When the Small Business, Enterprise and Employment Bill was published last month it contained many expected provisions implementing the Government’s proposals on simplifying filing requirements and improving corporate transparency (as we’ve commented on previously). But, appropriately enough, lurking within the depths of the Bill was an unexpected provision about shadow directors.
What is a shadow director?
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.
What duties does a shadow director owe?
Previously, shadow directors have not been subject to the same fiduciary duties as formally appointed directors. However, in a case at the end of 2013 the High Court held that a shadow director will owe fiduciary duties at least in relation to the instructions that the shadow gives to the appointed directors. When giving those instructions, a shadow director will normally owe a duty of good faith to the company and be expected to act in the company’s interests rather than the shadow’s own separate interests.
What’s changing now?
The Government has now decided to follow the reasoning in the above case and has confirmed that the general statutory duties to which all directors are subject will be applied to shadow directors, to the extent that they are capable of doing so.
It has always seemed odd that someone who controls a company in the way that a shadow director does was not subject to the same duties as a formally appointed director. If the shadow director instructed the board to act in a way which was not in the company’s best interests, the appointed directors would be in breach but no action could be taken against the shadow director. Whilst it is quite right that the appointed directors should be liable for blindly following the shadow’s instructions, it’s strange that the shadow didn’t owe anyone any duties when giving those instructions.
Although some provisions of the Companies Act 2006, and other legislation (such as provisions relating to the disqualification of directors), are expressly stated to apply to shadow directors others are silent on the point and therefore, by implication, are taken not to apply. This clarification of the position regarding directors’ general duties is a good thing, although it remains to be seen how the courts will interpret the caveat of the duties only applying “where and to the extent they are capable of doing so”. The new Bill also gives the Government power to make regulations clarifying the application of the general duties to shadow directors and it is to be hoped that it takes advantage of this in order to flesh out the exact requirements in this area.
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