When involved in the management of a company, there is a risk, particularly at a more senior level, of individuals being deemed a director without necessarily knowingly and deliberately being appointed as such, resulting in certain duties (and potential liabilities) being imposed on those individuals which they may not have anticipated. Equally, there can be situations where individuals who appear to be the public face of the business may not actually be a director at all. Several recent cases in the area of director disqualification have brought these issues to light once again.
Unhelpfully, there is no statutory definition of “director” in the Companies Act 2006 (“CA06”), but rather s. 250 states that director includes any person occupying the position of director, by whatever name called.
Under English law there are three recognised types of directors:
- De jure directors
This is the most straightforward and generally recognised type of director, being a person validly appointed with their consent. The company must maintain a register of its de jure directors and notify the registrar of companies of the appointment or resignation of any such director – a list of the directors of an English company should be publicly available for inspection at Companies House.
- De facto director
A person who assumes the role of director, without validly being appointed as such – they are a director in fact rather than in law. There is no single test, but the overriding question is whether the individual is part of the corporate governance structure, and whether that person assumed the duties and responsibilities of a director.
- Shadow director
Section 251 CA06 states that a shadow director is “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”. Although the name may suggest otherwise, it is not necessary for the person to lurk in the shadows.
What is needed is, first, a board of directors claiming and purporting to act as such; and, second, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.
Consequences of being a director
A director, whether de jure, de facto or shadow, is subject to statutory duties set out under the CA06. They will also risk falling within the meaning of director for the purposes of:
- misfeasance claims under the Insolvency Act 1986 (“IA86”);
- liability for fraudulent and wrongful trading and certain other antecedent transactions under the IA86; and
- disqualification under the Company Directors Disqualification Act 1986 (“CDDA”).
A shadow director may also be liable for certain offences under the Financial Services and Markets Act 2000.
The concepts of shadow and de facto directors are distinct but with some overlap. The court will typically look at the cumulative effect of activities undertaken by a person, and the overall factual context of those actions.
Following Smithton v Naggar, Justice Falk in Re Keeping Kids Company (“Kidsco”) considered the relevant factors in determining whether a person may be a de facto director, and these considerations were subsequently followed by Justice Meade in Bisco v Milner (“Bisco”):
- title: typically, the CEO of a commercial company will also be a director, but these are distinct roles. Having the title of CEO of a company does not, of itself, make a person a de facto director in a situation where they have not otherwise been appointed and do not exercise ultimate decision-making of the company. In Kidsco, although the CEO had significant influence, she was not part of the ultimate decision-making structure of the company – a person can only be a de facto director if their status is allowed to become elevated.
- public perception: being the public face of a business is neither determinative nor of significance unless the role is one that is directorial in nature. In Bisco, it was found that the nature of directions being given, and information being provided, was of the kind and level of the highest decision making, giving the appearance of being a director even though the defendant in question had no formal title, either within the company or presented to the outside world.
- factual/corporate structure: there is a distinction between decision-making at the level of director, and making decisions under delegated authority, subject to supervision. A person engaged to perform delegated functions, which are subject to the supervision and control of directors, cannot properly be said to have assumed the duties of a director simply because of some indeterminate dividing line between what may be regarded as an appropriate or inappropriate level of delegation. As a matter of substance, a clear distinction between the board and the management team to which responsibilities may be delegated is likely to mitigate the risk, whereas the deferral of key decisions to a particular individual or group of individuals will likely exacerbate the risk – where does the accountability lie, and who is the ultimate decision-maker? In Bisco, there was no level of governance above the defendant in question, who was found to act as co-equal with his fellow de facto director in setting strategy and making significant operating decisions.
- motivation and belief: whether a person is a director is an objective test, and they will not avoid liability based on the subjective good faith belief that they were not acting as a director.
Similarly, a person may act as a shadow director where:
- they exercise real influence over the corporate affairs of the company;
- where communications, whether by words or conduct, are, objectively, classified as a direction (the understanding or expectation of the giver or receiver being irrelevant);
- irrespective of whether the board of directors exercised discretion of its own volition on occasions where a shadow director did not give advice; and
- irrespective of whether the board considered or simply accepted the directions.
Advisors and consultants
Whilst the law is clear that a person will not be deemed a shadow director solely by reason of the directors acting on advice given in a professional capacity, being appointed as an independent advisor or consultant does not necessarily avoid liability particularly where that role goes above and beyond an arms-length professional relationship.
In Bisco, the defendant argued he was a consultant and not a de facto director. However, it was found that the frequency and detail of communications with the company was far greater than would be consistent with being a consultant and his remuneration was out of proportion with the role of consultant, being consistent with the other directors. Justice Meade found that his argument of consulting on an arms-length basis “was obviously not true”. Often, the question goes to the level of involvement, control and authority – certain matters taken, by themselves, are of little significance, whereas others, such as the monitoring of a company’s trade and control of bank accounts are far greater.
Lenders and creditors are entitled to protect their interests without necessarily becoming shadow directors and are entitled to keep a close eye on what is being done with its money and impose conditions on the company in this regard. However, a lender should exercise some caution, particularly where a company experiences financial difficulty and the lender or creditor steps in, whether itself or by the appointment of an advisor, to take a more active role, over and above the conditions imposed by the finance documents, to make decisions for directors. The application of commercial pressure is not the same as giving an instruction or direction from which the status of shadow directorship flows – a successful claim of a lender acting as a shadow director must go beyond this – however it is likely that the active participation in board meetings and the giving of instructions from which action by the directors follows could very much result in a shadow directorship.
The liability of the partners depends on the type of partnership; a limited liability partnership (“LLP”) has a separate legal personality, is run by the partners as agents for the LLP and the liability of the partners is limited to their contribution. Indeed, the duties and responsibilities of partners of an LLP are not dissimilar to those of directors, and the consequences for breach may land such a partner squarely within the ambit of the IA86 and the CDDA. Further, the CDDA confirms that its provisions not only apply to members of an LLP, but also to “shadow members”.
The wide application of the CDDA was confirmed in the recent case of Bell Pottinger. The members argued that they were not members of the management board of the LLP, nor involved in or responsible for the business and affairs of the LLP. Justice Green held that any member of an LLP was potentially liable to disqualification proceedings under the CDDA. The application of s.6 was not limited to those members who sat on the LLP's management board or whose position was equivalent to that of a company director; indeed, there is no requirement to have a management board, or any particular structure of an LLP, and the application of the legislation is simply to the “members” as a general body. Justice Green also confirmed that the ambit of the CDDA applied to general partnerships at least to the same extent as LLPs, finding that Parliament has shown a clear intention to cast the net widely in the application of the CDDA.
It is important to know and understand the implications of acting as a director (or partner), by whatever name, as the law imposes a wide range of duties and responsibilities on such persons, which come with a range of penalties and liabilities for breach; these duties and responsibilities cannot be avoided simply by not being formally appointed to such a position.
If you have a particular situation you would like to discuss in more detail, please contact the authors, or any member of the Brown Rudnick Restructuring team.
 Re Hydrodam (Corby) Ltd  2 BCLC 180.
 Smithton Ltd v Naggar  1 WLR 189
  EWHC 175 (Ch).
  EWHC 763 (Ch).
 Secretary of State for Trade and Industry v Deverell  Ch. 340
 Re Tasbian Ltd (No 3)  BCC 358
 Ultraframe (UK) Ltd v Fielding  EWHC 1638 (Ch)
 Standish v Royal Bank of Scotland plc  EWHC 3116 (Ch)
 Bell Pottinger Private Ltd, Re  EWHC 672 (Ch)