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Shadow Director Owed Company a Fiduciary Duty, Rules Court

14th July, 2014

Shareholders are not necessarily directors of a company, which may lead them to believe that they cannot be held responsible for the actions of the company in which they have a stake.

However, when a shareholder (or anyone else) exerts sufficient sway over a director to influence the company’s business, the court may consider them to be a ‘shadow director’.

A shadow director is a person who is not formally on the board of directors but whose decisions are followed by the company in the same way as a director’s would be.

In the event of a corporate insolvency, shadow directors have the same legal responsibilities as ‘real’ directors, as the shareholder of a company recently found out.

The shareholder had used his influence over the director to get the company to make payments to him and to provide him with a salary. When the company went into insolvent liquidation, court action was commenced against him.

It was claimed that he was a shadow director and therefore owed a fiduciary duty to the company and its creditors.

The High Court accepted that the shareholder was a shadow director and also that he did owe a fiduciary duty to the company as regards the instructions he had given to the sole director, and that the duty had been breached by him when the company became insolvent. In his ruling, the judge cited seven reasons why a shadow director of a company would ‘commonly’ owe it a fiduciary duty, the prime one of which is that ‘a shadow director will have assumed to act in relation to the company’s affairs and to ask the…directors to exercise powers that exist exclusively for the benefit of the company’.

The director now faces a massive claim for reimbursement of payments made improperly.

If you are concerned about any aspect of the governance of your company, particularly if the solvency of the company is in doubt, please contact Stuart Haynes at [email protected].

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