Are you a director of a company, where there is an individual that is a shareholder who continually wants the board to follow their way or no way? It is likely that such an individual will be held to be a Shadow Director!

 

A director is defined under s.250 of the Companies Act 2006 (CA06) as "any person occupying the position of a director by whatever name called". This definition is quite vague but in practice a director of a company is an individual who is either appointed on incorporation of a company or appointed after incorporation by a resolution of the company and the filing of the statutory form AP01 at Companies House (CH). In both cases the individual concerned must consent to the appointment and in either case the Registrar of Companies will contact them to confirm this is the case.

A Shadow Director is defined under s.251 CA06 as "a person with whose directions and instructions the directors of the company are accustomed to act". The leading case on Shadow Directors is the Secretary of State v Deverell. In this case the judge stated that the definition should not be construed strictly. If it was interpreted strictly it would mean that professional advisors to companies would be deemed to be 'Shadow Directors' and this was not the intention of the legislation. Instead, a Shadow Director is the individual who has a "real influence" on the decisions that the directors make with regards to the running of the business. The "real influence" does not have to be all the directors' decisions as it is enough for it to be some of the company's affairs.

Under the Small Business Enterprise and Employment Act 2015 s.170 of the CA06 has been amended with an additional paragraph (5) and this states "the general duties apply to a Shadow Director of a company where and to the extent that they are capable of so applying". Therefore, the 7 codified directors' duties in ss. 171-177 CA06 also apply to Shadow Directors!

How can directors resolve the issue of these individuals continually wanting to call the shots? The short answer is - to ensure the directors have good corporate governance!

The directors should record all their decision making in detail noting what was proposed and how the directors arrived at the decisions. The opinion of the individual in question should be noted but directors have a duty to act in the best interest of the company and to exercise independent judgement (ss. 172 and 173 CA06).

It is arguable that these individuals would also be classed as a person of significant control (PSC) and should be entered in the PSC register with the necessary completed statutory form to notify CH (currently the Confirmation Statement but there are proposals to notify CH through new statutory forms). It is very likely that these individuals would not appreciate the idea of being determined as the PSC, so this may be one way to convince them that their opinion is valid but it is the statutory directors who have the last word.

Also, it is worth noting that the same consequences for directors apply to Shadow Directors. These are:

  • Wrongful trading – being held personally liable for the debts and liability of the company
  • Fraudulent trading - where if proven (although difficult) the penalty is a fine and/or conviction
  • Directors disqualification - where the court gives a disqualification order barring the individual from being a director of a company or being concerned with the management of a company

My advice is that if you are a director, and you do have an individual who has a "real influence" on the directors' decisions, inform them of the implications outlined in this article. It is likely that instead of having it "their way or no way", they will instead prefer their opinions to be on the record only.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.