In limited company parlance, directors are individuals (but sometimes they can be other companies) tasked with running the company. There is, however, an element of confusion surrounding this specific company officer because there are different types of directors.
In this post, we focus on the shadiest of these – shadow directors. Let’s get started.
What is a shadow director?
A shadow director is a person (or corporate entity) who holds a significant influence over a company’s board of directors, without formally being appointed as a company director.
As the term ‘shadow’ would suggest, shadow directors are not a legitimate form of directorship.
The Companies Act 2006‘s definition of a shadow director is: “A person in accordance with whose directions or instructions the directors of the company are accustomed to act.”
Shadow directors are referenced in an official capacity as a way to hold the correct people accountable when a company is accused of wrongdoing. Typically, if this accusation is being levelled at a company, the directors are culpable. However, if a Court decides that a shadow director was in place, they should be held accountable.
How directors should be appointed
A private company limited by shares, the most common of the company structures available in the UK, cannot be formed and then operated without at least one person taking on the role of director (corporate appointments are permitted as long as a person is appointed too).
For a director appointment to be legitimate, a number of things need to happen:
- The individual must provide their consent to act as a company director
- The necessary forms are correctly completed, filed, and accepted at Companies House (the IN01 if the director is being appointed during the company formation process, the AP01 if the company has already been formed)
- The required meeting minutes are taken and filed electronically or in the company’s minutes book
A director appointed in this way is sometimes referred to as ‘de jure’, meaning ‘by law’ in Latin. The correct steps have been taken and, in the eyes of the law, the person is a director.
The directors of a company make up the board of directors. Even if a company were operating with just one director, that person would still be considered as the board of directors.
A director’s responsibilities and duties
These duties are:
- To work to the company’s constitution
- Promote the success of the company
- Make independent judgement
- Exercise reasonable care, skill, and diligence
- Avoid conflicts of interest
- Refuse third party benefits
- Be transparent about any interests in transactions
In cases where a shadow director is found to be in place, these duties are generally passed on to them – despite the fact they have not been formally appointed as a company director.
Why would someone become a shadow director?
The main reasons why someone would knowingly be acting as a shadow director are:
- They has been disqualified from being a company director but want to persevere in running a business
- They want to run a business anonymously (remember, director information is published on the Companies House register)
- They want to run a business, but do not want to take on any of the responsibilities that come with being a company director
Being a shadow director is not always a conscious decision. It’s possible for someone to hold a large amount of control without intending to be a shadow director.
What’s the difference between a shadow director and a de facto director?
‘De facto’ means ‘from the fact’ in Latin.
A de facto director is someone who has taken on some or all of the responsibilities and duties of being a director, but, like a shadow director, has not been formally appointed.
A shadow director’s directorship comes from the power(s) they exert. A de facto director’s directorship comes from the tasks that they perform.
Professional advisors are not shadow directors
As outlined in the Companies Act 2006, there may be times when a company pays a specialist to provide a service, such as an accountant or consultant. In these instances, the specialist would not be considered a shadow director.
We can help appoint directors the right way
As highlighted in this post, appointing a director is not simply a case of completing an AP01 form and sending it to Companies House. For a company to be fully compliant, it must follow the correct process for appointing a director.
With our Director Appointment & Resignation Service, available for only £29.99 (per director being appointed or resigned), we will carry out all of the necessary tasks required to appoint a director in the proper fashion.
- The appointment letter
- The board resolution
- Submission of the AP01 to Companies House
Thanks for reading
So there you have it. A shadow director is an individual (or corporate entity) who directs a company’s board of directors, even though the person has not officially been appointed as a director. The board then acts on these instructions.
It’s an important term in company law, as it ensures that the correct person is held accountable in cases of wrongdoing.
We hope you have found this post helpful. Please leave a comment if you have any questions.