THE COPPERBELT UNIVERSITY DIRECTORATE OF DISTANCE EDUCATION AND OPEN LEARNING PO.

BOX KITWE
NAME: TIMOTHY NSHIMBI P.O BOX 20515 KITWE

STUDENT NO.:09175202

PROGRAME: BBA4 COURSE: COMPANY LAW- BBA390 LECTURER: DR P.KAMANGA ASSIGNMENT :FIVE

DUE DATE: 14TH OCTOBER 2013

English judicial precedents are helpful in order to better understand what factors are used to determine whether an individual or a corporate entity is a shadow director. A useful starting point is Harman Js description that the Shadow Director must be in effect the puppet master controlling the actions of the board (Re Unisoft Group) which in turn implies that his influence stretches across the majority of the companys directors. If only a minority of directors of the board are accustomed to acting according to a persons instructions this is not enough to make that person a shadow director (Kuwait Asia Bank EC v National Mutual Life Nominees Ltd). Furthermore, a shadow director must have been giving the majority of directors instructions as a regular practice over a period of time (Re Unisoft Group). A one-off instruction, even if accepted by the majority of directors, is unlikely to give rise to the figure of the shadow director. Perhaps the most comprehensive judicial assessment of the term shadow director was carried out by the Court of Appeal in Secretary of State for Trade & Industry v Deverell & another where it was concluded that: a. the term should not be narrowly construed b. the giving of non-professional advice could result in a shadow directorship;

c. the concepts of direction and instruction also included advice, as the common feature these terms all share is guidance d. it would be sufficient to show directors had subordinated themselves or surrendered their discretion in the face of guidance from the shadow director (although this element may not always be present) e. such guidance did not need to stretch across the whole of the Companys activities f. the communication did not necessarily have to be understood or expected to constitute a direction g. it was not necessary to show a degree of compulsion in excess of that implicit in the fact the company was accustomed to act in accordance with them (although the most clear example of a shadow directorship is where there is a penalty for not complying with the shadow directors instructions), and h. h. it is not necessary for the shadow director to lurk in the shadows, but this may often be the case. In practical terms whether a shadow directorship has arisen is a question of fact that must be determined, using the above guidelines, on a case by case basis. For example, a shadow directorship may, but will not necessarily, arise as a result of a parent-subsidiary relationship. In another scenario, a clearing bank may become a shadow director if, as a result of the Company encountering financial difficulties, the board has no option but follow the financial advice imposed by the clearing bank (Re a company (No 005009 of 1987)). A company doctor

appointed by a shareholder in order to assist in a corporate recovery may also render himself liable to being considered a shadow director (Re Tasabian Ltd No 3). Shadow directors are sometimes confused as de facto directors, however both terms are not interchangeable, as explained by Millet J in Re Hydrodan (Corby) Ltd both terms are alternates, and in most and perhaps all cases are mutually exclusive. While the shadow director exerts his influence without holding himself out as a director, a de facto director acts as if he were a director without being validly appointed, and rather than exerting his influence over a majority of the boards directors, his opinion carries at least equal weight to that of the companys de iure directors. The principle reason why it is important to draw a distinction between de facto and shadow directors is the different duties that are imposed by law on them. A de facto director, by definition, has a greater degree of involvement in the company than the shadow director, and as such, owes the company the same fiduciary duties as the validly appointed directors. In Re Eurostem Maritime Ltd Mervyn Davies J it was held that the words occupying the position of director covered any person who de facto acted as a director of the company. It is therefore arguable that any duty that is imposed to a director is also imposed upon a de facto director. Given that a shadow directors involvement in the company is not as hands on as a de facto directors, the duties imposed on him are much more specific and are limited only to the sections in the Companies Act that refer to a person in accordance with whose directions or instructions the directors of the company are accustomed to act. One should be bear in mind that acting as a shadow director or a de facto is not an offence in itself, but the existence of a shadow director and de facto director may be a risk indicator and may raise suspicions as to whether these individuals are attempting to conceal something by managing the company but not being listed as a director. More importantly, both the shadow director and de facto director must be acutely aware of the duties that are imposed upon them by law so as not to fall short of these requirements. A de facto director is not formally appointed but carries out all the duties of and makes decisions as a director. He may also sign company documents and be treated as a director by the other directors. A shadow director is a person whose instructions and decisions the other directors accept and implement unlike a de facto director he may not carry out those actions himself. A shadow director often acts behind the scenes, which may be because there is a reason why they cannot be formally appointed. Differences between de facto and shadow directors The major differences between a de facto director and a shadow director are outlined in the official transcript of Ultraframe (UK) Ltd v Fielding and others.

