22 May 2015

The day to day running of a company or a business is often overseen by a person who has not been formally appointed as a director, and many people believe that unless you have been formally appointed you will not owe the usual directors’ duties to your company.

This is not the case. Directors that have not been formally appointed, often referred to as de facto directors or shadow directors, will also be bound by certain duties.

Breach of directors’ duties can result in harsh sanctions such as: the liability to contribute to the company’s assets following the company’s insolvency; disqualification precluding the person from being concerned in the running of a company for a period of up to 15 years; personal liability for breaches of directors duties; and criminal sanctions.

Types of directors

There are three types of directors:

  • De jure director: a director who is formally appointed and whose appointment is registered at Companies House.
  • De facto director: “any person occupying the position of a director, by whatever name called”, as defined in section 250 of the Companies Act 2006 (“CA”).
  • Shadow director: a person “in accordance with whose directions or instructions the directors of the company are accustomed to act”, as defined in section 251 CA.

Duties owed by directors

De jure directors owe the fiduciary duties of good faith and loyalty as well as the common law duties to exercise skill and care to the company / shareholders. They also owe statutory duties including those set out in the CA, such as the duty to act within their powers, the duty to promote the success of the company, and the duty to avoid conflicts of interest.

However, what if you have not been formally appointed? Will you still owe all these duties, and can you therefore be held liable for a breach of those duties?

De facto directors

If a person is held to be a de facto director, they will owe fiduciary duties as well as duties imposed by statute. This is because de facto directors come under the general definition of a director in section 250 CA.

Accordingly, any breaches of the fiduciary duties or statutory duties can result in liability, even where the individual has not been formally appointed.

It is not always abundantly clear whether or not someone is a de facto director. However, in the case of Smithton Ltd v Naggar and others [2014], it was held that one of the key factors in determining whether someone was a de facto director was whether that person was part of the corporate governance system of the company and whether he assumed the status and function of a director so as to make himself responsible as if he were a director. The judge also gave further guidance on the matter, namely:

  • That a job title will not be a deciding factor – the court will also look at what the director actually did.
  • It is not a defence to show that the director, in good faith, thought he was not acting as a director. This question will be determined objectively.
  • Any acts done by the director should be looked at in the relevant context.
  • A relevant factor will be whether the company considered the individual to be a director and held them out as such, and whether third parties considered the individual to be a director.
  • The fact that a person is consulted about directorial decisions, or their approval is sought on such decisions, does not in general make them a director because they are not making the decision.

Shadow directors

Although there are some express requirements in the CA which state that shadow directors will be liable in the same way as de jure directors, e.g. in relation to wrongful trading, director disqualification and in relation to the declaration of interest in existing transactions, it has not historically always been clear whether or not they also owe fiduciary duties.

This was resolved by the case of Vivendi SA and anor v Richards and anor [2013], in which the High Court held that a shadow director will typically owe fiduciary duties in relation at least to the directions or instructions that he gives to the de jure directors. More particularly, the court held that a shadow director will normally owe the duty of good faith (or loyalty) when giving such directions or instructions.

In reaching their conclusion, the court noted that it is usually the case that a shadow director will have assumed responsibility for acting in relation to the company’s affairs and will have asked the de jure directors to exercise their powers that exist exclusively for the benefit of the company. The court also stated that a person who gives directions or instructions to a company’s de jure directors in the belief that they will be acted on, can fairly be described as assuming responsibility for the company’s affairs, at least as regards the directions or instructions that person gives.

Therefore if a person comes within the definition of a shadow director, they should look to act in accordance with the duties imposed on de jure directors, as failure to do so may result in liability.

Be cautious!

As an employer, you may wish to ensure that you do not have any de facto or shadow directors. If you do, you may wish to consider formally appointing them as directors – at the very least you should ensure that they are made aware of their duties.

As an individual, it is very important to know where you stand. If you think that you are a director, even if not in name, then you should insist on being covered by all relevant insurances and you should make sure you know your legal duties.

Alternatively, so as to avoid being classified as a director, you should ensure that you let the board make the major decisions. If you do attend any board meetings you should ensure that it is recorded in the minutes that you were “in attendance” rather than “present”.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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