Directors of a company hold significant responsibilities and duties. However, not all individuals who exert influence over a company's affairs are formally appointed as directors.
A person who has been validly appointed as a director is known as a 'de jure director'. Identifying a de jure director is usually straightforward, as they are registered at Companies House. However, not all 'directors' appear on the Companies House register, and individuals may find themselves unknowingly considered directors and subject to the same responsibilities and duties.
This article explores the key differences between shadow directors and de facto directors, along with their respective duties.
De Facto Directors
A de facto director is an individual who performs the functions of a director without being formally appointed. The Court applies an objective, fact-specific test, assessing their actions and level of involvement in the company's decision-making process.
De facto directorships often arise unintentionally. For example, this may occur where an individual was meant to be registered as a director at Companies House, but the appointment was never completed or was deemed invalid.
Key indicators of a de facto director include:
- Making or influencing significant business decisions;
- Representing themselves as a director to third parties; and
- Being treated as a director by de jure directors.
Shadow Directors
A shadow director, on the other hand, 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."
Unlike de facto directors, shadow directors do not openly represent themselves as directors. Instead, they operate behind the scenes, exerting influence without actively participating in the company's day-to-day management.
Shadow directorships commonly arise in intergenerational family businesses or where shareholders, who are not formally registered as directors, exercise significant control over decision-making. For example, a senior family member may exert substantial influence over a family business without holding a formal directorship.
Key elements of a shadow director include:
- A consistent pattern of directors following their instructions;
- An established relationship where the board routinely adheres to their guidance;
- No formal designation or active representation as a director; and
- Often perceived as a 'puppet master' behind company decisions.
Legal Duties
Both de facto and shadow directors can be subject to the same statutory duties as formally appointed directors.
For more information on directors' duties, please see our article: "Directors' Duties: What Are They and What Happens If You're in Breach?"
Practical Implications
For Companies:
- Clearly define roles and responsibilities within the organisation;
- Ensure proper appointment and documentation of directors to avoid ambiguity.
For Individuals:
- Avoid, where possible, acting as a de facto or shadow director unless formally appointed;
- Be cautious about exerting influence over company decisions without a formal designation—this is particularly relevant for professional advisers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
