Director by definition but not by title? De facto and shadow directors explained

The power delegated to a company director can be wide and may, in the wrong hands, be open to abuse. To combat this, the actions and powers of directors are restricted and regulated by legislation, namely the Companies Act 2006 (“Act”).

The duties outlined in the Act include obligations to promote the success of the company, to act within their powers and to avoid conflicts of interest, amongst other matters. A director in breach of such duties can be subject to serious consequences, including being held personally liable for the breach.

Although the Act does not define the term ‘director’, section 250 broadens its scope beyond those officially appointed as directors and registered at Companies House (referred to as de jure directors). It explicitly states that the term ’director’ encompasses any individual in the position of a director, regardless of the title used. The Act therefore prevents individuals such as shareholders, high-ranking employees, or company secretaries from evading the responsibilities and possible sanctions associated with directorship by merely abstaining from formally declaring themselves as directors.

Case law has now developed and provides specific terms for other types of directors, two of which we will look at below:

De facto directors

A de facto director is an individual who assumes the responsibility of a director, despite never being actually or validly appointed as one. Identifying a de facto director can be tricky, given there is no one definitive test. When assessing if an individual is a de facto director, the question is more one of fact and degree.

Key factors to consider include:

1. Whether the individual was holding out for the company as a director
2. If they had proper information on which to base decisions
3. Were they were required to make major decisions that would be considered the responsibility of a director

It is important here to consider whether the individual in question assumed and undertook responsibility and functions that were only appropriate for a director to undertake.

Shadow directors

By legal definition, a shadow director is “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”, they are distinguishable from de facto directors as they do not hold themselves out as directors, rather they make decisions behind the scenes (for example, a shareholder who influences large decisions).

It is not necessary that such influence is extended to the entirety of the business, so long as the individual has a significant influence over a certain part. Note that an individual providing a director advice in a professional capacity (i.e. a lawyer or an accountant) does not qualify as a shadow director.

Both de facto and shadow directors are subject to many of the same statutory duties of directors, and as such, could be a party to legal proceedings in their capacity as a director. It is therefore critical that director status is correctly determined.

If you would like to speak to a member of the Corporate team duties of directors, including de facto and shadow directors, please do not hesitate to Corporate team by phone on 0113 207 0000.