28 October 2013

Following insolvency, creditors and the (now insolvent) company can claim back losses from directors who breached their duties prior to the business breaking down. But it is not just formal directors – it is any individuals who actually control the company and have made themselves ‘shadow directors’ by doing so. In this way, creditors can recoup funds to meet the company’s debts from the individual directors who caused the loss of such funds.

The Court in Vivendi SA and Centenary Holdings Ltd v Murray Richards and Stephen Bloch has brought some clarity to the previously uncertain issue of shadow directors' duties and obligations.

The Defendants were the sole director (Bloch) and the alleged shadow director (Richards) of the second Claimant. A shadow director is anyone on whose advice or instructions the board of directors is accustomed to act (other than a professional adviser retained to give advice) whether or not that person is formally a director.

The Court found that Mr Bloch acted in accordance with directions from Mr Richards, consequently Mr Richards was a shadow director. Mr Richards had used his position and influence within the company to encourage company spending far beyond its means at a time when he knew it to be in financial difficulty. The court found that Mr Richards acted dishonestly in seeking to extract as much money from the floundering company as possible before it went into liquidation. Significantly, Mr Richards was found to have breached a fiduciary duty to act in the best interests of both the company and its creditors.   

Prior to this case, the Courts had been reluctant to impose fiduciary duties on shadow directors on the basis that a shadow director did not assume responsibility for the company’s affairs. The Court in this case found that a shadow director does owe fiduciary duties to the company and its creditors, at least in respect of the directions and instructions given to the directors of the company. The Court reasoned that if a shadow director was accustomed to giving directions or instructions to a company’s directors which he intended to be acted upon, it could fairly be said that the shadow director had assumed responsibility for the companies affairs. Having assumed responsibility, it was fair to impose a duty on a shadow director to act in the company’s interests, rather than their own, and to act in good faith when giving directions to directors of the company. The Court recognised that a shadow director's role in a company's affairs may be just as important as that of a director’s.

This case demonstrates that the Courts are prepared to take a flexible approach in ensuring that those who act dishonestly or recklessly in managing companies are held to account. Just because an individual is not officially a director does not mean they are beyond the jurisdiction of the Court.

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David Hall

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