When we are doing a question which requires us to discuss
directors’ duties, the first thing we need to do is always determine if the
given character can be considered as a director. This is because only a ‘director’
is subject to the directors’ duties under section
170 to section 177 of the Companies Act 2006.
- De jure director
- De facto director
- Shadow director
Section 250 of
the Companies Act 2006 provides that
director “includes any person occupying the position of director, by whatever
name called”.
I suppose section 250
was designed to overcome these two mischiefs that were left behind:
- Those who held a different official title other than director, for example manager, advisor, etc.
- De facto director and shadow director which are recognised at the common law
In Secretary of State
for Trade and Industry v Hollier (2006), Etherton J stressed that no one can be a de facto and a shadow director at the same time.
You can download Companies
Act 2006 here: http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf
You can download Insolvency
Act 1986 here: http://www.legislation.gov.uk/ukpga/1986/45/pdfs/ukpga_19860045_en.pdf
You can read director's duties here: http://thewallyeffect.blogspot.my/2017/10/directors-duties.html
You can read the role, appointment, removal and remuneration of directors here: http://thewallyeffect.blogspot.my/2017/10/the-role-appointment-removal-and.html
You can read director's duties here: http://thewallyeffect.blogspot.my/2017/10/directors-duties.html
You can read the role, appointment, removal and remuneration of directors here: http://thewallyeffect.blogspot.my/2017/10/the-role-appointment-removal-and.html
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Some tips that will get you along
A de facto
director is one who is not formally appointed as a director, but somehow acts
as if he or she is a de jure
director.
There is a common practice
in many countries where many couple do not get marry but they do behave act as
if they are legally married couple. They live together for years, give birth to
children, etc. Some of the countries consider their relationship as de facto relationship, and the couple is
having various responsibilities and protections under the respective Family Law
Acts, even though they are not legally married.
A shadow director is one who is the ultimate control of the
company, and the de jure director of the company will follow whatever he or she
says.
Take the small (but glorious) country beside my
country as example. The late Mr. Lee was the shadow PM of the country, as his
son, who is the de jure PM of the
country, will follow whatever he says.
De facto director
At this point of time, given that you are doing your
research on de facto director and
shadow director, you are probably on your second or third year. You should be
aware of the meaning of de facto.
While a de jure
director is formally and legally appointed or elected as a director in
accordance to the law, a de facto
director is one who has not been formally appointed but has openly undertaken a
directorial role in the conduct of the company’s affairs: Re Kaytech International plc (1999).
In Secretary of State
for Trade and Industry v Tjolle (1998), Jacob J stated that the essential test is whether the person in
question was ‘part of the corporate governing structure’. This was approved by
the Court of Appeal in Re Kaytech
International plc (1999).
Question: What is the meaning of being ‘part of the
corporate governing structure’? Gemma Ltd
v Davies (2008) suggested that a de facto director must has real influence
in the governance of the company, and HM
Revenue & Customs v Holland (Re Paycheck Services 3 Ltd) (2010) suggested
a de facto director must assume
liability or responsibility as if he or she is a de jure director.
In Gemma Ltd v Davies
(2008) a company secretary, who was the wife of a director of the company but
took no part in the decision-making, was held clearly not a de facto director. According to the
court, she would be considered as a de
facto director only if she has exercised real influence in the
governance of the company on an equal footing with her husband. However it
was submitted that she was merely performing clerical tasks under the direction
of her husband and exercised no real decision-making powers.
In HM Revenue &
Customs v Holland (Re Paycheck
Services 3 Ltd) (2010), the question posted to the Supreme Court was whether
a director of a corporate director of the company, can be liable as a de facto director of the company, and
therefore subject to the fiduciary duties owed to the company. The Supreme
Court (3-2) held that the parent company (the corporate director) and the
director of the parent company are separate legal persons, and the fact that
simply acting as a director of the corporate director was insufficient to make
him a de facto director. According to
Lord Collins, the basis for a de facto director is an assumption of
liability together with his being a part of the corporate governing
structure. Here the director of the parent company was simply acted within
the scope of his duties and responsibilities as a director of the corporate
director, and there was no evidence to show that he was acting as a de facto director of the company in
question so as to make him responsible for the misuse of their assets.
