Are You a Shadow Director?

If you routinely encounter business terms, chances are you’ve come across the term “shadow director.”

So, what is a shadow director, and how could it affect you in an insolvency situation? As described in the definitions of the Insolvency Act 1986, a shadow director is a person in accordance with whose directions or instructions the directors of the company are accustomed to act.

What is a shadow director?

This situation commonly occurs within a business’ finance division, but there are several other factors which also come into play when deciding whether you could be regarded as a shadow director:

• Whether or not the company portrayed you as a director – perhaps using the title in written communications.
• If third parties considered you to be a director – because you regularly negotiated on behalf of the company, for instance.
• Whether you assumed responsibility for an entire area of the business – you were the sole signatory on the company’s bank account or took the lead when recruiting senior members of the management team, for example.

All these factors will be taken into consideration during an insolvency procedure and will help the acting insolvency practitioner determine the outcome for any responsible directors.

Bankrupts are not allowed to act as company directors, but if they’re acting as shadow directors, they could fall foul of the law should the company become insolvent.

Shadow directors in insolvency

In an insolvency situation, while the distinction between directors and shadow directors is important, a shadow director is considered just as accountable for the company as any formally appointed director. The reason being is that a shadow director is considered a person who can make decisions upon which the company’s board must act. So, the entire board of the company and even the business’ parent company could be considered shadow directors.

Consequently, shadow directors are equally responsible as formally appointed directors. Therefore, they should be aware of the potential for liability and have a duty to act in the best interest of the company at all times.

If the company enters administration or liquidation, the actions of shadow directors will be scrutinised along with the actual directors. If either party is found guilty of wrongful trading or preferential treatment of creditors, they’ll face the same consequences, and could be held personally liable.

In summary

Shadow directors are parties connected with a company who provide directions, instructions or advice to the directors which the board act upon. During insolvency, the liquidator or administrator may consider you a shadow director if you’ve regularly acted or assumed responsibility on the company’s behalf. If during the insolvent period, the company is found guilty of wrongful trading or preferential treatment of creditors, shadow directors will face the same consequences as the appointed directors.