Shadow directors

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Why it matters

  • Shadow directors may be personally liable for wrongful trading if the company is wound up.
  • Shadow directors are subject to statutory duties in the Companies Act 2006, for example, to declare their interest in a proposed transaction and to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole.
  • They may be at risk of disqualification as a director.

What is a shadow director?

  • The statutory definition is that a shadow director is a person in accordance with whose instructions the company is accustomed to act.
  • To avoid being a shadow director, therefore, the key is to avoid the board acting on your instructions.

What categories of person are particularly at risk?

  • Parent companies who are directing the board of a subsidiary.
  • Investors who have appointed a representative to an investee board and who are effectively directing its operations.
  • Consultants appointed to help a company trade through its difficulties.
  • Banks and other lenders who become too closely involved in the borrower’s affairs.
  • There is an exception for the giving of professional advice.

Practical tips

  • Avoid making or influencing major decisions at board level.
  • Avoid exercising powers of veto.
  • Ensure that any advice to the board is presented as a recommendation, rather than an instruction, with an explanation of why the course of action is recommended.
  • Any recommendation should not be accompanied by a sanction if it is not complied with.
  • Ensure that your attendance at a meeting is noted as being in the capacity of “In attendance” or “Observer”.
  • Do not negotiate with third parties on behalf of the board.
  • Do not control executive appointments.
  • Do not sign documents on behalf of the company.
  • Do not exercise de facto control over the cheque book.
  • Do not decide which creditors to pay.
  • If you are employed by a lender, make sure you make clear to the board of the borrower, preferably in writing, that you are acting for the lender.
  • If you are relying on the professional advice exemption, make sure you stick to giving professional advice and do not stray beyond that boundary.

The key is to avoid a pattern developing whereby the board becomes accustomed to acting upon your instructions. Doing the above actions once, or even twice, may not present a risk – but the more it happens the greater the risk.

For further information on the role of directors and their duties please refer to our little green book of directors’ duties. Our free pocket sized guide to your legal obligations as a director of a limited company.