Silhouette of a person stood by a window

The danger lurking in the shadows

In the admirable hit Netflix series “Stranger Things”, the principle conceit which gripped the viewers and helped make it the most watched Netflix series ever was the terrifying creature lurking in the shadows.

In today’s high velocity business world, we are increasingly used to working in fully magnified open view. The temptation is to look for ways in which we can retreat back into the shadows. But particularly for those of us who have relatives, friends, or business associates who are company directors, or for professional advisors of companies or their directors, there can be significant jeopardy lurking in the shadows.

Anyone involved informally in the activities of a company may be surprised to learn that, despite not being officially appointed as a director, duties and personal responsibilities and liabilities similar to that of a director may arise. In particular the risks are:

  • a potential liability to contribute to the company’s assets following insolvency;
  • being disqualified from being a director following the company’s insolvency; and
  • criminal sanctions and personal liability for breaches of directors’ duties;

Under the Companies Act 2006, a shadow director is defined as a person in accordance with whose directions or instructions the directors of a company are accustomed to act. It is not an offence to be a shadow director but it does give rise to a number of onerous responsibilities and duties and can lead to those individuals unwittingly adopting significant personal liability. Shadow directors commonly owe fiduciary duties, and can reasonably be expected to assume responsibility for the company’s dealings and act in the company’s interests (rather than their own), when giving directions and instructions. Importantly, a shadow director can be liable for wrongful or fraudulent trading and is also subject to the threat of director disqualification.  Typically you won’t be covered by the company’s directors and officers liability insurance (if any).

The clients I talk to often have the common misconception that they can only be a “shadow director” if they are the puppet master of the company, controlling a board from the sidelines. In fact, it is unnecessary for a shadow director to have any form of control. Instead the key factor is the influence that person has over the directors, namely to what extent the board is accustomed to acting in accordance with the person’s instructions.

Experienced business people and entrepreneurs are increasingly encouraged to see themselves as Dragons Den type advisors, providing informal advice to company boards, directors, family members and friends. Given their hard earned reputation for astute commercial acumen, such advice is more often likely to be followed leaving them most at risk.

Members of senior management, who are not directors, may have trusted views about the decisions which the company makes or may be the only person with expertise in a certain area (such as accountancy). Family members and friends, particularly if they are shareholders, may also routinely offer advice or have influence over the decisions which the directors take.

Although there are some additional safeguards for professional advisors, (particularly where retainers are in place) where a professional goes beyond that retainer as a trusted business advisor they may also find themselves at risk.

So what are the 6 things should anyone concerned about that their involvement with a company do now to protect their position?

  1. seek specialist legal advice from a commercial solicitor;
  2. confirm your role via a written consultancy agreement to clearly define roles and the basis of your involvement;
  3. be careful to stick within the confines of that agreement;
  4. record your advice in writing and the basis upon which you are being asked to help;
  5. consider asking the company to appoint you as a director to formalise your position and give you full visibility of the decisions they are taking and which you could become your responsibility
  6. ensure that you are covered by insurance against any potential personal liability, whether that is through any policy the company already has in place or by taking out your own policy

As the residents of Hawkins, Indiana found out, the creature lurking in the shadows can provide a terrifying and unwelcome surprise.