Shadow Director Case Study

2248 Words 9 Pages
To what extent should shadow directors be liable?

1.0 Separate Legal Personality and the Board

1.1 Upon incorporation, a company is recognised as a legal person with its own rights and obligations. Although, being a legal entity, it cannot operate without its organ namely, the Board of directors. The principle of limited liability flows from the concept of separate legal personality in that the assets and liabilities of the company belong to the company and not to its shareholders and directors .

1.2 Directors owe fiduciary duties to the company and are empowered to manage the company in good faith. Whilst de jure directors automatically owe fiduciary duties to the company, the position of the shadow directors has been the subject matter
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In that sense, they would be controlling the affairs of the company by instructing the Board, rather than being appointed as directors. However, in a recent case, State for Trade and Industry v Deverell , Morritt LJ stated that a shadow director may openly operate as one. This was also noted in Re Paycheck where Lord Walker stated, “a shadow director need not be hidden from view.” It could be that a subsidiary’s board are habituated to act upon the parent company’s directions …show more content…
Failure to comply may render the directors or connected persons , including shadow directors, liable to account for any profit or loss to the company. In Smithton Ltd v Naggar , Court ruled that the person cannot be a shadow director since he did not wear the hat of the subsidiary’s director for the protested acts.

5.0 Conclusion

This research paper is meant to demonstrate the evolution of laws in relation to shadow directors’ liabilities. Courts are imposing on shadow directors the fiduciary duties owed by de jure directors to avoid abuses in relation to the affairs of the company, protect company’s members and avoid the corporate structure to be used as a device for fraud.

Legislations and judicial decisions are evolving with the purpose of clarifying the liability of the shadow directors such that it becomes more difficult to escape liability. However, it could be that while trying to enlighten the situation; it might become more complex and require more interpretation of the law. In that sense, would not have it been simpler to add shadow director to the definition of “director”, as the Australian Corporations Act 2001

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