Implications of a finding of shadow directorship

Many of the statutory controls over directors have been extended to shadow directors. Therefore:

• shadow directors have a duty to have regard for the interests of the company's employees (s 309 of the Act);
• shareholders must approve shadow directors' employment contracts which have a duration of more than five years (s 319 of the Act);
  
  
• the statutory provisions dealing with substantial property transactions between shadow directors and the company will apply (s 320 of the Act);
  
  
• if the company has one shareholder only, any agreement entered into with the shadow directors must be recorded in writing (s 322B of the Act);
  
  
• the statutory provisions in relation to loans to shadow directors will apply (ss 330 to 346 of the Act);
  
  
• shadow directors must declare an interest in a contract or proposed contract with the company (s 317(8) of the Act);
  
  
• shadow directors are prohibited from dealing with call options in the company (s 323 of the Act);
  
  
• shadow directors have an obligation to disclose a shareholding in the company;
  
  
• shadow directors can be found liable for wrongful trading (s 214 of the Insolvency Act 1986); this provision allows a company's liquidator to seek a contribution from shadow directors if the company goes into insolvent liquidation and prior to the insolvency the shadow directors knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation; and
  
  
• the Secretary of State may impose disqualification orders on shadow directors (Company Directors Disqualification Act 1986; ss 6 to 9 and 22(4).

"New Law Journal" 16th November 2001