Me and my shadow

November 9, 2011 12:33 pm Published by

Despite clarification of the responsibilities of formally appointed directors in the Companies Act 2006, vagueness still haunts the whole question of ‘shadow directors’ and what they really are.

A shadow director is a person in accordance with whose directions or instructions the board of a company are accustomed to act. He, she or it is not held out to the world as having authority to act, but rather directs activities through the board.

The term is not strictly construed and applies to someone with real influence over the company’s affairs on a cumulative basis, whose wishes are complied with by the majority of the board as a matter of practice. Those at risk of being defined as shadow directors would include: parent companies, shareholders of joint-venture companies and private equity investors and any corporate lender playing a proactive role in the affairs of a corporate borrower.

Actions which predispose any party being defined as a shadow director would include : imposing financial controls on the company, influencing major decisions, negotiating with third parties on behalf of the board and controlling appointment of executives.

The possible consequences of being treated as a shadow director are that the relevant party, in not being a formally appointed director, may fail to comply with statutory requirements and restrictions concerning the governance of the company, including obtaining member’s approval, declaring interests and other statutory duties. A shadow director of an insolvent company may be pursued by a liquidator for such offences as fraudulent and wrongful trading.

To minimise the risk of being identified as a shadow director, parent companies, bespoke lenders and the like should avoid instructing a company board in any way that limits its discretion and, if making recommendations, should give clear reasons for doing this. If attending a board meeting, it should be made clear that they are present as observers only and they should never act as a signatory for or purport to negotiate on behalf of or represent the company in question.

 

For more detailed information please contact Andrew Fleming on 01473 230033 or emailarf@blockslegal.co.uk

The above is general comment only and individual advice should be taken

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This post was written by Andrew