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 Pulling the corporate strings – de facto and shadow directorships - 16th October 2013 - Click for larger version Pulling the corporate strings – de facto and shadow directorships - 16th October 2013

Performing the role of director of a private limited company can be a highly demanding and rewarding task. For bearing the burden of a boardroom heavyweight is a double-edged sword; a privileged position to which the old aphorism of ‘With great power comes great responsibility’ is applicable.

When the company is performing well, the directors are praised for their diligence and business nous; when the company fails to meet its targets and/or is faced with insolvency, the management are met with a barrage of criticism and scrutiny from the shareholders and the regulatory authorities. In the latter situation where things haven’t gone according to plan, the conduct of those individuals who are not officially appointed as directors, i.e. de facto and shadow directors is subject to the same level of examination as is applied to the actions of the directors instated through the proper process.

The issue of de facto and shadow directorship is particularly relevant given the collapse of numerous limited companies stemming from the aftermath of the recession. The increased incidences of insolvency have inevitably led to investigation and assessment of how efficiently and competently the directors operated the company.

But what are de facto and shadow directors? A de facto director is simply defined as someone who acts as if he is a director and is treated as such by the board but who has not been validly appointed. According to section 251 of the Companies Act 2006, a shadow director is classed as “a person in accordance with whose directions or instructions the directors of a company are accustomed to act”. The two definitions are ultimately similar in nature and indeed an individual can be held as both a de facto and shadow director.

The question then becomes one of how to establish that a person is a de facto and/or shadow director. The recent English case of Re UKLI Ltd, Secretary of State for Business, Innovation and Skills v Chohan [2013] EWHC 680 (Ch) provides concise and effective guidance to ascertain whether someone is a de facto director. The ten factors promulgated by the court are all important but not all of them require to be demonstrated in order to assert de facto directorship.

The ten factors are as follows:-
1. the individual must act as if he were a director;

2. he must be part of the corporate governing structure and participate in directing the affairs of the company in relation to the acts or conduct complained of;

3. he must be either the sole person directing the affairs of the company, or a substantial or predominant influence and force in doing so in respect of the matters complained of – mere influence itself is not sufficient;

4. he must undertake acts or functions which indicate that his remit to act is the same as if he were a properly appointed director;

5. the functions he performs and the acts complained of must be such as could only be carried out by a director;

6. whether he is held out as a director or claims to be one is a relevant consideration;

7. his role may relate to part of the affairs of the company only, provided that part is the one of which complaint is made;

8. his lack of accountability to others and involvement in major decisions suggest status as a de facto director;

9. if he has the power to intervene to prevent some act on behalf of the company that might suffice; and

10. he must be more than a mere agent, employee or adviser.

The factors resonate with the role of a de facto and shadow director on a practical level and provide a clear illustration of how to identify someone in such a position. Therefore, since they are subject to directors’ duties and disqualification proceedings in terms of the Companies Act 2006 and the Company Directors Disqualification Act 1986 in the same way as validly appointed directors, individuals involved in the running of companies who may properly be regarded as either a de facto or shadow director should be fully aware of the nature and scope of what is required of them as directors.

If you would like further advice on directorships or company matters generally, please get in touch with David Beveridge (db@macdonaldhenderson.co.uk) or Louise Hamilton (louise@macdonaldhenderson.co.uk).

Last updated: 3.30pm, Wednesday 16th October 2013

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