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Legal Focus

OCTOBER 2013

Corporate Law: Shadow directors & de Facto directors under Gibraltar Law By Michael Castiel, Hassans

Michael castiel E i)

The term “shadow director” is not used in the Gibraltar Companies Act (“the Act”), but is defined in s.63 of the UK Companies Act 1980 as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”. This wording appears in various provisions of the Act, meaning the concept does exist in Gibraltar, and mirrors the UK definition.

nglish judicial precedents are therefore helpful in understanding the concept. As a starting point, Harman J describes the shadow director as “the puppet master controlling the actions of the board”

(Re Unisoft Group), implying that his influence stretches across the majority of the company’s directors. It is not enough that only a minority of directors are influenced (Kuwait Asia Bank EC v National Mutual Life Nominees Ltd). Furthermore, influence must be exerted as a regular practice over time (Re Unisoft Group); a one-off instruction is unlikely to give rise to shadow directorship.

Perhaps the most comprehensive judicial assessment of the term, in Secretary of State for Trade & Industry v Deverell & another, concluded that:

it should not be narrowly construed;

ii) non-professional advice could result in a shadow directorship;

iii) “direction” and “instruction” also included advice,

guidance;

iv) it would be sufficient that directors had subordinated themselves or surrendered their discretion following guidance from the shadow director;

v) such guidance did not need to stretch across the whole of the company’s activities;

vi) the communication did not necessarily have to be understood to constitute a direction;

vii) it was not necessary to show compulsion in the fact the company was accustomed to act in accordance with them; and

viii) the shadow director does not necessarily “lurk in the shadows”.

www.lawyer-monthly.com the common feature being

Whether a shadow directorship has arisen must be determined on a case by case basis. For example, it may, but not necessarily, arise out of a parent-subsidiary relationship. A clearing bank may become a shadow director if, due to financial difficulties, the board has no option but follow its financial advice (Re a company (No 005009 of 1987)). A “company doctor” assisting in a corporate recovery may also be considered a shadow director (Re Tasabian Ltd No 3).

Shadow directors are sometimes confused as de facto directors, however, as explained by Millet J in Re Hydrodan (Corby) Ltd, both terms “are alternates, and in most and perhaps all cases are mutually exclusive”. While the shadow director does not hold himself out as a director, a de facto director acts as one without valid appointment, his opinion carrying at least equal weight to the company’s de iure directors.

For instance, a person was deemed a de facto director because he regularly signed resolutions and his usual residential address was given as the company’s registered address, at which board meetings were also held. Again, the term itself does not appear in the Act, however, given that the definition of ‘director’ in the Act is identical to that under English Law, it is reasonable to infer that the concept also exists.

The principle reason why it is important to draw a distinction between de facto and shadow directors is the different duties that are imposed on them. A de facto director has a greater degree of involvement, and as such owes the same fiduciary duties as validly appointed directors. The words “occupying the position of director” in s.2 of the Act cover any person who de facto act as a director (Re Eurostem

Maritime Ltd). Therefore any duty imposed on a director, is also imposed upon a de facto director.

Given that a shadow director’s involvement in the company is not as hands on, the duties imposed are much more specific and limited only to the sections in the Act referring to “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”.

Acting as a shadow director or a de facto is not an offence in itself, but their existence may be a risk indicator or raise suspicions as to whether these individuals are attempting to conceal something. More importantly, both must be acutely aware of the duties that are imposed upon them so as not to fall short of these requirements.

Crucially, the existence of a shadow or de facto director could have a direct impact on the place in which the company is deemed to be managed and controlled, which can lead to important tax consequences. LM