What Is a Shadow Director & Are They Liable?

January 28, 2022 / Business Insolvency

The director of a limited company is registered with Companies House and is required to take on specific responsibilities and statutory duties upon being appointed.

However, if there is an individual that offers guidance and advice to the company that is regularly listened to and acted on, then they might be considered a shadow director.

If the limited company becomes insolvent, the shadow director will understandably wish to know whether they will be held liable, as this can have wide-reaching impacts for the individual.

To help, Clarke Bell has put together this guide, outlining what a shadow director is and whether they are liable.

What is a shadow director?

The Companies Act 2006 defines a shadow director is as a person whose ‘directions or instructions the directors of a company are accustomed to act.’

There are several instances in which an individual may be considered a shadow director. Although they are often linked to financial situations, there are other situations that you may be deemed a shadow director.

Some common examples of when you might be classified as a shadow director include:

  • Instances in which the company has portrayed you as a director: this might be verbally or by using the word ‘director’ in written communications when referring to you.
  • Instances in which it is assumed that you have responsibility for an entire area of the business. Evidence of this could be when you have taken charge of hiring senior members of staff, you have been the sole signatory on a company bank account or you are in charge of managing an entire team.
  • Instances in which third parties classify you are a director. This might be because you are often in charge of negotiating on the company’s behalf, for example.

Are shadow directors liable?

Those are the instances in which you might be classified as a shadow director, but what does this mean in practice?

Shadow directors are deemed to hold the same lawful duties and responsibilities as directors.

After all, the director of a limited company is not only responsible for the running of the company, they also have a number of other duties to which they must abide.

A director’s duties include:

  1. The company’s constitution: this means that a director must act within their powers under a company’s constitution and must use their directorship for the intended purpose, not acting for personal benefit.
  2. Promote the success of the company: this means that directors must also act in a way that promotes the success of the company, taking into account the consequences of the whole business when they take action.
  3. Exercise Independent judgement: it is expected that directors develop their own informed view on the company’s activities and exercise independent thought.
  4. Practice care, skill and diligence: the director must act with reasonable care, skill and diligence. If the director has a specific skill set then they are expected to meet a higher standard because of this.
  5. Avoid conflict of interest: directors must avoid conflict of interest, which can impact their objectivity.
  6. Don’t accept third-party benefits: directors must not accept third-party benefits due to their role.
  7. Declare any interest in a proposed transaction or arrangement: directors are required to declare the nature of their interest in a proposed or existing transaction to ensure the board is aware of the director’s interest in a transaction.

To find out more about director’s duties in more detail, check out our handy guide.

Those are the duties that apply to a company director, and it is assumed that a shadow director meets these standards and responsibilities as well.

What if the company goes into liquidation? 

In the instance that the company becomes insolvent and must enter into liquidation, the actions of the shadow director will be analysed and scrutinised just as the actions of a director would.

The Insolvency Practitioner undertaking the liquidation process will look closely at the shadow director’s actions to determine their role within the business and identify any instances where they may be personally liable.

A shadow director might be held personally liable in cases of:

  • Wrongful or unlawful trading
  • If they have failed to put the interest of creditors first
  • If they have failed to complete and file company accounts or returns

Shadow directors will also run the risk of seeming to have tried to avoid any legal repercussions by acting as a director but not declaring themselves with this title.

In cases of compulsory liquidation, if the shadow director is found guilty of misconduct, they can face penalties, including anything from fines to the liability for the company’s debts.

You may also face disqualification from being a director or a shadow director for up to 15 years as outlined by the Company Directors’ Disqualification Act.

Find out more about personal liability during liquidation in this handy guide.

Let Clarke Bell help

If you are the director or shadow director of a company that is facing insolvency, it is important that you act quickly, getting in touch with an Insolvency Practitioner such as Clarke Bell as soon as possible.

If your company is insolvent, we will work closely with you to find the best path forward. We have a team of experts to hand that have helped thousands of businesses UK wide with the liquidation process. Whatever your circumstances, we can help to advise you on the best way forward, meaning you can rest assured that you are in the best hands.

If you would like some free, initial advice or wish to find out more about how we can help, simply get in touch with one of our team today.