Table of Contents
When running a company, you will have several corporate obligations, including disclosing your company directors to the public when they are validly appointed. This is so other businesses know which individuals have the authority to bind the company and act on its behalf. However, there are circumstances where non-validly appointed directors nonetheless act as a director. Here, the law treats these individuals as if they were directors, regardless of the validity of their appointment. This article will explain how these “de facto” and “shadow” directors arise. It will also explain key legal implications of the extent of liability if you or another person in your company is found to be acting as a de facto or shadow director.
Company Directors and the Law
A director is any person occupying the position of a company director, regardless of whether their appointment is valid. In other words, if you act in such a way as to manage a company’s affairs, such as by entering into contracts on behalf of the company or holding yourself out as a company director, the law may consider you to be a director. This is the case even if you have not been validly appointed.
Regardless of whether they are validly appointed or not, all directors have certain duties and obligations that they owe to the company and its shareholders. These obligations include:
- always acting in the best interest of the company;
- avoiding conflicts of interest;
- disclosing any personal interest in a company transaction; and
- ensuing the company complies with its legal obligations, such as filing annual accounts.
As we will explore below, directors can face civil and criminal penalties if the company has been negligently run. This is particularly the case where the company is insolvent.
Valid Appointment
A valid appointment is any appointment of a natural or legal person to the office of a director. Generally, the required process will be detailed in the company’s articles of association. As a result, the exact requirements for a valid appointment will vary for each company.
In practice, director appointment usually occurs from a few common scenarios, including:
- at the point the company is incorporated;
- by approval of the existing board of directors (either unanimously or with the majority’s approval); or
- by consent of the shareholders (either via an ordinary resolution or special resolution).
De Facto Directors
A de facto director is any person who has never been validly appointed as a director but who performs the function of a director. De facto directors include individuals:
- whose appointment was in some way inadequate; or
- who has stayed on as director after the expiry of their term.
If you are in any doubt about the validity of your appointment or if you are unsure whether you act as a director, you can ask yourself if you:
- have assumed responsibility to act as a director; and
- if the company considers you to be a director and holds you out as a director.
The law does not consider if you actually knew you were acting as if you were a director. In other words, this is an objective test. Where there is any doubt, the law will look at the entire set of circumstances and determine if you were effectively acting as a director.
Examples of a De Facto Director
If you engage in the following acts, the law may consider you to be a de facto director:
- you routinely negotiate and sign contracts on the company’s behalf with or without the consent of other directors;
- you participate in board meetings by tabling and voting on proposals; and
- you liaise with shareholders on behalf of the company.
Consequences of Being a De Facto Director
If you engage in wrongdoing in the course of your actions as a de facto director, the law can hold you liable as if you were a validly appointed director.
The most common example is when a de facto director knows the company cannot meet its obligations (i.e. is insolvent or approaching insolvency). Nonetheless, they continue to trade as if they were solvent. Depending on the circumstances, this can be classified as wrongful trading, which is a criminal offence. The penalties for wrongful trading can include imprisonment, a fine or disqualification from being a director in the future.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
Shadow Directors
A shadow director is any person other directors routinely rely on when exercising their responsibilities and duties. This differs from a professional advisor, who typically includes accountants, bankers, and solicitors.
To determine if you or another person is a shadow director, the law will determine how much influence the individual has on the company’s affairs. If the influence is negligible, the law is unlikely to conclude this person is a shadow director.
However, a shadow director also includes individuals who make no point hiding their influence. This commonly includes shareholders not appointed as company directors but who influence the directors’ decision-making process.
Likewise, suppose another person or company has lent your company money. In that case, they may try and exercise their control over the company’s affairs in such a way as to amount to a shadow director. For instance, if the lender requires your company to obtain their consent for every substantial transaction your company is involved in, they may be acting as a shadow director.
Consequences of Being a Shadow Director
Like a de facto director, the law may treat a shadow director as if they were a director in law. Accordingly, if they engage in conduct that amounts to wrongful trading, the law can find them just as liable as any de jure director.
Additionally, the law can require shadow directors to declare the nature and extent of their influence in the company’s affairs and any interest they might have in a transaction.
Key Takeaways
Companies are their own legal persons. The practical effect is that natural persons act on behalf of the company, whereby the law holds such persons to a very high standard of conduct. Generally, there is a formal process to appoint an individual as a company director. However, the law will impose certain restrictions on individuals that behave as if they were directors (de facto directors) or those who otherwise exert substantial influence on the company’s affairs (shadow directors). Such individuals can be held civilly and criminally liable for misconduct or wrongful trading.
If you need help with regulatory advice as to your duties as a company director, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A de facto director behaves as if they were a validly appointed director despite the fact they are not. In other words, they act on behalf of the company to enter into contracts on the company’s behalf and execute other duties of a director, such as voting at board meetings.
If your company’s directors rely upon the advice of another individual who is not a director to exercise their duties, this other individual may be a shadow director. Notably, a professional adviser cannot be a shadow director.
We appreciate your feedback – your submission has been successfully received.
