Shadow directors and their duties

A shadow director is defined in section 251(1) of the Companies Act 2006 as a person in accordance with whose directions or instructions the directors of the company are accustomed to act. There are limited exceptions for those who act purely in a professional capacity when providing advice — such as lawyers. A de facto director, on the other hand, is a person who performs the functions of a director but who has not been formally appointed as a director. 

A number of cases have been concerned with the identification of a shadow and/or de facto director. The High Court decision in Smithton Ltd v Naggar is the latest.

In this case, the claimant company (Hobart) claimed for loss suffered when two companies, Insureprofit and Mariona, defaulted on obligations under contracts entered into with Hobart. Insureprofit and Mariona were insolvent and the claim was brought against a Mr Naggar personally. Naggar was the director of a company called Dawnay Day, itself the majority shareholder of Hobart. Dawnay Day’s business model was to ‘incubate’ new businesses and then spin them off in joint ventures should they prove successful. Directors were appointed to the new companies by Dawnay Day to protect its interests. Naggar directly and/or indirectly owned both Insureprofit and Mariona. The first part of the claim against Naggar was that he was a de facto or shadow director of Hobart and had breached his statutory duties to Hobart…

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