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The art of law - a person can be a director of a company without having been formally appointed to the board

De facto directors and shadow directors

In In re Lo-Line Electric Motors Ltd [1988] Ch 477 at 490 Sir Nicolas Browne-Wilkinson V-C said, apropos of the English Companies Act of the time, that -

'the plain intention of Parliament ... was to have regard to the conduct of a person acting as a director, whether validly appointed, invalidly appointed, or just assuming to act as director without any appointment at all.'

There can be no doubt that South Africa's new Companies Act similarly intends to include in the expression director certain persons who have not been formally appointed or elected to sit on the board of directors. Thus, the Act defines a director as -

'a member of the board of a company ... and includes any person occupying the position of director or alternate director, by whatever name designated'.

This definition is clearly wide enough to cover a de facto director, but it is open to some doubt as to whether it is wide enough to cover a shadow director.

The distinction between the two is important. In In re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 Millet J said that -

'in my judgment an allegation that a defendant acted as de facto or shadow director, without distinguishing between the two, is embarrassing. It suggests ... that the liquidator takes the view that de facto or shadow directors are very similar, that their roles overlap, and that it may not be possible to determine in any given case whether a particular person was a de facto or a shadow director. I do not accept that at all. The terms do not overlap. They are alternatives, and in most and perhaps all cases are mutually exclusive. A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level. A de facto director, I repeat, is one who claims to act and purports to act as director, although not validly appointed as such. A shadow director, by contrast, does not claim or purport to act as director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself. He is not held out as a director by the company."

In short, therefore, a de facto director is a person who openly acts as though he were a director, even though there may be some defect in his appointment or he may not have been appointed at all. By contrast, a shadow director exerts a covert and clandestine influence on the board of directors, giving his instruction to the board from the shadows, as it were.

It is to be hoped that South Africa's courts will recognise this distinction and hold that the definition of director in the new Companies Act of 2008 is wide enough to include a shadow director..

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