The Deverell Case: A Shadow Of Doubt

The concept of the shadow director is relevant in the context of company law and taxation. Shadow directorship can bring financial liabilities and disqualification for the shadow director upon the insolvency of a company, or cause such an individual to be a "person with significant control" (PSC). In the latter case, this will probably be the last thing such an individual will want if he has appointed directors to manage and control his business to maintain confidentiality.

In the tax field, a UK-resident shadow director of an offshore company may suffer UK taxation under the "benefits in kind" legislation e.g. rent free occupation of a UK residential property owned by an offshore company.

Shadow directorship therefore has serious implications for a private client thinking of using a professional corporate service provider to act as a director of a company in which he or she may well own share capital.

Shadow directorship also has potentially adverse consequences for those professionals nominated by the private client to act as director (i.e. as jure director). A regulator will be unlikely to view favourably situations where one of its regulated corporate service providers has allowed a private client to become a shadow director - especially if, as a result of the actions of the shadow, significant economic damage has been done to third parties.

A shadow director is in reality a director, albeit not formally appointed according to the company's articles or the Companies Acts. The shadow must be a person in accordance with whose directions or instructions the de jure directors are accustomed to act. Directors and their nominators need to keep this definition in mind at all times. However, since the Deverell case (of which more below) it is arguably more difficult for those that "lurk in the background" to avoid becoming shadow directors.

Case law prior to the Deverell case required the de jure directors to "surrender their discretion" to the shadow. Consider the following pre-Deverell judicial dicta:

In Lo-Line Electric Motors Ltd [1988] it was stated by Browne-Wilkinson V-C that a shadow director presupposed a board of directors "...who act in accordance with instructions from someone else, the eminence grise or shadow director."

In Unisoft Group Ltd (No. 3) [1994], Harman J said "...the shadow director must be in effect the puppet master controlling the actions of the board. The directors must be the cat's paw of the shadow director. They...