27th May 2016No more power without responsibility – Shadow Directors’ duties defined

In the Companies (Particulars of Directors) Act 1917, the term director was defined as “any person in accordance with whose directions the other directors were accustomed to act.” It was not until the Companies Act 1980 that the term “Shadow Director” was introduced. They were described as a person who had not been appointed; but a person who lurks in the shadows behind the other directors and exerts significant influence over the board of directors. It may be necessary to prove the following:

a. It is established who are the actual directors appointed; and

b. The directors of a company are being directed by the alleged shadow director; and

c. The appointed directors are acting on the direction of the shadow director; and

d. The directors are accustomed to act on instructions from the shadow director.

The legislation excludes professional advisers within the definition of shadow director; despite circumstances in which directors may act in accordance with their direction. A controlling shareholder or creditor may be regarded as shadow director if they are able to exert any significant control over the affairs of the board of directors. Any such person may also need to be entered into
the new Persons of Significant Control Register (PSC).

A gradual tightening of the rules on shadow directors has imposed greater transparency and responsibility on those who influence companies but are not appointed directors.

The duties and responsibilities of shadow directors were not clearly defined under the various Companies Acts which applied common law rules and equitable principles to the extent that they may be applied.

Transparency of duties

…these precedents do determine that a shadow director does commonly owe a company a fiduciary duty to some degree.

Various court cases in the past made attempts to clarify the fiduciary duties of a shadow director. These cases disagreed with each other as to the nature of the duties owed by a shadow director to the company. Nevertheless these precedents do determine that a shadow director does commonly owe a company a fiduciary duty to some degree. The Companies Act 2006, as amended by the Small Business Enterprise and Employment Act 2015, revised section 170(5) which now provides that the general duties apply to shadow directors where and to the extent that they are capable of being applied. This means that a shadow director now has responsibilities in respect of general duties where applicable, as defined in sections 170-177 of the Companies Act 2006, without distinction between him and an appointed director:

1. To exercise and act only within the powers granted in the Articles
2. To act in good faith and for the benefit of the company, and to promote success of the company
3. To exercise independent judgement and the care, skill and diligence reasonably expected
4. To avoid any conflict between the directors’ interest and the company’s, and to declare interest in a proposed transaction
5. Not to accept any benefit from a third party to influence any decisions

The implications of this regulatory change are simple: the protection of the public is paramount. Any person who is directing the board regarding the interests of the company may be held responsible, sued, disqualified, and may have to contribute financially if found to have assumed the director’s responsibilities.

David Parkinson, Company Secretary
T 020 7874 7899
E dparkinson@hwfisher.co.uk

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