Shadow director checklist

Shadow directors can have as much influence over a company as properly appointed directors. What is a shadow director and what are the consequences of being one?

What is a shadow director?

The Companies Act 2006 defines a shadow director as someone in accordance with whose directions or instructions a company is accustomed to act. Potentially, this could cover a range of situations, from a family business that regularly consults a non-director family member, to a holding company directing its subsidiary’s activities, or a professional advisor who goes beyond their remit. Our checklist can help companies to identify a shadow director, as well as individuals to check whether they are likely to be classified as one.

What if your company has a shadow director?

Shadow directors can be held liable in much the same way as properly appointed directors, under company law as well as in criminal and insolvency proceedings. They can be required to account personally for any breach of fiduciary duty, for example, and be disqualified from acting as a director.

It’s always better to make a formal appointment so that it is clear to the company, those dealing with it and the individual just what their powers and responsibilities are. Therefore, if you identify that your company has an “accidental” shadow director, it would be best for the company and individual to formalise their role. If, on the other hand, someone has overstepped the mark and their influence is not beneficial to the company, the board needs to be aware of the situation and make sure that it takes steps to reduce their influence.

Professionals such as management consultants need to be particularly aware of their potential liability as shadow directors and should make sure they act within their professional remit. They might, for example, ask the board to put instructions in writing to them so there is a record of the fact that they are acting on the board’s instructions and not the other way around.