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Out-Law Legal Update 2 min. read

Pair were shadow directors but didn't breach duties, says court

LEGAL UPDATE:  Two men were  found to be shadow directors of an insolvent property development company and so did owe the company fiduciary duties but their behaviour did not breach those duties,  the High Court has ruled . The decision underlines that whether an individual is a shadow director and whether that individual owes fiduciary duties in that capacity are two distinct questions which can only be answered following a careful analysis of the facts. The decision is a cautionary reminder that the courts may find people who have an extensive influence on the running of a company are shadow directors, placing them in the position of having to explain and defend their conduct and actions in relation to the company.

Buy to let property developer Instant Access Properties Ltd (IAP) entered liquidation in 2008, following an earlier administration. IAP's liquidators brought claims against, amongst others, Brad Rosser and James Moore who were argued to be de facto or shadow directors of IAP due to their involvement and influence in the running, management and operation of IAP.  

A de facto director is a person that acts as a director of the company, although they have not actually or validly been appointed as such. A shadow director is a person whose directions or instructions the directors of the company follow, although that person has not been appointed as a director of the company.

Prior to insolvency IAP received commission in relation to the sale of residential properties. This commission was then shared with two offshore companies in which both Rosser and Moore held an interest.

The liquidators of IAP claimed that these arrangements were a fraud on IAP and that the commission was given away for no or no adequate consideration. It was also claimed that this amounted to a breach of fiduciary duty on the part of IAP's properly-appointed director Maria Gifford and the alleged de facto or shadow directors, Rosser and Moore.

The judge concluded that both Rosser and Moore were shadow directors, at least for certain purposes. From the extensive evidence given during the trial it was found that Gifford was accustomed to act on the instructions of Rosser and Moore. It was material that Rosser was described in evidence as having "final say on all agreements/contracts".

However, the argument that the commission-sharing arrangements were for no consideration or for no adequate consideration was rejected by the judge. The offshore companies provided services to IAP and the liquidators did not establish that these were inadequate consideration for a share of the commission.

The judge said that it was clear that de facto directors had the same duties as regular directors and that the extent of shadow directors' fiduciary duties will depend on the circumstances of each case.

However in this case there was nothing to support the claim that the commission-sharing arrangements allowed Rosser and Moore to use their positions to obtain a benefit for themselves from IAP. After analysing the various agreements the judge said that these either did not benefit Rosser and Moore or were for the benefit of IAP.

The judge considered whether the arrangements involved a conflict of interest which Rosser and Moore breached and as a result made them liable to account for profits made. He said that a duty to account for profits was not imposed on the shadow directors, who had at all times acted in good faith, where a regular director, such as Mrs Gifford, would be relieved of this liability in the same circumstance.   

A further technical argument that the business was carried out with the intention to defraud creditors under section 213 of the Insolvency Act of 1986 was also rejected.     

Jennifer McCormick is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com

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