Shadow Directors - a lender being overly involved in the management of their customer’s affairs - sound familiar?

Shadow Directors – I am not a director of the company, so why would I have any liability as one? Why does it matter that I have influence over how the company is run?

Admin: One recurring theme is coming across in case after case - that is the use of 'Shadow 'Directors' by factoring companies - this we believe will allow you to attack them to protect your self!

You could be a “shadow director”. This is someone in accordance with whose directions or instructions the directors of the company are accustomed to act.
Examples of when the courts have found someone to be a shadow director include the following:

• a management consultant appointed by a shareholder to assist in a corporate recovery plan;
• a shareholder in a joint venture who has dictated the actions of the company but not appointed a member to the board; and
• a lender being overly involved in the management of their customer’s affairs.

Despite the name, a shadow director does not need to be someone who “is lurking in the shadows” and behind the scenes. They can be classed as a shadow director if they are involved in the company’s management and decision making.

The significance of being a shadow director is that such a person has the same responsibilities as a director. There are statutory duties that they need to abide by, including exercising reasonable care and skill, avoiding conflicts of interest and declaring their interest in transactions.

If the company enters into insolvency, a liquidator can pursue actions against the shadow director such as misconduct in the course of winding up. A shadow director can also be subject to a disqualification order, prohibiting him from being a director of any company.

Solutions

Whether someone is a shadow director or not depends on their specific circumstances.

It is best to avoid making or influencing major decisions at board level or exercising any veto powers. In addition if a person controls the financial activities of a company that increases the risk of being classed as a shadow director.

What to do now?

You should carefully consider whether you could be a shadow director. Shadow directorships typically arise when instructions are given to the board; when a parent company gives instructions to the directors of its subsidiaries; or when an investor has a right under the investment agreement to appoint a representative to a board and this representative is influential. However, this list is by no means exhaustive.

A non-director in an influential position over a company should think about how that company’s board goes about making major decisions. They should ensure that they are giving advice as opposed to instructions, and that the board exercises independent judgment when reaching those decisions. Board minutes should show you as “in attendance” rather than present. It is prudent to keep a copy of such minutes.

If, however it becomes clear that you are a shadow director you should insist on being covered by all appropriate insurances in order to protect yourself.