It is not uncommon for a person's job title to include the word "director", such as "Finance Director" or "Marketing Director". While such roles will carry a high level of responsibility, the individuals in these positions are not always formally appointed to the company's Board of directors. Even though such persons are not formally appointed as directors, they may still owe all (or at least some) of the same directors' duties as an appointed director. But it should be made clear that a person's job title would not be the deciding factor in determining whether a person owed directors' duties. This blog considers the different types of director and the duties each type of director owes.
There are three different types of directors recognised by law:
• de jure directors (i.e. legally appointed);
• de facto directors (i.e. a director of fact); and
• shadow directors.
De jure directors
A de jure director is someone who has been validly appointed to the Board. Directors appointed to the Board owe fiduciary and general duties to the company (as imposed by the Companies Act 2006 and general operation of law). Further details in relation to these duties are contained in our 'Handy Guide to Directors' Duties', which is available here.
De facto directors
A de facto director is someone who assumes to act (and has authority from the Board to act in certain circumstances) as a director, although they have not been actually or validly appointed. There is no single, definitive test for a de facto director. Key determining factors of whether a person is a de facto director will include:
• whether that person was part of the company's corporate governance system (for example, if they met regularly with the de jure directors at what were called Board meetings);
• whether they assumed the status and function of a director (for example, if they assumed the finance function for certain activities of the company or if they were responsible for the recruitment of senior management);
• whether the company and third parties considered them to be a director and the company held them out as such (for example, if they were authorised to negotiate contracts on behalf of the Board or they were an authorised signatory on the company's bank mandates); and
• whether the person's acts were directorial in nature (for example, if they had the power to prevent action being taken on behalf of the company).
The courts will consider what a person actually did in their role – not their job title. But the fact that a person's job title included "director" will add weight to the argument that they were a de facto director.
Critically, a de facto director of the company owes the same fiduciary duties to the company as those directors who are officially appointed. They may also have liability for the purposes of wrongful trading or misfeasance claims (under the Insolvency Act 1986), and in relation to disqualification proceedings under the Company Directors Disqualification Act 1986.
Shadow directors
A shadow director is different from a de facto director as they are not able to take action as if they were a director, but their instructions are followed by the appointed (de jure) directors. Again, the existence of a shadow directorship would be a question of fact and dependent on the prevailing circumstances – potential shadow directors would commonly include holding companies, directors of a shareholder, lenders/creditors or management consultants.
Again, a shadow director owes the same fiduciary duties to the company as de jure directors, as well as the general duties owed by directors under the Companies Act 2006. They may also have liability in relation to wrongful trading and director disqualification as referred to above, as well as some other statutory liabilities.
Considerations
A company which suspects that certain individuals are de facto or shadow directors should consider formally appointing them as de jure directors. For the individual, this would ensure there is no ambiguity in respect of their duties.
If the decision is made not to formally appoint such individuals, then the company should set out in writing the scope of that person's authority; and that person should not hold themselves out as a director in meetings internally or externally.
The company and individual should also check the company's directors' liability insurance to ensure that actions taken by de facto directors and shadow directors are covered by the policy.
How can Brodies help?
Our corporate colleagues have extensive knowledge of corporate governance matters and regularly advise directors and companies on such issues. If you have any questions relating to the above, or any other matter, please get in touch with any member of the corporate team or your usual Brodies LLP contact.
