In the day to day running of a Company, businesses are often overseen by individuals who are not legal directors registered at Companies House.

In the Companies Act 2006, a shadow director, in relation to a Company, means a person in accordance with whose directions or instructions the directors of the Company are accustomed to act.

The question of whether or not a person is a shadow director may arise in a variety of contexts and can extend, for instance, to management consultants, and even lenders and creditors of a Company, i.e. not just to those who work directly within the organisation in question.

There are several factors which could lead to a person being considered a shadow director. The following questions can be asked:

  • Did third parties consider you to be a director because, perhaps, you were their main contact and regularly negotiated business terms?
  • Did the Company itself portray you as a director in written and verbal communications?
  • Did you assume responsibility for an entire area of the business?
  • Did you make key management decisions?
  • Were you the sole cheque signatory on the Company’s bank account(s) and other documents?
  • Were you responsible for recruiting senior staff?

This list is not exhaustive.

What are the risks for a shadow director?

During most insolvency procedures the actions of all directors, including shadow directors, are scrutinised by the Insolvency Practitioner for any instances of misconduct, and a report is then submitted to the Secretary of State on their conduct.

Under the Company Directors Disqualification Act 1986, you may be disqualified from being a director or shadow director for between two and fifteen years, and where fraud has been identified, criminal proceedings could also be brought, possibly resulting in a prison sentence.

The financial penalties for misconduct, including misfeasance, can also be significant, ranging from fines to an obligation to pay towards a Company’s liabilities. Both civil and criminal proceedings, and consequently costly Court proceedings, can therefore ensue.

How can I manage the risk?

It is imperative that a person recognises when they are at risk of becoming, or being considered, a shadow director, as there will be a need to comply with all relevant duties and obligations.

The risk of being found to be a shadow director can be eliminated by ceasing to act in ways outlined above; for instance, ensure that directors only act on the instructions of the board. Board minutes should also properly reflect that the person was ‘in attendance’ at meetings, rather than being ‘present’. The company should also be up to date with its statutory filing obligations.

If you or a client of yours is in doubt as regards their position, please contact a member of our Business Recovery & Insolvency team, who would be pleased to discuss this on an initial no-cost basis.

 

 
 
 
 
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