Shadow directors - a wider definition 2

United Kingdom

In a recent case, The Secretary of State for Trade and Industry v John Deverell and Peter Hopkins, the Court of Appeal gave some judicial guidance on interpreting the definition of "shadow director" contained in both section 22(5) of the Company Directors Disqualification Act 1986 (the "CDDA") and section 251 Insolvency Act 1986. The Court of Appeal's interpretation of "shadow director" was considerably wider than that of the court of first instance. With the exception of professional advisers, the basic requirement is whether the person exerts real influence over the company's affairs. In addition, the influence exerted by a shadow director over a company's directors need not relate to all aspects of the company's activities, provided it covers the core activities. This wider definition may cause concern to non-professional company advisers and others closely involved with companies.

More detail...

The definition of shadow director is:

"a person in accordance with whose directions or instructions the directors of the company are accustomed to act (but so that a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity)".

Overruling the first instance decision, the Court of Appeal made the following points:

1. The purpose of the CDDA is the protection of the public and, on that basis, the definition of "shadow director" should not be strictly construed merely on the basis that quasi-penal consequences can result.

2. The purpose of the definition is to identify those, other than professional advisers, with real influence in the company's corporate affairs.

3. "Directions or instructions" should be interpreted on an objective basis and can include both words and conduct. It is not crucial to show an expectation on the part of either the "shadow" or the board that the communication will be followed.

4. The fact that professional advice has been expressly excluded from the definition means that all other advice may be included.

5. It is not necessary to show that the board casts itself in a subservient role to the "shadow". Obviously, evidence of such behaviour will support the argument that such a person is a shadow director. However, to require this in all cases would require a greater degree of compulsion than is intended by the words "the directors of the company are accustomed to act".

6. The Court of Appeal also said that it is not necessary for a shadow director to give directions in respect of all or most of the corporate activity of the company, provided that the directors cover the matters essential to the company's corporate governance, including the company's financial decisions. Furthermore, although shadow directors often "lurk in the shadows", this is not a pre-requisite and an individual could be a shadow director notwithstanding that they do not try to conceal their involvement in the company.

The relevance of this decision is that shadow directors can, alongside their duly appointed fellow-directors, be held personally liable to contribute to the assets of an insolvent company under the wrongful trading provisions of the Insolvency Act 1986, and can be disqualified from acting as directors under the CDDA.

For further information, please contact either:

Inga West, an assistant in our corporate recovery group

Tel: 0171 367 3478

e-mail imw@cms-cmck.com

or

Dan Hamilton, a partner in our corporate recovery group

Tel: 0171 367 2796

e-mail: djh@cms-cmck.com