RTICLE (April 04 2010): A 'shadow director' is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. A person, who exerts 'real influence' over directors in a company's affairs is held to be a shadow director of that company. Using the analogy of 'puppet master', the key feature is that "the shadow director is controlling mind of a company.
He lurks in the shadows, sheltering behind others who, he claims, are only directors of the company to the exclusion of himself. He never claims himself to be the director of the company but rather he asserts that he is not director of the company. Shadow director embodies the role of puppet master, who pulls the strings and controls the company's board of directors.
Although the Companies Ordinance, 1984 does not directly identify a shadow director, yet section 282K, reproduced below, regarding non-banking finance companies substituted by Finance Act 2007 identifies a shadow director:
"Notwithstanding anything contained in any other provision of this Ordinance, if any person, being the chairman, director, chief executive, by whatever name called, or a person not being a professional advisor in accordance with whose directions or instructions the directors are accustomed to act, or official liquidator or any officer of a NBFC or a notified entity in any document, prospectus, report, return, accounts, information or explanation required to be furnished in pursuance of this Ordinance or the rules or regulations made thereunder, wilfully makes a statement which is false in any material particular knowing it to be false, or willfully omits to make a material statement, mismanages the affairs of the NBFC or a notified entity or misuses his position for gaining direct or indirect benefit for himself or any of his family members, he shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine which shall be not less than one hundred thousand rupees, and shall be ordered by the court trying the offence, to deliver up or refund within a time to be fixed by the Court any property acquired or gained by him in his own name or in the name of his family members by so mismanaging the affairs of the NBFC or a notified entity or misusing his position or, in default, to suffer imprisonment for a term which may extend to three years."
The role of shadow director has been recognised in many jurisdictions and even in some jurisdictions, he is required to be notified with the regulators. Legislation's in these jurisdictions seek to identify real source of decision making within a corporate entity and to hold such persons responsible for the consequences of their decisions.
Shadow director is different from de facto director, while the former makes others to act as directors, but according to his directions and instructions while later himself acts as director whether he is validly appointed or not. A person acting overtly as a de facto director or covertly as shadow director is subject to the obligation of validly appointed director, however, prosecuting an openly acting de facto director will be much easier than secretly acting shadow director.
A professional advisor cannot be brought INTO brstoriesthe ambit of a shadow director so far as he gives an 'advice' or expresses an 'opinion' to which the directors of the company are not accustomed to act. There is difference between 'direction', 'instruction', 'advice' and 'opinion', as in direction and instruction, the words compel others to follow and abide by that direction or instruction, whereas in advice and opinion, suggest others to follow and abide with.
The English case of Re Tasbian Ltd is instructive, wherein Vinelott J states that "...the dividing line between the position of a watch dog or advisor imposed by an outside investor and a de facto or shadow director is difficult to draw, and there is serious question whether (the accountant) passed over it."
In order to avoid crossing of this line, Coburn suggests the following precautionary measures:
-- Have written terms of appointment.
-- Put advice in writing or keep note of oral advice.
-- Note to distinguish between 'direction or instruction' and 'advice.
-- Do not sign company documents or authorisation.
-- Ensure that you are paid for professional service.
-- Do not become a cheque signatory.
-- Do not negotiate with trade creditors.
One simple advice to professional advisor is to send a bill for his or her advice and not to become freelance advisor that may drag him in the position of shadow director. He should also not have right of veto and let the directors use their mind for acting on the advice.
Lending bank's position as a shadow director is also required to be analysed, especially in the scenario of recession economy (some jurisdiction allow a legal person to be appointed as a director) and the borrower company cannot disobey the directions and instruction of the lender.
Again it is a thin dividing line, so far as the lending bank is ensuring compliance with the lending covenants, it would remain in the domain of lender but when it would exercise powers and functions and perform duties of the directors, than it would step INTO brstoriesthe position of shadow director.
Position of a shareholder with majority shareholding is also required to be seen whether he can be termed as shadow director or not. He is the person, who controls majority shareholding and by virtue of his shareholding, he can control the directors and can be seen in the position of puppet master.
Directors are elected representatives of the shareholders and their prime responsibility is to protect the interests of the shareholders and work for their benefits and to their advantages, but they are not servants and employees of the shareholders and need not to be controlled and dictated by the shareholders.
Shadow director does not enjoy rights of a director, but he has to bear the burden of liabilities of the company. In fact, acting as shadow director is not an offence in itself (unless he is an undischarged bankrupt or ineligible person to become director), however, acting as a shadow director is a risk indicator.
It raises the suspicion that the shadow director is attempting to conceal something by managing a company without notifying his position as validly appointed director of the company. He shares the civil liabilities of other directors in case of corporate insolvency as the insolvency of the company emerged as a result of directions and instruction given by him.
For a puppet master or shadow director, ignorance of his responsibilities is no defence. Casual acting of directors on the directions or instruction of some person does not make that person a shadow director. The phrase "accustomed to act" suggests that the directors must act on the directions and instructions of a shadow director as a matter of regular practice.
This practice must be a regular course of conduct over a period of time, say one year or so. A case cannot be developed on the basis of certain occasions but over a period of time and as a regular conduct of business. It is also not necessary that the shadow director involves himself in all the matters relating to the company's affairs, idea is that whenever the shadow director "calls the tune", the directors "dance" in their capacity as directors. It must be seen that the directors have adopted a subservient role and surrendered their discretion's in accordance with the directions and instructions of the shadow director.
Here, the only question is, who makes the decision in a company? If it is board of directors, then there is no problem, company is running smoothly, but if it is someone else, then he, she or it is a shadow director. Shadow director is a 'big man', the actual responsible for the affairs of company and board of directors is just a group of front men; law must recognise his role and spell out the role of those persons, who just dance at his tune, whatever the reasons may be. In this way, we can easily identify the character role of each players on a company stage and fixed their responsibilities accordingly.
Source: http://www.brecorder.com/index.php?id=1040728&currPageNo=1&query=&search=&term=&supDate=
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