The news follows moves by the Insolvency Service to disqualify Camila Batmanghelidjh, founder of Kids Company, which collapsed in 2015, just a month after it had received a £3m government grant backed by the then prime minister, David Cameron.

Despite Batmanghelidjh, the former chief executive, not formally holding a role as a director at the time the charity collapsed, the Insolvency Service alleges she acted as a de facto – or shadow – director, and should therefore also be disqualified from running or controlling other companies for up to six years.

The case has highlighted the risks faced by becoming a shadow director for many people who are involved in board level decisions while not being a formal director of an organisation.

Shadow director: legal definitions

The term shadow director is defined under Section 251 of the Companies Act 2006 as a person in accordance with whose directions or instructions the directors of a company are accustomed to act. In May 2015 such roles were also added to the Small Business, Enterprise and Employment Act, so that the general duties of directors would apply to shadow directors.

The Insolvency Service has since been able to make the case that someone was a shadow director and seek their disqualification on the basis that they acted as a director rather than as a manager, member of staff or advisor. However, professional advisors to boards such as chartered accountants, lawyers, property advisors and bankers remain exempt from being classified as a shadow director.

“A shadow director is someone who is not formally appointed as a director but who gives advice that the directors of the company are accustomed to act upon”, explained David Parkinson, company secretary at HW Fisher & Company. “While a de facto director and shadow director are, strictly, separate terms, they are, in effect, treated as the same role,” he added.

Eamonn Quinn, managing partner at Boards Matter International, explains anyone in the C-suite of a company who is not listed as a company director could be considered a shadow director under the law.

“There is a clear distinction to be noted between Chief Company Officers and Directors, however, unless appropriate care is taken, such officers can fall within the definition of de facto or shadow director”, said Quinn.

The risks of being considered in law as a shadow director can be significant, he added.

What are the risks of being legally considered a shadow director?

Quinn continued, “If you are either a shadow or de facto director, you are subject to the same onerous legal duties and responsibilities as any normally appointed director as defined either through statute or common law. Critically, shadow and de facto directors would not be covered by directors’ and officers’ liability insurance that is usually put in place by companies or the individual directors themselves to cover their risk.”

Quinn believes such risk is too great to accept.

He said, “First, if you are a shadow or de facto director, get formally appointed to the board. If that isn’t available then you either need to remove yourself from the situation, or place very clear caveats with the board that the advice you provide to the directors is precisely that, advice. Decisions can only be made by the board of directors who may use the advice as part of their overall considerations, but not solely and repetitively place habitual reliance on such advice. The person should also make sure their sole advisory function is recorded in board meeting minutes as appropriate.”

Disqualification could, in turn, affect membership of the ICAEW. If a member is reviewed by the Chartered Accountant Regulatory Body or similar and breaches of ethics or other Bylaws are found, the punishment ranges from censure to being removed as a member in good standing with the Institute.

“However”, Parkinson explained, “if a qualified accountant has given advice to a board in their professional capacity then they would be exempt from being considered a shadow director, and therefore unlikely to face disqualification proceedings.”

David Parsley

Corporate Governance Group, September 2017