Complete Guide to Shadow Director

After forming a limited company in the United Kingdom, you must appoint a director who makes business-critical decisions. The director also approves expenditures and oversees audits and employee performance. But what happens when the director is not around? That's where a shadow director takes directors' roles. However, the roles of different types of directors confuse many people.

In this guide, we’ll discuss what a shadow director is, as well as their responsibilities, risks, and responsibilities. So read to the end to determine if you can appoint a shadow director in your company.

What's a Shadow Director?

A shadow director is an individual who plays the role of a director but isn't appointed to the board of directors. According to the Companies Act 2006, a shadow director is someone whose guidance or commands are followed by the official directors of a company, even though they may not hold an official position within the company's leadership structure.

Here are instances where an individual can be classified as a shadow director:

• In cases where the company has treated you like a director, it could be when they call you a director in conversation or use the word "director" in written messages about you.
• Instances where it's believed you're responsible for a whole section of the company. Proof might include when you've overseen hiring top staff, been the only one signing a company account, or managed an entire team.
• In cases where a third party refers to you as the director, this may be because you are taking charge of business negotiation on behalf of the company.

Remember, they are mentioned in an official capacity to ensure the right individuals are held responsible when a business faces allegations of wrongdoings. This is because directors are deemed reliable even though accusations are made against a company. However, if a court determines the existence of a shadow director, they're held accountable instead.

Is the Shadow Director Liable?

In instances where you are classified as a shadow director, know you hold the duties and responsibilities of a director. Remember, a director of a limited company is responsible for running the business and carrying out other responsibilities like:

Directors' Duties in a Limited Company

Apart from directors' legal responsibilities to the Companies House, other general duties are provided in the Companies Act 2006.

Let's check the duties of a director in a limited company:

1. The company constitution

a director must operate within their authority as outlined in the company's rules and should utilize their position for its intended purpose, refraining from acting for personal gain.

2. Promote the business's success

Directors must act to foster the company's success, considering the overall impact on the business when making decisions.

3. Exercise independent thought

As a company director, you can provide an informed view of the company's activities and have independent thoughts.

4. Refrain from conflict of interest

as a director, you are required to steer clear of situations where conflicts of interest arise, as such disputes can compromise their impartiality.

5. Practice skill, care, and diligence

As a director, you must exercise reasonable care, expertise, and diligence. If you possess particular skills, you are held to a higher standard due to your expertise.

6. A director mustn't accept third-party benefits

As a director, you're not supposed to take third-party benefits because of your role.

7. Declare interest in a proposed arrangement or transaction

You must disclose the details of your involvement or interest in a proposed or ongoing transaction to ensure transparency and awareness within the board regarding their potential conflicts of interest.

Remember that a shadow director plays the same role as a company director, so a business must be careful when identifying a shadow director and ensure legal requirements are fulfilled.

There can be severe repercussions when a shadow director fails to fulfil their duties, regardless of whether they were formally appointed or not. You should be cautious about unintentionally taking on this role, as claiming ignorance about its responsibilities may not be a valid legal defence.

Read here Top 11 Roles and duties of a UK company director

How is a Company Director Appointed?

In the UK company structure, a limited company by shares cannot be registered and operated without one person taking the director position. Corporate appointments are also allowed as long as the individual is appointed.

Several requirements must be met for a director appointment to be considered valid. They include:

• The person must agree to serve as a company director
• Complete the required documents accurately, submit them, and ensure Companies House approves them. This includes the IN01 form if the director is appointed during the company formation process, or the AP01 form if the company is already established.
• Meeting minutes must be recorded and stored electronically or in the company's official minutes book.

A director appointed through this process is called a 'de jure' director. This is a company director appointed using the correct steps in the law's eyes. There are other types of directors apart from the shadow and 'de jure' directors. They include:

• De facto director: A person recognised as a company director who presents as such but has not been officially appointed.
• Alternate: An alternate director substitutes for a legally appointed director when they are unavailable. Alternate directors are treated and have responsibilities of the director they temporarily replace.

Why Would a Person Become a Shadow Director?

