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Shadow Directors

In 1985 there was a major reform of company law. Among the reforms, and one then hailed as particularly significant, was the introduction of the idea of a 'shadow director', a man or woman who stays off the formal (and personally responsible) list of directors, but who nevertheless controls the company's activities to a significant extent.

It has been common for someone to be involved in one company's failure, but then to resurrect the business, hiding the fact of his involvement in the new company behind more easily approved directors. There are many other, usually unlawful or shameful reasons, for so hiding. The Companies Act 1985 set out to make such people as responsible in law as those who stood up in public to be counted.

In the year 2000, we face another possible re-writing of company law, but, perhaps surprisingly, it is only now that the courts have come properly to consider who actually is a shadow director. In the case of Secretary of State for Trade and Industry v Deverell and another Times 21-Jan-2000, the court considered the definition, for the first time in a case where the result actually depended upon the meaning of the terms.

The court repeated the often heard, but sensible mantra, that we should be careful always to start with the words actually used in the Act, and to be careful before wandering off into the fields of speculation which lay beyond that definition. The words were used in several statutes, some of which imposed criminal liability in order to protect the public, and so the court should be careful not to construe it too closely.

A shadow director is one who can be said to have a 'real influence' on the affairs and management of a company. That influence does not have to affect the full range of all the company's affairs, but is particularly significant when it affects those area concerned particularly with corporate governance, and financial management.

Mercifully, the Court confirmed that professional advisers, bankers, solicitors, and accountants, would not normally be considered to be shadow directors, provided that and for so long as, their advice stayed within the range of their usual professional duties.

Important: Please note that our law-bytes are retained for archival purposes only. The law changes, and these notes are often, now, out of date. You must take direct advice on your own personal situation and the law as it currently stands.
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18 October 2013 103 18 October 2013