A company executive director is someone who is responsible for managing the company under the law and the company’s constitution. It is widely understood that a director has fiduciary duties such as to act in good faith and to exercise duty of care. But when it comes de facto or shadow directors, some are unsure if they will owe duties of care so we’d like to discuss this issue in this post.
A de facto director is someone who fulfils the role of director without being formally appointed. A shadow director, on the other hand, is someone who makes decisions behind the scenes. Under the Companies Act 2006, both de facto and shadow directors can be held liable for breaches of directors’ duties and are subject to other associated provisions.
The roles of de facto or shadow directors usually come under scrutiny when there is a conflict of interests or when the company is wound up. If you’re a de facto or a shadow director and you’re found to have breached your director’s duties, you can be held liable by the court and even subject to criminal penalties.
Identifying de facto directors
There have been many legal cases involving de facto directors and almost all of them went through a lengthy and costly process. In the landmark Secretary of State for Business, Innovation and Skills v Chohan and others case in 2013, Judge Hillyard gave 10 characteristics that could help to identify a de facto director, though it must be said that not all 10 attributes need to be established.
The 10 characteristics copied from the verdict are as follows:
- A de facto director must presume to act as if he were a director.
- He must be or have been in point of fact part of the corporate governing structure and participated in directing the affairs of the company in relation to the acts or conduct complained of.
- He must be either the sole person directing the affairs of the company or a substantial or predominant influence and force in so doing as regards the matters of which complaint is made. Influence is not otherwise likely to be sufficient.
- Whether the person concerned has undertaken acts or functions such as to suggest that his remit to act in relation to the management of the company is the same as if he were a de jure director.
- The functions he performs and the acts of which complaint is made must be such as could only be undertaken by a director, not ones which could properly be performed by a manager or other employee below board level.
- It is relevant whether the person was held out as a director or claimed or purported to act as such: but that, and/or use of the title, is not a necessary requirement, and even that may not always be sufficient.
- His role may relate to part of the affairs of the company only, so long as that part is the part of which complaint is made.
- Lack of accountability to others may be an indicator; so also may the fact of involvement in major decisions.
- The power to intervene to prevent some act on behalf of the company may suffice.
- The person concerned must be someone who was more than a mere agent, employee or advisor.
How Blackhawk can help
Corporate intelligence is one of our core services. The process of collecting and analysing business information from a wide variety of sources to assess the opportunities and challenges can also be used to help you identify potential risks associating with de facto or shadow directors from a business relationship.
Within corporate intelligence, we have specialist teams looking after due diligence, research, security, risk management and GDPR. All of these teams regularly work together to help you mitigate regulatory and reputation risks. For more information on what we can do for you, call us today on 020 7788 8983 or fill out our online form.
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