In Ultraframe (UK) Ltd v Fielding the High Court clarified a number of matters concerning shadow directors and de facto directors. What is a Shadow Director? A shadow director is defined in 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 (although a person is not deemed to be a shadow director simply because the directors act on advice given by him in a professional capacity). The High Court spelt out what this means in practice:

on the question of who must be accustomed to act, this means that a governing majority of the board must be accustomed to act in accordance with the directions or instructions of the alleged shadow director. The purpose of the legislation is to catch a person who effectively controls the running of the company by controlling the board. Therefore, a person is unlikely to be within the definition of a shadow director if only one or two directors on a board of several directors follow his instructions on the question of how must the directors react to the instructions, the directors must do something in conformity with such instructions. It is not sufficient for the alleged shadow director simply to give instructions to the directors; his instructions must be translated into action by the board the directors must act on the alleged shadow directors directions as a matter of regular practice; it must be a regular course of conduct of the directors over a period of time.

What duties does a Shadow Director owe to the company? From the moment that it can be established that a governing majority of the directors are accustomed to act in accordance with the alleged shadow directors instructions, then he will owe certain duties to the company. Failure to comply with these duties may result in a fine for the company and/or the shadow director concerned. The High Court clarified the nature and scope of these duties:

the duties owed by a shadow director do not apply retrospectively back to the time that the directors began to act in accordance with his instructions a shadow director who does not directly deal with the companys assets does not owe the company any fiduciary duties; e.g. he has no duty to act in the best interests of the company or to not make a profit from his position.

However, certain specific statutory duties and prohibitions are imposed on a shadow director. For example:

a shadow director must declare his interest in any contract or proposed contract with the company at a board meeting a shadow director must disclose his interests in any shares or debentures of the company

any transaction by which the company will acquire from the shadow director or by which the shadow director will acquire from the company a non-cash asset value of the requisite value (i.e. its value exceeds (a) 100,000 or (b) 10 per cent of the companys net asset value and is more than 5,000) must first be approved by an ordinary resolution of the shareholders of the company. If prior shareholder approval is not obtained, the transaction could potentially be unravelled.

What is a De Facto Director? A de facto director is a person who performs the functions of a director but who has not been formally appointed as a director. The High Court reiterated that a de facto director is a person who undertakes functions that should probably only be discharged by a director and who has an equal ability to participate in decision making. It is unlikely that a person will be a shadow director and a de facto director at the same time, although it will be possible for a person to be a shadow director before becoming a de facto director. What duties does a De Facto Director owe to the company? A de facto director owes the same duties to the company as a formally and properly appointed director, i.e. he is subject to both statutory duties and prohibitions, and he also owes fiduciary duties to the company. The facts of ultraframe These are a good illustration of the concepts of shadow directors and de facto directors in practice. Ultraframe Limited, the claimant, alleged that Mr Fielding was either a shadow director or a de facto director of two companies, Northstar Limited and Seaquest Limited. The court found on the evidence that Mr Fielding had become a de facto director of both companies, but that he had never been a shadow director of either company as neither board of directors had been accustomed to act on his directions or instructions. The most important of the acts undertaken by Mr Fielding in relation to Seaquest Limited that characterised him as a de facto director were:

his statement that he was running the company his decision to change the companys suppliers the grant of leases to the company.

The court also held that Mr Fielding owed fiduciary duties to Seaquest Limited as the sole signatory of its bank account as he was dealing directly with an asset of the company. Finally, it should be kept in mind that the existence of a shadow or de facto director could have a direct impact on the place in which the company is deemed to be managed and controlled, which circumstance can lead to important tax consequences.

Refernces

1. Web www.gibraltarlaw.com 2. Consolidated Lawyers fact Sheet, 2013, Sidney Austrailia

3. Nicholas Briggs Hugh Sims Guildhall Chambers June 2011