Danger Lurks in the Shadows

Article

16 August, 2007

Companies are increasingly making use of non-executive directors and external advisors who are not formally appointed as directors to their board but who act, in effect, as directors of the company.

It is not always appreciated by non-executive appointees that where a person acts as a director - in the sense that their instructions or directions are normally acted upon by the company - they are for some purposes in the same legal position as 'proper' directors of the company. People in this position are known as 'shadow directors'.

Unfortunately for such people, danger lurks in shadow directorships because the main way in which their position resembles that of actual directors is that they can share the civil liabilities of other directors in the event of a corporate insolvency. This may lead to them being required to contribute funds to pay creditors of the company if it becomes insolvent. They also face the possibility of being disqualified from acting as a director by the Department of Trade and Industry where their conduct warrants such a ruling.

If you are a 'shadow director' or if your company has 'shadow directors' you must also be aware that the duties which directors owe to their company will be based in statute from October 2007, and the majority of the duties will apply to 'shadow directors'. In May 2007 Lord Goldsmith commented 'The Law is still developing. It would not be right for the general duties not to apply at all to shadow directors, but the law may develop in such a way that some do and some don't. It is right as now to leave those areas to the courts…'

If you are asked to be a non executive director or if your company has non executive directors or you participate at the decision-making level of a company's management as a consultant or advisor, take care.

Recently, a shadow director of a company was ordered to repay over £850,000 plus compound interest after the company with which he was involved went into insolvent liquidation.

"If you are operating at a senior level in the company and are in effect 'part of the team', you may be at risk, even though your name is not on the letterhead," says Pauline Rigby. "Ignorance of one's responsibilities is no defence."

Pauline Rigby

Tel 01254 222399, or email Pauline Rigby

Back

Make an enquiry