The term ‘director’ usually refers to people formally appointed to a Board. However, some people who are not formally appointed may operate as ‘deemed directors’ or ‘shadow directors’. They are increasingly likely to be treated by the law in the same way as formally appointed directors.
Justice Millett in a well-known case said a ‘de facto’ director “… is one who claims to act and purports to act as a director, although not validly appointed as such. A shadow director, by contrast, does not claim or purport to act as a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims are the only directors of the company to the exclusion of himself.”[1]
Justice Millett’s description is perhaps a little cynical. Some shadow directors may be trying to avoid the accountability that attaches overtly to appointed directors, while others may be quite open about the influence they have on directors and boards.
What does the Companies Act say? What matters is that de facto and shadow directors are captured in the Companies Act definition of ‘director’ as a person in accordance with who directors or instructions the board of the company may be required or is accustomed to act. This means that whether or not they regard themselves as directors, these ‘deemed directors’ may be held accountable as though they were directors for any breaches.
Who might this capture? Looking at the definition, whether or not a board is “required or accustomed to act” for a deemed director is a matter of fact. The court will look at any evidence that shows a pattern of behaviour that amounts to directors being “accustomed to acting” on a deemed director’s instruction.
One legal commentator has suggested that the statutory wording of “required to” might extend the accountability net to include people who can be shown to have exercised control over the board even without a pattern of behaviour,[2] although this has not yet been tested in court.
An example in practice could be a large shareholder who is not a director but who behind the scenes is directly what the Board does.
Key points to note:
- Parliament implemented this definition intentionally. It makes sense that if deemed directors have been instrumental in action or inaction that breaches directors’ duties, they too should be held accountable; perhaps even more so if they did this to avoid attention and liability.
- Boards often rely on the professional advice from lawyers or accountants. It is important that relationships with advisors are purely advisory in nature and that directors or boards are not controlled or directed by the advisors.
- If you are a shadow director, or your company has a relationship likely to be deemed a shadow director, be aware of the implications. One question to ask might be whether or not shareholders are aware of the shadow director, and if not, why not. Should the person just be appointed?
[1] Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180 Ch, at 183.
[2] Taylor Lynn “Expanding the pool of defendant directors in a corporate insolvency: the de facto directors, shadow directors and other categories of deemed directors” New Zealand Business Law Quarterly 16(2) Jun 2010:203.
Should you require assistance, please contact: Steven Moe stevenmoe@parryfield.com, Michael Belay michaelbelay@parryfield.com, Sophie Tremewan sophietremewan@parryfield.com or Yang Su yangsu@parryfield.com at Parry Field Lawyers.
