People who give directions or instructions to company directors and are therefore found to be ‘shadow directors’ may now owe fiduciary duties to the company, in addition to other potential liabilities, following a court ruling.
A shareholder of a company in trouble used his influence to make the sole director of the company pay him a salary and other money from the company, without providing any benefit or services back. These payments were made while the company was insolvent.
The company went into liquidation and its assignee claimed compensation from the shareholder, claiming:
he was a shadow director;
a shadow director owed the company fiduciary duties just as if he had been formally appointed as a full de jure director;
the shareholder had breached those duties.
A shadow director is defined in company law as someone who has not been formally appointed as a director but “in accordance with whose directions or instructions the directors of a company are accustomed to act”. There are exceptions, including for advice given by a person in a professional capacity.
Traditionally, the courts have held that shadow directors can be liable for insolvency-related offences such as wrongful trading (trading when they knew or ought to have known it could not avoid an insolvent liquidation) but they are not subject to the same fiduciary duties (such as the duty to promote the success of the company and act in good faith in its best interests) as the de jure directors.
However, the High Court ruled that the shareholder was a shadow director and he did owe fiduciary duties to the company – at least in relation to the directions or instructions he had given the director. This was because, by giving directions or instructions, a shadow director assumes responsibility for the company’s affairs and should therefore be subject to fiduciary duties.
The court also decided he had breached those duties because the company was insolvent and his instructions had reduced the assets available to its creditors. Their interests were therefore prejudiced.
Those at risk of being found to be shadow directors can include, for instance, bankrupts who are no longer allowed to run companies themselves, but try to do so through their spouse, relatives or friends.
Companies (and the individuals concerned) should ensure they can spot when someone could be treated as a shadow director so they can formally appoint them as a de jure director, or take steps to stop them acting as a shadow director. They should be particularly vigilant if there is a potential insolvency.
Case ref: Vivendi SA and Centenary Holdings Ltd v Murray Richards and Stephen Bloch EWHC 3006
Alex Cook is a Director at Helix. Alex initially trained academically as an unregistered barrister and was a Partner and Head of Civil Litigation at a large firm based in the South East before joining Helix Law. As well as focussing on expanding Helix, Alex specialises in commercial and property related litigation and he has acted for a broad range of clients including offshore property investment funds, small businesses and individual property owners.
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.