Shadow director
Section 251(1) of
the Companies Act 2006 defines
shadow director as “a person in accordance with those directions or
instructions the directors are accustomed to act”.
Similar to the de
facto director, a shadow director is required to have real influence in the
corporate affairs of the company. Hence in Secretary
of Trade and Industry v Deverell (2001), a professional adviser was held
not a shadow director.
According to Vivendi
SA v Richards (2013), a person can be regarded as shadow director if he
assumes responsibility for acting in relation to the company’s affairs and asks
the de jure directors to exercise
their powers that exist exclusively for the benefit of the company. The court
also stated that a person who gives directions or instructions to a company’s de jure directors in the belief that
they will be acted on, can fairly be described as assuming responsibility for
the company affairs.
In Re Hydrodam
(Corby) Ltd (1994), the issue was whether two directors of the parents
company could be considered as the shadow directors of its subsidiary company.
It was held that being members of the parent company’s board per se was not
sufficient to render them to be shadow director; it must be proved that they
had personally instructed and directed the board of the subsidiary company.
Merely controlling one director will not render the
controller a shadow director; he must exercise control over the whole board or
at least a governing majority of it: Re
Unisoft Group Ltd (No. 2) (1994)
The fact that merely holding the position of directorship of
the parent company does not automatically make him a de facto director or shadow director, provided that he is just
acting within the scope of duties and responsibilities as a director of the parent
company: Smithton v Naggar (2014)
A person who provides advice in a professional capacity is
not a shadow director: Section 251(2)
of the Insolvency Act 1986
However, in Re
Tasbian Ltd (No. 3) (1992) it was held that if the conduct of an adviser in
such that it goes beyond the normal scope of his professional capacity and is
tantamount to effectively controlling the company’s affairs, he will be considered
as a shadow director.
Section 214(7) of
the Insolvency Act 1986 states
provide that a shadow director may be liable to contribute to the company’s
assets if it goes into insolvent liquidation and it is proved that at some time
before the liquidation he knew or ought to have known that there was no
reasonable prospect of avoiding insolvent liquidation.
The fiduciary duties of director
Shadow directors may also be subject to the fiduciary duties
owed to the company those de jure
directors: Yukong Line Ltd of Korea v
Rendsburg Investments Corp of Liberia (No. 2) (1998)
Generally speaking, shadow directors would not usually owe
fiduciary duties to a company because they do not deal directly with corporate
assets, but he is required to declare his interest in any contract with the
company under section 177 and obtain
the approval of members in relation to substantial property transactions under section 190.
However in Vivendi SA
v Richards (2013), Newey J
observed that the shadow directors commonly owe fiduciary duties to at least
some degree. This is because by giving directions to de jure directors, a shadow director assumed responsibility for a
company’s affairs. He concluded that public policy pointed towards the
imposition of fiduciary duties on shadow directors. On this view, all those
involved in directing a company, whether as a de jure or de facto
director or shadow director, are subject to the same fiduciary duties.
Recent development - Small
Business, Enterprise and Employment Act 2015
The Small Business,
Enterprise and Employment Act 2015 has clarified the law regarding the
duties owed by shadow directors. It has amended section 170(5) of the Companies Act 2006, which now provides that
the general duties of directors, found in section
171 to section 177 of the Companies Act 2006, also apply to
shadow directors ‘to the extent they are capable’ of doing so.
Thus, it must be proved that the shadow director is in fact
directing the de jure director and
they do have the capacity to ‘breach’ to duties.
It appears that some of the director duties, for example
duty to act within powers under the company’s constitution, are arguably cannot
be breached by a shadow director since such powers are conferred by the company
constitution.
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Feel free to comment if you find any mistakes, or if you have anything to share.
Please read the disclaimer (at the top of the page) before proceeding.
Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.
Feel free to comment if you find any mistakes, or if you have anything to share.
COPYRIGHTS © 2017 WALLACE LEE CHING YANG. ALL RIGHTS RESERVED.
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