Company Law Resembling Features of Shadow Directors

Question :

Modifications by Smithton case to the resembling feautures of defacto and shadow director.

Answer :

Resembling features of shadow directors and de facto directors

The concepts of shadow directorship, as well as de facto directorship, has been well established in the company law. These concepts are also enshrined in the United Kingdom Companies Act 2006. Under the act, a director is defined as “a person occupying the position of director, by whatever name called” (de facto director). On the other hand, shadow director has been defined as “a person in accordance with whose directions or instructions the directors of a company are accustomed to act.” 

The United Kingdom Court of Appeal has delivered its judgment that a director of a holding company had not become a shadow director or de facto director of its subsidiaries. In the case Smithton Ltd v Naggar [2014] EWCA Civ 939, the plaintiff company, Hobart claimed in the Court of Appeal against Mr. Naggar (a former director of its former holding company). The claim was made for the loss that was incurred as a result of the transaction with clients. The plaintiff sought to reclaim the losses incurred as a result of transactions with the client. It was claimed by the plaintiff that Mr. Naggar was shadow director or de facto director of the plaintiff and Mr. Naggar had infringed his duties as director (du Toit, 2017). The plaintiff also claimed that some of the transactions involved a conflict of interest because those transactions were associated with those companies that were associated with Mr. Naggar and hence furthering his interests. The claim of Hobart was rejected by the High Court earlier. Thus, Hobart appealed against the decision of the High Court in the Court of Appeal. The Court of Appeal upheld the decision of the High Court and rejected the claim of Hobart.

In order to determine the role of an individual played in a company; the following points should be considered. It is significant to analyze the role of an individual played in an organization. The role of the individual should be analyzed and determined whether he/she has assumed the roles and responsibilities of a director in the company or there is an invalid appointment. It is also important to determine whether the individual has been held as a director by the company. The role of the individual in a company can also be determined by analyzing whether the decision taken by the individual is being followed by the members of the board, or the individual is being consulted only on a particular issue. It is also important to analyze whether the individual has taken the responsibilities of other members of the board. The aggregate impact of the actions of the individual should be analyzed along with the activities that the individual has carried out outside the company. Apart from the above detail, the wider context, as well as the structure of the company in which the individual has carried out his/her responsibilities, should be analyzed. 

A member of the advisory board can be held as a de facto director if the size of the company is small and employees are not given great discretion in order to deal with significant matters of the company by the company. It is also important that people inside as well as outside of the company consider the individual as a director. Apart from this, the company, as well as the individual, should hold the individual as a director and it is important for the individual to perform top-level management functions that are expected from a director (Baxt, 2017). The following functions should be performed by the individual such as the individual should be authorized to negotiate the important transactions of the company on the behalf of the company as well as the individual makes high-level management decisions that affect the financial standing of the company.

References 

Baxt, B. (2017). Directors' counsel: Identifying a de facto director. Company Director, 33(6), 54.

du Toit, J. (2017). Beware of shadow directors; shadow directors beware. Without Prejudice, 17(11), 8-11.