Company Law

August re-entry AS 1 for 22-23 re-entry candidates

Assignment question:

“The concept of shadow directors lacks parameters.”

Discuss.

Word count: 1,500 including footnotes but excluding the Bibliography.

Referencing: OSCOLA must be used.

Per Salomon v Salomon, a company is recognised as a separate legal entity 1 and is owned by the

Shareholders playing a supervisory role, whereas Shareholders appoint Directors to manage the company.

This entire allocation of powers is elaborated upon under the Articles of Association (“AOA”) and the

Companies Act, 2006 (“the Act”). Since Directors adopt a very powerful and important role in managing

a company, there were many legal duties imposed upon them through various case laws. The law hereby

lays down a strict and direct framework for Director duties to be followed.

Within the UK, the concept of shadow directors is a well-defined and regulated concept. Section 251(1)

of the Act specifies, “in the Companies Acts “shadow director”, in relation to a company, means a

person in accordance with whose directions or instructions the directors of the company are accustomed

to act”2. Section 170(5) of the Act explicitly states, “the general duties apply to a shadow director of a

company where and to the extent that they are capable of so applying”. Such directors differ from de jure

and de facto directors in the sense that they are not officially appointed and exercise indirect control by

1 Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)

2 Companies Act, Act, 8 November 2006 (United Kingdom), <www.legislation.gov.uk/ukpga/2006/46/section/251>
instructing de jure directors on how to proceed 3. With the general duties applicable to them, they are held

equally liable in cases regarding a breach of duty, thus suggesting that shadow directors owe a fiduciary

duty to their company, the same as de jure and de facto directors.

Shadow directors lack the legal authority of de jure directors. The laws concerning shadow directors are

intended to deter those who have not been properly appointed as directors from influencing the acts of

regular directors. Shadow directors are considered to be directors solely because the responsibilities

placed upon them are similar to those placed upon a de jure director, which directly increases the amount

of responsibilities being placed upon a shadow director. Yet, it is equally important to recognise that these

responsibilities and duties placed upon a shadow director do also tend to differ from those placed upon a

de jure director. As a result, a cursory analysis of the statute indicates that the provisions for shadow and

de facto directorship serve quite different functions 4.

Director duties play a vital role in protecting not just the interests of the company they run but customers,

creditors and shareholders, to name a few. Sections 171-177 provide a list of general fiduciary director

duties, each owed by the Director to the Company. This list ranges from a duty of care to the Company

(Section 170), the duty to act within powers (Section 171), a duty to make a decision with reasonable skill

and care (Section 174) and more. The threshold for said responsibilities needs to be clear and flexible

enough to identify the directors making the decisions5.

Under English law, shadow directors are subjected to burdensome responsibilities, although they differ

from those of de jure directors. Hence, they must not engage in fraudulent or wrongful trading, same as

any other director. As straightforward as this seems to be, the case law we see remains to be in a

3 Colin R Moore, ‘Obligations in the shade: the application of fiduciary directors' duties to shadow directors’ (2016) 36(2) Legal
Studies 326
4 Chris Noonan and Susan Watson, ‘The nature of shadow directorship: ad hoc statutory intervention or core company law
principle?’ [2006] The Journal of Business Law 24
5 Neil Jamieson and Kelly Hughes, ‘The identification of shadow directors under English law: what guidance might Buzzle
provide?’ (https://www.clydeco.com).
“confused state”6. In Re Hydrodan (Corby) Ltd, the liquidator of Hydrodan alleged that the parent

company, Eagle Trust, and the directors of the former were guilty of ‘wrongful trading’ on the basis that

they were shadow directors or de facto directors of Hydrodan. Further, if Eagle Trust were found to be a

shadow director, then all the directors of it would also be shadow directors 7. According to Lord Millet, in

his judgement, it is unlikely for one to be a de facto director and also a shadow director of the same

company, along with there being no overlap between the two terms 8. Millet further went on to clarify,

“Attendance at board meetings and voting, with others, may in certain limited circumstances expose a

director to personal liability to the company of which he is a director or its creditors. But it does not,

without more, constitute him a director of any company of which his company is a director”9. To establish

a director, it needs to be seen who the directors of the company, whether de facto or de jure; that the

alleged shadow director directed those directors how to act in relation to the company, that the directors

acted in accordance with those directions; and that the directors were accustomed so to act.

In contrast, in Secretary of State for Trade and Industry v Deverell [2001], the Secretary of Trade and

Industry sought disqualification of Mr. Deverell and Mr. Hopkins as directors and prove that their

activities failed the companies as ‘directors’. The Court of Appeal laid down criteria for shadow directors

and clarified “the definition of a shadow director …. effect to the parliamentary intention ascertainable

from the mischief to be dealt with and the words used. The term is not to be construed strictly just

because it has some quasi-criminal consequences; the purpose of the legislation is to identify those, ……

real influence in the corporate affairs of the company. But it is not necessary that such influence should

be exercised over the whole field of its corporate activities; whether any communication from an alleged

shadow director is to be classified as a direction must be objectively ascertained ……it will suffice to

6 Neil Jamieson and Kelly Hughes, ibid

7 Neil Jamieson and Kelly Hughes, ‘The identification of shadow directors under English law: what guidance might Buzzle
provide?’ (https://www.clydeco.com).
8 Marc C Hammerson, ‘What is a shadow director?’ 151 The New Law Journal XXXX <https://plus.lexis.com/uk/analytical-
materials-uk/what-is-a-shadow-director-151-nlj-1703?crid=8e851def-f2b7-4470-9071-22e9a7327ca5>.
9 ‘In re Hydrodam (Corby) Limited: ChD 1994 - swarb.co.uk’ (swarb.co.uk) <https://swarb.co.uk/in-re-hydrodam-corby-
limited-chd-1994/> accessed 7 August 2023.
prove the communication and its consequence. Evidence of such understanding or expectation may be

relevant, but it cannot be conclusive; non-professional advice may come within the statutory description

