Shadow Directors

Are you a Shadow director?

The term 'shadow director' is defined in the Companies Act 2006 as a person 'in accordance with whose directions or instructions the directors of the company are accustomed to act'.

While someone giving advice to the directors of a company in a professional capacity will not be a shadow director, the definition of a shadow director encompasses many different people.

You might be found to be a shadow director even though your influence only applies to a small part of a company's activities. If you have real influence over a company's corporate activities, you might be considered to be a shadow director. Directing the decisions of the directors of a company on one occasion will not generally be enough to show that you are a shadow director – but you could become a shadow director if the majority of the directors of the company are shown to have 'become accustomed' to following your instructions.

What are the consequences of being a shadow director?

(a) Duties of directors towards their company

The duties that directors owe their company were codified in the Companies Act 2006. Even though you might not have been appointed to the board of directors, as a shadow director, you will be bound by those duties (including the duty to act in the best interests of the company and to avoid conflicts of interest with the company).

A breach of these duties could lead you into difficulty (see below).

(b) The Companies (Trading Disclosures) Regulations 2008

A shadow director falls within the definition of an 'officer' in these Regulations. Failure to comply with the Regulations (for example failure to print the correct information on your company paper) can result in the commission of a criminal offence, for which you as a shadow director could on summary conviction be fined a maximum of £1000 (currently) plus a daily fine.

(c) Wrongful Trading

Under the Insolvency Act 1986 where a company has gone into insolvent liquidation and at some time before winding-up begins, a director who knew or ought to have known that the company had no reasonable prospect of avoiding liquidation, the court may order that director to contribute personally to the company's assets.

A "director" in these circumstances can include you as a shadow director of the company.

The court will not order this if the director is shown to have taken all steps they should have taken to minimise the company's creditors' losses, so if you think your company is trouble, you need to take advice.

Shadow directors can also be found guilty of fraudulent trading (trading with intent to defraud creditors of the company). Other actions taken by shadow directors can also be subject to review or set aside in insolvency proceedings (including transactions at an undervalue, preferences, and transactions which have been used to avoid creditors getting hold of the company's assets).

d) Getting struck off

Shadow directors can be subject to disqualification orders, preventing them from being a director of a company (or acting in the management of a company) without prior consent of the court.

A shadow director is highly likely to be disqualified if their conduct makes them unfit to be involved in company management or they have been involved in fraudulent or wrongful trading.

Disqualification is usually between two and 15 years. Acting as a director when disqualified is a criminal offence.

If in doubt, take advice!

For any queries, please contact at our Thetford Office Tim Stevenson 01842 756101 e-mail Tim.Stevenson@mcp-law.co.uk

For further information please call Tim Stevenson or Aimee Marsh 01842 756139 e-mail Aimee.Marsh@mcp-law.co.uk