Are shadow directors liable in an insolvency procedure?

Company directors are bound by common law and statutory duties when they are appointed and their position is registered at Companies House. For those who are not named a director, but are generally found to be giving instructions or directions to the de jure directors of the company – you could be considered a ‘shadow director’. While they may not have the official status, shadow directors are still very vulnerable to legal action should the company face insolvency. This article will outline the definition of shadow directors, as well as the personal risks from an insolvency procedure.


What is a shadow director and what legislation applies?

According to the Companies Act 2006, a director includes any person occupying the position of director, by whatever name called. Often, a company will receive advice on the day-to-day running from a person not holding the official position. Those who do not hold the official status of director – commonly called a de facto director or shadow director – are still bound by certain duties. Breach of those duties can lead to severe consequences, outlined later in the article.

While you may provide instructions the company does act upon, you are not solely considered a shadow director for providing advice in a professional capacity.

The below are examples where you could be considered a shadow director:

  • The company portrayed you as a director, perhaps in written communications
  • You are considered a director by third parties, due to negotiation on behalf of your company
  • You assumed the role for a specific area of business
  • Assumed the position when recruiting senior management

 

A shadow director is subject to number of legislative provisions, similar to that of official directors (de jure directors). For instance, you may be liable for wrongful or fraudulent trading, or director disqualification, should evidence suggest wrongdoing during the investigation.

Shadow director

De facto director

As mentioned above, a de facto director is also not officially appointed a director, but they assume the role. For example, a company may rely on the skills and qualifications of an individual in a senior position. While there is no definitive test for determining whether a person can be considered a de facto director, relevant factors will be taken into account. For instance, what capacity was the individual acting? Has the individual been using the title of director in written communications? Is the individual part of the corporate governing structure? A de facto director will also be liable for the similar duties to a de jure director, under the Companies Act 2006 and Company Director Disqualification Act. You could be considered a de facto director if you:

  • Assume responsibility for the company finances
  • Act as a significant signatory for the company bank account
  • Negotiate with third parties on behalf of the company board
  • Actively involved in recruitment for senior management

Duties of a company director

As a director, there are specific duties you must adhere to. You must act in accordance with the company’s articles and memorandum of association and work to promote the success of the company. Similarly, you must exercise reasonable care, skill and diligence and avoid conflicts of interest. The director duties are owed to the company and enforcement can be taken if there has been a breach of duty. In an insolvency situation, director’s investigations will be carried out to look for any evidence of wrongdoing. You may be liable for offences under the Insolvency Act, so it’s important to err on the side of caution.

Risks from insolvency

Directors accept fiduciary, statutory and common law duties when holding the status. It has been said that shadow directors should also assume the same responsibilities. If you do this and act in the interests of the company, it’s likely you will reduce liability. However, if the company does enter insolvency, your actions will be scrutinised as part of a directors’ investigation. This will determine your role at the company, and identify any instances of personal liability. This might include:

  • Wrongful or fraudulent trading
  • Acting against the interests of the company creditors
  • Failing to file and complete company accounts, as well as statutory returns

 

Alongside the above risks, you could damage your personal reputation if associated with a company facing insolvency. This is even more prominent if you have been seen to act unlawfully to avoid legal repercussions.

Director disqualification

Shadow, or de facto directors, can be disqualified under the CDDA if in the ‘position’ three years before the start of the insolvency procedure. You can be liable for director disqualification if you have not met your ‘legal responsibilities’. For example:

  • Allowing the company to continue to trade when it cannot pay its debts due
  • Failure to file company accounts at companies house
  • Trading on without filing returns with HM Revenue & Customs or paying amounts due.
  • Using company money and assets for your personal benefit

 

The insolvency practitioner (IP) will file a report for the Insolvency Service to decide whether to commence disqualification proceedings. If the order is made, you will be unable to act as a director between 2-15 years. In addition, you may be ordered to contribute to the insolvent estate. Where fraud has been identified, you could even face criminal action. More information on the subject can be found here.

Manage the risks

There are certain actions available that can reduce the risks of the above procedures. You could allow board members to make the decisions on behalf of the company, and only act on their instructions. Alternatively, you could consider becoming formally appointed as a de jure director, so there is no doubt as to your position in the business.

Ensure simple measures are completed, such as completing and filing company accounts with Companies House. Taking care of these obligations will reduce pressure if the company faces signs of insolvency.

We do recommend seeking professional advice if you are unsure of your position, and need help mitigating the risks. Our business rescue experts have the experience to clarify your position and work to find the best possible solution.

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