Shadow Directors and the duty to act in good faith

Even if you have not been formally appointed as director of a company you may be classed as a shadow director and therefore subject to certain director’s duties.

Who is a Shadow Director?

The definition of a shadow director is given in the Companies Act 2006 as “a person in accordance with whose direction or instructions the directors of the company are accustomed to act.” This could, for example, be a controlling shareholder who in practice directs the Board how to run the company. It could also be the directors of a corporate shareholder in relation to its subsidiary or joint venture company. However, a person will not be considered a shadow director if the directors act only on advice given by him in a professional capacity.

Duties of Shadow Directors

Whilst shadow directors are not subject to every duty which applies to an appointed director, the role and responsibilities are in many ways similar. Certain transactions with shadow directors (including some service contracts) will require approval by the members of a company, and members may bring derivative claims against shadow directors on behalf of the company on grounds of negligence. Shadow directors may also be liable for wrongful trading.

A recent High Court case (Vivendi SA v Richards) confirmed the position that shadow directors, like appointed directors, will also owe a fiduciary duty of good faith to the company. This means that they cannot simply run the company in their own interest, but must act in the best interests of the company itself. A shadow director could therefore be liable to the company if it has procured the directors to act against the interests of its shareholders.

Duties Owed to Creditors

Where the shadow director is also the sole or controlling shareholder of the company, the fiduciary duties may not in the usual course of events be a major concern, since the interests of the company and shareholder are generally aligned. However, Vivendi SA v Richards also highlighted that where a company is insolvent, or on the verge of insolvency, it will be the interests of the creditors that directors must consider paramount. In that case therefore the shadow director, who in this case was the ultimate owner of the company, was held liable to the company for breach of fiduciary duty for having instructed the director to make certain payments that put money out of reach of the creditors.

If you are not formally appointed as a director but do exercise control over a company in practice, you should seek advice on whether you could be liable as a shadow director and what you can do to avoid this. The Corporate & Commercial team at Ashtons Legal would be happy to assist, so if you have any concerns please do not hesitate to get in touch on 0330 404 0773.