Shadow Directors – “Pulvis et umbra sumus (We are but dust and shadow)”

Any person who elects to become a Director of a Company is likely to be aware of the onerous fiduciary duties that will be imposed upon them, and the serious implications that can follow from a breach of these duties. A person can become a shadow director without realising that they have done so (and indeed with very little appreciation of the consequences) – but the obligations placed upon them can actually be as strenuous as those of an appointed Director.

In the case of Vivendi SA and Centenary Holdings Ltd v Murray Richards and Stephen Bloch [2013] EWHC 3006 the Court held that a shadow director can be subject to the same fiduciary duties as any other director. This case involved a shareholder who dishonestly used his influence over one of the directors of the company in order to extract substantial amounts of money, whilst the company was in financial trouble. The shadow director was found to have breached his duty to act in the best interests of the company and its creditors.

A shadow director is defined as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act” (s. 251(1) Companies Act 2006) and there are limited exceptions to the general rule in relation to professional advisors and parent companies.

In recent months, legal commentators have become increasingly certain that even lenders could be considered to be acting as shadow directors, in certain circumstances. Although there has not yet been a case in which a lender has been held to be a shadow director, there is certainly evidence that lenders should proceed with caution. In Re PFTZM Limited (in liquidation) [1995] BCC 280 the Court decided against holding the lender liable as a shadow director on the basis that the lender was simply protecting their own position, but they acknowledged that a lender could potentially become a shadow director if their actions went beyond this remit. When a company is at risk, it is reasonably common for their major creditors to take an interest in the running of the company. It is important for creditors to take legal advice at this stage, so that they can develop strategies in order to protect themselves from the possibility of being considered to be a shadow director.

This serves as a warning to those who have a strong influence over the management of a company, and highlights the necessity of seeking legal advice in order to ensure that both the individuals concerned and the company are protected.

Donna Bromyard
Business Services Department
Breeze & Wyles Solicitors Ltd

Tel: 01992 558411
Email: donna.bromyard@breezeandwyles.co.uk

 

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