What Is a Shadow Director?
Even if the company doesn’t officially recognise shadow directors, they’re still recognised as directors by the law. This means shadow directors who fail to uphold their duties to company shareholders or creditors can face legal and financial consequences.
In this guide, we’ll explain who may be recognised as a shadow director, what their duties are, and what potential legal implications they may face.
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What Actions Might Make Someone a Shadow Director?
A shadow director is anyone who exercises control over the management of a company without officially being appointed to the board of directors. As a result, any action that can be viewed as managerial can qualify someone as a shadow director. Some of the most common examples include:
- Securing loans on behalf of the business
- Helping to recruit senior team members
- Instructing the actions of board members
- Being recognised by third parties as a director
- Getting referred to as a director in the company’s written communications
- Approving business expenditure
Anyone helping in the management of a company should keep the duties of a company director firmly in mind.
What Are the Duties of a Company Director?
- Act according to the company’s constitution
- Only use powers for their intended purpose
- Act in good faith to promote the success of the business as a whole
- Protect the interests of creditors if the company enters into insolvency
- Exercise reasonable care, skill, and due diligence
- Avoid conflicts of interest with the company
In the event of insolvency, the conduct of directors and shadow directors will be scrutinised to see if they’ve properly upheld these fiduciary duties. Failure to do so can have severe financial and legal consequences.
What Are the Potential Consequences for Shadow Directors?
If the company enters into an insolvency procedure, such as liquidation or administration, the office-holder will have to investigate the conduct of shadow directors to see if they’ve upheld their duties.
For those who haven’t, they can face a range of charges:
Each of these charges carry similar consequences. You can be made personally liable for company debts, disqualified from future directorship, issued with large fines, or – in severe cases – even imprisoned for up to 10 years.
Acting on Behalf of a Shadow Director
Often a shadow director will be operating from behind the scenes due to a previous disqualification from directorship. They operate through a “puppet director” who carries out their actions for them.
Unfortunately, arguing that you were acting on behalf of a shadow director does not serve as a legitimate defence. The law will still expect you to have upheld the duties of your position, and will not look kindly on you helping an individual to circumvent the rules.
Individuals who have acted on behalf of a shadow director will be held to the same standards as anybody else.
How Can I Protect Myself?
If you’re the shadow director of an insolvent company, you should consult with an insolvency practitioner as soon as possible.
Our team can help assess any potential liabilities in your case and mitigate any risks. Placing the business into liquidation will help to protect the position of creditors, upholding your fiduciary duty, and reducing the risk of any further fallout.
Get in touch to arrange a free consultation today.
