Shadow Directors Case Study

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To what extent should shadow directors be liable? 1.0 Separate Legal Personality and the Board 1.1 Upon incorporation, a company is recognised as a legal person with its own rights and obligations. Though, a company is a legal entity, it cannot operate without its organ namely, the Board of directors. The principle of limited liability flows from the concept of separate legal personality in that the assets and liabilities of the company belong to the company and not to its shareholders and directors . 1.2 Directors owe fiduciary duties to the company and are empowered to manage the company in good faith, diligence and care. Whilst de jure directors automatically owe fiduciary duties to the company, the position of the shadow directors…show more content…
found in relation to section 214 of the Insolvency Act that “the directors of the company must be known; there were directions or instructions which was given in relation to the company; that directors acted in accordance with the directions; and that they were accustomed so to act.” The Judge concluded that “what is needed is firstly, a board of directors claiming and purporting to act as such; and secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.” 2.5 An important point outlined in Re Hydrodam (Corby) Ltd (supra) was that a shadow director would not want to claim to be a director but would rather prefer to ‘lurk in the shadows’, to flee the obligations of a company’s directors. However, in the recent case, State for Trade and Industry v Deverell , Morritt LJ stated that a shadow director may openly operate as one. This was also noted in Re Paycheck where Lord Walker stated, “a shadow director need not be hidden from view.” It could be that a subsidiary’s board are habituated to act upon the parent company’s directions…show more content…
The rationale being that section 212 is applicable to company’s officer only and the definition of officer under the IA 1986 does not include shadow director . Nevertheless, provision is made to capture those who are not officer but, are ‘concerned, or has taken part, in the promotion, formation or management of the company’ . In QEB Metallics Ltd v Peerzada , the Court said that the third defendant ‘was the controlling mind behind the claimant company (Q) and was at the epicentre. He was more than a mere manager and controlled Q and its activities and had the real influence in Q’s corporate affairs’. It follows that shadow director can be held liable under section 212 as the definition of director is so widely drafted, i.e., it is believed that they are to be regarded as director even though not appointed. 4.3 Fraudulent Intent Dignam and Lowry said that where the company was used for fraudulent trading, a director cannot hide behind the corporate veil and avoid personal liability for the company’s debts . Fraudulent trading may result in both civil and criminal sanctions. While the criminal offence is found in CA 2006, section 993, the civil provisions are found in IA 1986, ss.

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