What is a Shadow Director in the UK?

As a business owner in the UK, your company structure may contain a board and company directors. A director has certain legal duties to the company, and they will typically sit in board meetings. Shadow directors, however, are individuals who are not formally appointed directors. They still have significant influence in directing the actions of the company. 

This article will explain in more detail exactly what a shadow director is. It will also touch on some of the legal responsibilities of this type of director. 

What is a Shadow Director?

A shadow director is an individual who has a significant role in giving instructions to a certain company. In other words, it is an individual who has decision-making power at a company and exercises de facto influence. The exact legal definition of a shadow director is defined in the Companies Act 2006. 

To decide if a person is a shadow director, a court might look at several different factors. This could include:

• whether the company has refers to the person as a director, for example, in written communications;
• whether third parties consider the person as a director, for example, because the person negotiates on behalf of the company; and
• whether that person has responsibility for an important aspect of the company’s operations, for example, because they are the only signatory for the company’s bank account. 

What are Director Duties?

Determining whether a person is a shadow director or not is important because directors have general duties. In particular, a director will have certain fiduciary duties to shareholders of that company. These include;

• an obligation to act in the shareholders’ best interests; and
• a duty to avoid conflicts of interest. 

Similarly, directors also have statutory duties in English company law and common law responsibilities (such as liability for wrongful trading). A director can also be responsible for the potential liabilities of the business, such as insolvency. 

Typically, it is easy to identify who has director duties. This is because the corporate governing structure of the business should make it clear. However, English company law tries to make sure that people who are acting in a director capacity are legally liable as directors, even if they are not formally appointed directors. As a result, you should know the responsibilities of a shadow director. 

What are Shadow Director Duties?

The key point on shadow director duties is that a court will not consider them a person exempt from general director duties. At the same time, however, they do not automatically have all of the duties of a de jure director. A de jure director is an individual who the company has appointed as a director. 

Some important duties and responsibilities include possible disqualification for being a director under the Company Directors Disqualification Act. The Companies Act 2006 outlines other statutory duties. However, a shadow director will not automatically have a fiduciary duty. This is especially true if they are not directly dealing with company assets. 

What Should My Company Do if we Have a Shadow Director?

Historically, companies used shadow directors to avoid potential liabilities for directors. Further, shadow directors could avoid some of the duties and obligations of directorship. However, the commencement of the Companies Act 2006 gives shadow directors the same or similar statutory duties as appointed directors. There is therefore little benefit to having a person make decisions in a company without formally appointing them as a director. 

Because of this, it is a good idea to have a clear idea of the role of people who have a strong influence over your business. You could either allow for board members to make decisions over your company’s direction, or you can give a more formal role to people who your company listens to when deciding actions. Overall, this can help avoid ambiguity about liability and duties. 

Key Takeaways

A shadow director is an individual who has significant influence over a company and the actions that they take. Shadow directors will be taken to have much of the same statutory duties as formally appointed directors, even if they are not named in the corporate governing structure of the company. This can include liability for insolvency, as well as fiduciary duties if they are dealing with company assets. 

As a result, it is generally a good idea to make it clear if someone is directing your company, as it can avoid potential future problems about roles and responsibilities. 

If you have any further questions about shadow directors and their duties, 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 on 0808 196 8584 or visit our membership page.

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