The duties owed by a director to the company were codified in the Companies Act 2006. If the director has been in breach of those duties, the company can pursue a claim against him for compensation. However, many people do not appreciate that these duties can also be owed by someone who is not a registered director if they are a shadow director.
A “shadow director” is “a person is accordance with whose directions of instructions the directors of the company are accustomed to act”. The term is invariably used in respect of individuals who are not registered as directors of the company at Companies House. For the sake of clarity it should be noted that a person is not to be considered a shadow director “by reason only that the directors act on advice given by him in a professional capacity”.
The recent case of Vivendia and Centenary Holdings III Limited v Murray Richards and Stephen Bloch [2013] EWHC 3006 (Ch) involved a claim by Vivendia (a creditor in the liquidation of Centenary Holdings III Limited (“CH3”)) against a former director and a shadow director of CH3. The circumstances were complex and involved a total of nine separate payments which CH3 had made totaling more than £10million. Many of these payments had been made irresponsibly to third parties. One payment involved a distribution by way of dividend in a sum in excess £5million. In a long judgment, the judge found that none of the nine separate transactions had been made in the best interests of CH3 or its creditors and that Mr Bloch (as CH3’s registered director) and Mr Richards (as a shadow director) had both acted in breach of their duties to the company in causing CH3 to make the various payments at issue.
Conclusion
Whilst the company continues to trade it is often the case that no claim is made in these situations because the defaulting director is also the controlling shareholder. The case is a reminder that even if the directors and/or shadow directors of a company do not hold themselves accountable for transactions in which they have not acted within the best interests of the company and/or its creditors, they can still find themselves liable to account to the company and/or its creditors if the company ends up subsequently becoming insolvent.
However, it is worth remembering that even if the company continues to trade, it is possible for one of the other members or shareholders of the company to issue what is known as a “derivative claim” on behalf of the company against a defaulting director or shadow director pursuant to Section 260 of the Companies Act 2006. It is not necessary for a shareholder to wait until the company becomes insolvent. Indeed it would generally be too late for a shareholder to take action in those circumstances since it is unlikely that a shareholder will benefit from the company pursuing any claim against the former directors if the company is insolvent because any benefit will be distributed to the creditors in the liquidation.