It is important that all business owners and those contemplating commencing a business are aware of the issues surrounding shadow directors and how someone may accidentally become one.
What is a shadow director?
A shadow director is someone who is not a registered director of a company but exercises control or influence over a business
and on whose instructions the directors of the company act.
Professional advisors are not regarded as shadow directors. This aspect of the definition of shadow directors has been slightly extended by the Small Business Enterprise and Employment Act 2015 to also exclude persons providing such advice and instructions in their capacity as a minister of the crown or in exercise of their function conferred by or under an enactment.
When does this happen?
This scenario typically arises in two main situations:
- When there is a reason why an individual does not want to be registered as a director; and
- When there is an oversight in registering an appointment.
The first scenario often arises when someone is employed by a company that prevents them from becoming a director of or working for another company.
Sometimes an individual doesn’t want to be imposed with the onerous duties that directors take on by being appointed formally. However most of the provisions under the Company Act that apply to directors, apply equally to shadow directors. Therefore shadow directors do not have all of the benefits that come with running the company but are still subject to the responsibilities which protect the company and its shareholders.
Does it matter?
In short, yes! Shadow directors will in most situations still be subject to the same duties under the Companies Act as directors are. If you satisfy the conditions of a shadow director then you will be subject to a range of duties towards the company.
There has been previous uncertainty as to whether a shadow director owes the company a fiduciary duty. A fiduciary duty is a duty of good faith between the director and the company, for the director to act in the company’s best interests at all times. The SBEE has provided an element of certainty to this by inserting that “The general duties apply to a shadow director of a company where and to the extent that they are capable of so applying”. It seems that a shadow director will have a fiduciary relationship with the company in relation to the advice/ information that they provide.
This change in the law provides much needed clarity and aims to ensure that shadow directors are accountable for any wrongdoing.
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