The thought of a nice cosy non-executive directorship (NED) may be appealing for some people and certainly in the past many were regarded as undemanding stipends. However, the role of non-executives is being increasingly put under the microscope when companies fail and legislation coming in in October further ups the ante for NEDs. This much is well known. What is less well known is that even where the appointment to the board is unofficial, the same dangers are present. The risk of being considered to be a shadow director depends on your role in the company. If you act as a director – in the sense that your instructions or directions are normally acted upon by the company – you are for some purposes in the same legal position as ‘proper’ directors of the company. People in this position are known as ‘shadow directors’.
Unfortunately for such people, danger lurks in shadow directorships because the main way in which their position resembles that of actual directors is that they can share the civil liabilities of other directors in the event of a corporate insolvency. This may lead to them being required to contribute funds to pay creditors of the company if it becomes insolvent. They also face the possibility of being disqualified from acting as a director, by the Department of Trade and Industry, where their conduct warrants such a ruling.
Other risks include anti-competitive behaviour by other directors in the company and bribery of foreign officials and UK businesses under the new Bribery Act 2010. These could result in fines, imprisonment and negative publicity even if there was no active knowledge as connivance or turning a blind eye could be enough.
If you are asked to be a non-executive director or to participate at the decision-making level of a company’s management as a consultant or advisor, take care – especially if the company is in financial difficulty.
Recently, a shadow director of a company was ordered to repay over £850,000 plus compound interest after the company with which he was involved went into insolvent liquidation. For a shadow director, ignorance of one’s responsibilities is no defence.
Directors who fail to take actions to protect the interests of shareholders or who behave improperly can face significant penalties. In another recent case, a director who was aware of a fraud being repeatedly committed by a fellow director was banned from acting as a director for twelve years. In a third case, a director who misused a company credit card, took company property for his own use and committed a number of other improper acts had his civil evidence referred to the Director of Public Prosecutions with a view to criminal proceedings being brought.
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