In a recent post we highlighted some of the duties owed by directors to a company. In order to know whether or not those duties apply, it’s first necessary to establish whether or not someone actually is a director. The answer to that is not quite as straight forward as you may think. And because we’re lawyers, it involves a bit of Latin.
When most people think of a company’s directors they think of those people who have been validly appointed in accordance with the company’s constitution and whose appointments have been recorded at Companies House. These are known as de jure directors – those who are directors ‘by right’. De jure directors owe common law and statutory duties to the company. Almost certainly, these people know they are directors and the fact that they are subject to these duties will come as no surprise.
Not so obvious directors
What many people are unaware of is that there is another class of director known as de facto directors – those who are directors “in fact”. This refers to people who act as directors despite not having been formally appointed as such. They form part of the governing structure of the company, taking part in the directors’ decision-making processes, and undertake functions within the company that could only be discharged by directors.
The problem for de facto directors is that, whilst they may not think of themselves as directors as such, they are subject to the same fiduciary duties as the de jure directors referred to above.
Executive or non-executive?
An executive director is one who is employed by the company and devotes (substantially all) his working time to the company’s affairs. A non-executive director is generally not an employee but is someone who is engaged, usually on a part-time basis, to provide independent advice and supervision to the company.
But, in the context of directors’ duties, the distinction is irrelevant: both executive and non-executive directors are subject to the same fiduciary duties.
Those lurking in the shadows
A shadow director is a “person in accordance with whose directions or instructions the directors of a company are accustomed to act”. So someone who, whilst not appointed as a director, is actually the directing mind of the company and exerts control over it (unlike a de facto director who, whilst acting as a director, does not have the ability to control the company like a shadow director).
Surprisingly, despite controlling the company, shadow directors have not previously been subject to the same duties as the de jure directors whom they effectively control. However, as we’ve mentioned in a previous post, the Government has decided to address this apparent anomaly and the new Small Business, Enterprise and Employment Bill contains provisions extending the general statutory duties of directors to shadow directors.
For more information, email firstname.lastname@example.org.