(as shown by the statutory exception for professional advice); it will be sufficient to show that in the face

of directions from an alleged shadow director, the properly appointed directors or some of them cast

themselves into a subservient role” [at 35]10. Lord Morritt held the position of Mr Deverell in the

company “gave to his advice the potency of directions or instructions” even if he did not tell the directors

what to do [at 116]. He observed that the concepts of “direction” and “instruction” did not exclude the

concept of “advice” for all three shared the common feature of “guidance”; “Both men appeared as men

of importance whose words were listened to, and the directors were accustomed to acting on their advice”

[at 112]

In Ultraframe (UK) Ltd v Fielding and others (2005). The statutory definition of a shadow director was

considered and stated that if a company of member(s) are accustomed to acting upon the advice of a

shadow director, and that person falls under the definition of the same, it still does not impose upon the

same fiduciary duties as a de jure or de facto lawyer 11. In said case, while the alleged shadow director was

involved in the company's affairs, it was evident that the Board was not accustomed to his instructions,

holding that he was in fact not a shadow director.

Relevantly, we see confusion arise in Re Paycheck12 where the Supreme Court considers and touches

upon de facto and shadow directors. His Lordship stated that “once the concept of de facto director was

divorced from the unlawful holding of office, there were two consequences. The first was that the

distinction between de facto directors and shadow directors was eroded…the distinction was impossible

10 Secretary of State for Trade and Industry v Deverell, Court of Appeal, Civil Division (United Kingdom) XXXX
<https://plus.lexis.com>.
11 ‘Shadow directors: definition and duties’ (uk.practicallaw.thomsonreuters.com).
12 Holland v The Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Holland and another, Supreme Court
(United Kingdom) XXXX <www.supremecourt.uk/cases/docs/uksc-2009-0131-judgment.pdf>.
to maintain with the extension of the concept of de facto directorship” [at 91].13 Consequently, it can be

argued that English law may no longer differentiate between de facto and shadow directors. Additionally,

the Supreme Court seems to be shifting from a rigid method of identifying de facto and shadow directors

to one that emphasizes determining the individual with "real influence" over the company's affairs in any

given situation. The English legislation governing the identification of shadow directors remains unclear,

particularly in light of the Supreme Court's decision in Re Paycheck. It is unclear if Millett J's test in

Hydrodan will continue to be the primary way for detecting a shadow director.

If the legislation does not specifically establish separate liability standards for shadow directors, it is

reasonable to conclude that a shadow director's culpability would be comparable to that of the directors

who have breached their obligations. As a result, the amount of culpability will be established by the

obligation breached. To conclude, it is relevant to note that courts have struggled to obtain uniform

rulings on the fiduciary position of shadow directors. The employment of numerous explanations for

fiduciary obligations and connections has further muddled the situation, adding to the complexity and

confusion surrounding this subject14, as seen by the case law abovementioned.

(1640 words)

Bibliography:

13 Holland v The Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Holland and another, Supreme Court
(United Kingdom) ibid 38
14 Colin Moore, ‘Obligations in the shade: the application of fiduciary directors' duties to shadow directors’ (2016) 36 27,
1. Salomon v A Salomon & Co Ltd [1897] AC 22

2. Regent Crest v Cohen [2022] EWCA Civ 123

3. Charterbridge Corp. Ltd v Lloyds Bank Ltd [1970] 1 QB 146

4. Moore CR, ‘Obligations in the shade: the application of fiduciary directors' duties to shadow

directors’ (2016) 36(2) Legal Studies 326 <http://dx.doi.org/10.1111/lest.12110> accessed 6

August 2023

5. ‘Shadow directors: definition and duties’ (uk.practicallaw.thomsonreuters.com)

6. Fakude N, ‘Fighting with your shadow – understanding the concept of non-executive and shadow

directors’ (www.derebus.org.za)

7. Companies Act, Act, 8 November 2006 (United Kingdom)

<www.legislation.gov.uk/ukpga/2006/46/section/251>

8. Jamieson N and Hughes K, ‘The identification of shadow directors under English law: what

guidance might Buzzle provide?’ (https://www.clydeco.com)

9. Hammerson MC, ‘What is a shadow director?’ 151 The New Law Journal

<https://plus.lexis.com/uk/analytical-materials-uk/what-is-a-shadow-director-151-nlj-1703?

crid=8e851def-f2b7-4470-9071-22e9a7327ca5>

10. —— ‘In re Hydrodam (Corby) Limited: ChD 1994 - swarb.co.uk’ (swarb.co.uk)

<https://swarb.co.uk/in-re-hydrodam-corby-limited-chd-1994/> accessed 7 August 2023

11. Secretary of State for Trade and Industry v Deverell, Court of Appeal, Civil Division (United

Kingdom) <https://plus.lexis.com>

12. Holland v The Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Holland

and another, Supreme Court (United Kingdom)

13. Noonan C and Watson S, ‘The nature of shadow directorship: ad hoc statutory intervention or

core company law principle?’ [2006] The Journal of Business Law 24

14. Moore C, ‘Obligations in the shade: the application of fiduciary directors' duties to shadow

directors’ (2016) 36 27