Shadow, De Facto and De Jure Directors. Which one are you?
The above terms are often used in Insolvency proceedings and something that all directors and senior company personnel want to know more about.
As many of you will know a director is a person who is in charge of the running of the business. Most people will say that the easiest way to check who is a director is to check Companies House and the register of directors. However what happens when there is a senior member of staff who appears to be in control of the business?
Then this is when the term Shadow director is used, a shadow director is a person who the board is accustomed to taking instructions from. This could this be an investor, a shareholder or a senior employee in the company, however most of the time it is considered someone who should be a director but does not want the responsibilities that come with the role.
The term De Facto Director is very closely associated with Shadow Director and is described as someone who is a director in everything but shown on Companies House. This is also the same for someone who refers to themselves as a Director of the company; they may be involved in key negotiations and be the face of the company. This could also include being the signatory for the bank accounts. There is no definitive list as each company is different and therefore the tasks required of a director differ on each case.
Lastly, a De Jure Director is a director ‘in law’. This being the most common and is when the director is shown at Companies House and is a director in every aspect as covered by law.
Many people ask why this is such an issue in Insolvency cases and we can understand their frustration when it is investigated and begins to cause problems. The reason being that when a company is placed into insolvent liquidation a report is made by the liquidator on each director, which if a person involved in the business was worried about their conduct they may try to avoid reporting obligations by not registering as a director. This may be for a number of reasons but most likely due to a previous disqualification precluding them from acting as a De Jure director.
The Liquidators duty is to simply report on the conduct of a director and any other persons who they believe are in a position to be considered a shadow or de facto director. The title alone is not the only thing that is covered in the report and will include evidence or reasoning behind such beliefs.
Why is the Insolvency profession concerned with non-legal directors? The reason being is to seek to investigate and identify the reasons behind the demise of the company. Were the directors shown on Companies House to blame or was there another person in the background seeking protection from having no such role.
Ultimately when considering your role within the company always seek advice from an Insolvency Practitioner, Accountant or Solicitor if concerned with these terms.
Luke Cockerton FIPA, Insolvency Manager