Directors and Officers

Lurking in the shadows - When is a "director"
a director?

30 March 2020

When is a director a director? At first glance this may appear to be a facile question. Why would individuals who only carry the title “director” fall within this group? Surely a director must be someone who has been formally appointed as a director?


Well, yes and no. For instance, someone who is involved in the day to day management of a business, but has not been formally appointed as a director or someone who tells the board what to do may also be considered to be a director for the purposes of company law.

Directors who have not been formally appointed might nonetheless be subject to the same statutory duties and obligations, and potential sanctions, as are imposed on formally appointed directors. For this reason, the answer to someone’s status may only be evident after some digging.

What type of director are you?

There are three categories of director recognised in law.

A de jure director is the most common form of director. A de jure director is someone who has been validly appointed as a director. Their appointment must be registered at Companies House using Form AP01 (or Form AP02 in the case of a director that is a corporate body or firm) and their details will appear on the public register.

A de facto director can be broadly described as being a person who occupies the position of director by way of their conduct but they are not validly appointed as such. This includes someone who acts as a director but they use a title other than director. It may also include a person who for all intents and purposes is a director but for some reason their appointment is defective.

Case law suggests that in order to determine whether someone is a de facto director, that person must undertake responsibilities that only a director of the company (and not, for example, a manager below board level) could perform. Whether or not their actions are those that only a director of the company could carry out is determined objectively. It is not sufficient for someone to argue that they thought, in good faith, they were not acting as a director.

A shadow director is defined in the Companies Act 2006 as a person in accordance with whose directions or instructions the directors of a company are accustomed to act.

This definition is not intended to catch people who, in their capacity as professional advisors, provide advice to the board which the directors then act upon (note it may catch non-professional advisors who instruct the board). There are also certain exemptions for a corporate director that is holding company of a subsidiary and as such the directors of the subsidiary are accustomed to act in accordance with its directions or instructions.

An example of a shadow director would be a shareholder or an investor or, in many cases, a person who has been disqualified from acting as a director, who instructs the board to pursue a certain course of action.

What are the consequences of being a de facto director or a shadow director?

It is well established that de jure directors owe various duties to a company, including the general statutory duties set out at sections 171 to 177 of the Companies Act 2006, e.g. acting within their powers, to avoid conflicts of interest and to exercise reasonable care, skill and diligence.

To what extent, if at all, do these duties apply to de facto directors and shadow directors?

De facto directors fall within the definition of ‘director’ contained in s. 250 Companies Act 2006 (i.e. a director by conduct) and are therefore subject to the same duties as de jure directors.

The general duties also apply to shadow directors to the extent that they are capable of applying (the starting point being that the general duties apply unless they are not capable of applying).

In the event that a company fails, the spotlight will fall on the board, whether the individuals concerned are de jure, de facto or shadow directors. Like de jure directors, de facto directors and shadow directors may be subject to criminal liability, disqualification, and liability for wrongful trading under the Insolvency Act 1986 if they are found to have breached their duties. In particular, directors may be personally liable to account to the company for any loss of profit or benefit received, as a result of a breach of their duties.

It is therefore important for someone who has not been formally appointed as a director to understand whether they may nonetheless be deemed to be a director.

If you are unsure whether your role within the company amounts to holding the office of director in all but name then you should seek legal advice so as to make sure you understand your legal duties.

Further information

If you have any concerns or require further information about directors’ duties and their potential implications, please contact a member of our directors and officers team.

About the author

Luke Gregory is an Associate in the Corporate and Commercial team, he works on a broad range of corporate and commercial matters including advising on company incorporation, bespoke articles of association and shareholder agreements, corporate governance, and Companies Act procedures such as off-market share buybacks and the removal of company directors. Contact Luke.

 

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