There are numerous reasons why a person would knowingly take the role of a shadow director:

• They were disqualified from being standard directors but still wanted to operate the company.
• They want to run the business anonymously, considering if they become a director, their information will be publicly available in the Companies House register.
• They wish to manage a business without assuming any associated directorial responsibilities.

However, sometimes, becoming a shadow director is not a conscious decision. You may hold a considerable part of company control without being a shadow director.

Can Company Advisors Become Shadow Directors?

According to the Companies Acts, an individual is not considered a shadow director if the company acts upon advice they provide in a professional capacity as an external consultant. This could be lawyers, accountants, and consultants.

This can be confusing because of the blurred line between advising and directing. The notion of a shadow director is intended to identify individuals who seek to exert directorial-level influence over a company's affairs without assuming the responsibilities of a director.

Advisers like advisory board members and management consultants must exercise caution to avoid assuming too much of a directorial role, even with good intentions, if they wish to prevent the associated responsibilities and liabilities.

When is a Shadow Director Identified?

A shadow director is identified when issues arise in the company, and someone must be responsible. If a court determines someone as a shadow director, it will treat them as if they were legally appointed. The critical consideration is the level of influence the individual or entity had on the company's affairs. If the court establishes that the board consistently heeded their influence, they will likely be deemed a shadow director.

A shadow director might face liability if claims are made against the company directors for failing their duties or committing corporate offences. One such offence is wrongful trading, where a director fails to act in the best interests of the business's creditors, as stipulated by the Insolvency Act 1986. If found guilty, the shadow director can be held accountable for the company's losses following liquidation.

How to Avoid Falling into Shadow Directors Risk and Liabilities

The court defines shadow directorship as a situation where the company's board follows the advice of an individual over an extended period.   Directors may act on an adviser's instructions without this habit, without making it a habit. However, if seeking the person's advice becomes the norm for the board, that individual transitions into a shadow director. According to company law, becoming a shadow director involves a cumulative process that unfolds with time.

Although companies can rely on advice from advisers like consultants, there's no implication that these advisers are shadow directors. However, if a company faces difficulties and accountability is sought, there may be a retrospective examination of their roles and level of influence. So, as a  Professional adviser, be mindful of this possibility when offering advice to a company.

Here are steps you can take for self-protection:

1. Create an agreement or a contract that defines the extent of your involvement with the business. The service agreement should focus on services in specific areas of the business and state that you shouldn't be treated as a shadow director.
2. Avoid board meetings as much as you can if you must ensure they are recorded in the minutes you're in attendance instead of present. The standard practice is that directors and the company secretary are considered "present," while all others are deemed "in attendance."
3. Make it clear to other parties that you're not a shadow director and are acting as a professional adviser.
4. Ensure the company doesn't portray you as a director through titles used in written communications.
5. Let the board of directors make the company's significant decisions. Remember, your actions will be examined in case of insolvency. Your status and liability will be determined by how consistently and decisively you exercise authority in the company.
6. Don't get involved in business finance, such as participating in negotiations and other roles of an appointed director.
7. Get legal advice

Shadow Director vs. ‘De Facto’ Director: What's the Difference?

A de facto director is a person who takes on all the responsibilities of a director, but they are not formally appointed, just like a shadow director. On the other hand, a shadow director refers to an individual's power, while a de facto director is derived from the tasks someone performs in a company.

Form Your Company with Incorpuk Today

At Incorpuk, we will help you through the company formation process and file your confirmation statements to help your business stay compliant. Whether you're a UK resident or a non-UK resident, our team is ready to provide guidance and help you establish your company in the UK. Contact us here today.

Winding Up

A shadow director is an individual with significance in influencing decision-making, yet they are not formally appointed to the board. Despite the lack of official status, they bear similar responsibilities and liabilities as de jure directors. The distinction between advising and directing a company can be confusing. It poses a potential risk for professionals providing advice to limited companies if a company becomes insolvent. Shadow directors must exercise caution, define roles clearly, and seek legal advice to mitigate potential liabilities. Do you have questions about shadow director? if yes, contact Incorpuk for help.