Timothy Thompson of Kangs Solicitors discusses the consequences of being involved in any way in the administration of a company as a shadow director and de facto director whilst being subject to a Director’s Disqualification Order.

The Company Directors Disqualification Act 1986 (‘CDDA’)

Directors can be disqualified and removed from office for a number of reasons, two of the most common being:

  • for general misconduct in connection with companies

The above applies if the director concerned has either been convicted of a criminal offence;

or

has persistently been breached Company Act legislation

requiring any return, account or other document to be filed with, delivered or sent, or notice of any matter to be given, to the registrar of companies.’

  • for unfitness

If the director’s conduct whilst in office is deemed to make him ‘unfit’ to be concerned in company management, then it is the duty of the Court to disqualify and prevent him from holding office for a period of up to 15 years.

What Are My Legal Obligations After Being Disqualified?

Section 1 of the CDDA states that, unless the Court otherwise orders, the period of disqualification imposed shall begin at the end of the period of 21 days beginning with the date of the order.

A disqualified director has to ensure that within that period he has formally resigned from all directorships and ceased all involvement in the administration of companies affairs.

Who can be regarded as a ‘Director’? | Solicitors Defending Company Directors

Directors Disqualification Orders  are made not only against directors registered at Companies House but others who are found to have exercised administrative functions as ‘de facto’ or ‘shadow’ directors.

The extent of the meaning of the word ‘director’ is, therefore, much wider than most people would appreciate and does not just involve those directors registered at Companies House.

De Facto Directors (or Directors ‘in fact’) | Kangs CDDA Solicitors

The description de facto director applies to those who:

  • following a defective appointment, continue to act as if appointed
  • have ceased to hold office, through disqualification for example, but continue to act as if they were still in office
  • were never appointed but assume the position of director in the Company’s administration.

A de facto director will normally be involved in all of a company’s activities such as:

  • Accepting responsibility for the company’s financial affairs
  • Acting as sole signatory for the company bank account
  • Negotiating with third parties on behalf of the board
  • Recruiting and appointing senior management positions.

Shadow Directors | Solicitors Defending Insolvency Service Cases

‘Shadow director’ is defined within Section 22(5) CDDA:

“…..a person in accordance with whose directions or instructions the directors of the company are accustomed to act……”

Frequently, registered directors run a company’s affairs based on the direction and/or instruction provided to them by others, especially where such others have employed the registered director(s) to carry out their wishes.

On 26th May 2015, the section was amended by The Small Business, Enterprise and Employment Act 2015 to exempt specific persons from this definition, such as Accountants and Solicitors.

If a Solicitor or Accountant provides advice upon which the director acts, it does not necessarily follow that the professional adviser is acting as a shadow director.

How Does The Court Identify A Shadow Or De Facto Director?

Whether or not a person is a de facto or shadow director is decided on a case by case basis by the Courts.

There are two important cases in this area as follows:

HMRC v Holland [2010] 1 WLR 2793

Smithton Ltd v Naggar and others [2014] EWCA Civ 939

The leading case of HMRC v Holland [2010] 1 WLR 2793 was followed by Smithton Ltd v Naggar in which the Court noted a number of points that arose in the Holland case.

The factors determining who is a de facto director can be summarised as follows:

  • In determining whether a person is a de factodirector, the question is whether he has assumed responsibility to act as a director.
  • The questions must be determined objectively. It does not matter whether the individual thought he was acting as a director.
  • Whether the company considered the individual to be a director and held him out as such, and whether third parties considered that he was a director, are however relevant.
  • The Court must look at the acts in their context and determine their cumulative effect.
  • The fact that a person is consulted about directorial decisions, or asked for approval, does not in general make him a director because he is not making the decision.

The Court of Appeal said that, ordinarily, it will be important for the Court to determine a company’s corporate governance system to decide whether an individual had assumed the responsibility of a director.

As the Court of Appeal noted in the Smithton case, it is therefore important for group companies and their directors to understand when liability as a de facto or shadow director may arise.

Consequences of Breaching a Directors Disqualification Order

It is clear from the above cases, that individuals exerting a degree of control over a company will not be protected from director’s liabilities and responsibilities on the basis they do not have the title of director or have been appointed as a director.

However, it would have to be proven that this individual’s actions cannot be attributed to any other role held.

If an individual is found to be in breach of a Director Disqualification Order, he may be disqualified for a further term or face criminal prosecution.

Section 12 CDDA 1986 states:

 ‘a person who acts in contravention of a disqualification order, could face a term of imprisonment of up to 2 years’.

Two Gentlemen jailed for acting as Director whilst Disqualified

The above case heard at Southwark Crown Court in October 2014, shows the seriousness of the breaching a Director Disqualification Order.

The Defendants were sentenced to a combined 13 months in prison and disqualified from holding the position of director for a further 12 years each.

If a person is  found to be in breach of a Director’s Disqualification Order  it is a criminal offence and the consequences can include the following:

  1. A further term of disqualification. This will run concurrent to any existing term and will likely be in the top bracket of disqualification (11 – 15 years);
  2. A fine
  3. Imprisonment of up to 2 years
  4. Personal liability for any debts a Company may have incurred while the individual was illegally acting as its director
  5. Any properly appointed director or a shadow director could also be made personally liable for Company debts

Directors Assisting Disqualified Directors

There are also risks attached to properly appointed directors who allow others to conduct or hold themselves out as ‘directors’ of the Company when they are the subject of a Directors Disqualification Order (or if they are an undischarged bankrupt).

The appointed directors in this instance are also liable to be disqualified for a term of up to 15 years.

How Can We Help You? | Kangs Solicitors Insolvency Solicitors

Here at Kangs Solicitors, we have a specialist team of lawyers who deal with all aspects of Director Disqualification Investigations & Proceedings.

We can guide you through the entire investigation stage, ensure that you are properly advised and that your position is fully protected by:

  • advising you on the disclosure provided by the relevant authority
  • attending and representing you at interview
  • making representations to the Official Receiver on your behalf
  • representing you in Court proceedings

Who Can I Contact For Advice? | Kangs Solicitors

Please feel free to contact our team of lawyers with a proven track-record in defending Director Disqualification through one of the following:

Hamraj Kang
hkang@kangssolicitors.co.uk
07976 258 171 | 020 7936 6396 | 0121 449 9888

Tim Thompson
tthompson@kangssolicitors.co.uk
0121 449 9888 | 020 7936 6396 | 07989 521210