.

In Vivendi SA and Centenary Holdings Ltd v Murray Richards and Stephen Bloch [2013], two shadow directors had caused Centenary (“the Company”) to make several loans and investments to other entities, with which the shadow directors were associated. They used their influence and control to ensure the extraction of money for the benefit of the entities they were associated with before the Company became insolvent. This was clearly not in the interests of the creditors of the Company, and it was readily accepted that if they had been appointed directors they would have breached the duties they owed to the Company and its creditors.

The Court said that although shadow directors’ duties were not specified in legislation, the fact that the concept of shadow directors is recognised by statute must evidence Parliament’s recognition that a shadow director can bear responsibility for a company’s affairs. The court also observed that a shadow director’s role in a company’s affairs might be just as significant as an appointed director, and that public policy pointed towards statutory duties being imposed on shadow directors. In summary then, the Courts will look at the substance of relationship, and not just the form.

So avoiding formal appointment will not prevent a shadow director from owing fiduciary duties to the Company. However, if a shadow director accepts that, there may still be good reason for avoiding formal appointment – such as keeping his involvement with the Company out of the public eye – although, if he is also a shareholder, that may cause problems in obtaining entrepreneurs relief on a sale of those shares.