Companies and Allied Matters Act: Shadow directors revealed

The Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria 2004 (CAMA) recognises a category of directors referred to and known as shadow directors. In fact, a specific section of the CAMA was devoted to defining this behind-the-scene director. There are several other provisions in the CAMA making allusion to this “faceless” director. However, in spite of the copious provisions of the CAMA on shadow directors, it seems doubtful if the general understanding of the term is in conformity with the provision of the CAMA. We shall review the provisions of the CAMA vis-à-vis judicial decisions on the matter with a view to drawing attention to needed amendments to the CAMA to enable it meet the intended purpose of providing for shadow directors.

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Defining the term “shadow director”

The definition of shadow director is contained in section 245(1) of the CAMA which provides that the term “director” includes “any person on whose instructions and directions the directors are accustomed to act.” This is consistent with the definition of the term “director” in section 567 of the CAMA.

It is instructive to note that the fact that a person who in his professional capacity gives advice to directors and the director act on it shall not be construed to make such a person a person in accordance with whose directions or instructions the directors of a company are accustomed to act. By this exception professionals who advice directors in purely professional capacity cannot be deemed to be shadow directors merely because the directors acted on their advice.

Shadow directors as exception to the general rule regarding directors

Shadow directorship is an exception to the general principle of company law that directors are to be duly appointed by shareholders in general meeting. The shadow director doctrine confers director status on a person who was not duly appointed by the shareholders. In reality, shadow directors are unwilling directors. In the words of Millet, J. in Re Hydrodam (Corby) Limited [1994] 2 BCLC 180, a “shadow director . . . does not claim or purport to act as a 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.”

Shadow directors as special purpose directors

Shadow directorship is an aberration. It is inconsistent with the company law principle that directors are duly appointed by shareholder. Nevertheless, a refusal to recognise them amounts to a denial of stark reality. Where directors are controlled by another person who is not himself a director, it is appropriate to “lift the veil” in certain circumstances to identify the person behind the scene.

Consequently, the shadow director is only recognised as a director under certain special circumstances stipulated in the CAMA. What is common with those provisions is that it is usually expressly stated that the shadow director is being treated as a director solely for the purpose of the section concerned. Thus, the phrase “For the purpose(s) of this section” or such related phrase usually commences the provision.

The four tests for shadow directorship

The nearly universal expression used to describe shadow director is “a person on whose directions or instructions the directors of the company are accustomed to act.” It is necessary to examine this statement with a view to determining what it really means. The question to ask is: Will a person qualify to be regarded as a shadow director where a director (note the singular) of the company acts (or is accustomed to act) on his directions or instructions? The answer is “No!”

In the English case of Re Hydrodam (Corby) Limited, the four tests for determining whether a person qualifies to be regarded as a shadow director was stated to be:

  • The identity of the appointed and acting directors must be established.
  • It must be established that the alleged shadow director did direct the appointed directors in their actions or decisions in the running of the company.
  • It must be established that the appointed directors followed those directions or instructions of the alleged shadow director.
  • It must be established that it is the usual practice of the directors to follow the directions or instructions of the alleged shadow director.

Consistent with the above tests, in Re Unisoft Group Limited (No. 2) [1994] BBC 766, it was held that the compliance by one of the directors of a company with the directions of an outsider was not enough to make the outsider a shadow director. The outsider would be regarded as a shadow director where the whole board or a governing majority of the board is accustomed to act on the directions or instructions of the outsider.

Impact of the shadow director on the puppet directors’ liabilities

The fact that directors are accustomed to act in accordance with the directions or instructions of another person does not impair the duties of such “puppet directors” to the company. The duly appointed directors have certain responsibilities stipulated under the CAMA. They are bound by these whether or not they have minds of their own. Section 245(2) of the CAMA makes certain this position by providing that no provisions in the CAMA “shall be deemed to derogate from the duties or liabilities of the duly appointed directors.”

However, it is arguable whether the shadow director has such general duties and liabilities as duly appointed directors.

Suggestions for reform

Undoubtedly, there is some utility in recognising shadow directors even though they are not duly appointed by shareholders. This recognition helps in situating liability in some cases at the appropriate quarters. Thus, the provision for shadow directors in CAMA is justifiable.

However, it may be necessary to thinker with the provision of the CAMA on shadow directors to expressly stipulate that he has limited liabilities different from the general duties and responsibilities of duly elected directors. Also, if the intention is to make a person who controls one or a few directors (as opposed to all the directors) liable, then it should be so provided in the CAMA through an amendment. As the law is now, it is only a person on whose instructions or directions the directors (note the plural) are accustomed to act that can be a shadow director. This is not the common understanding of a shadow director; but this definition, which is backed by judicial authorities, follows from the literal interpretation of the provisions of the CAMA on shadow directors.

Next week, we shall consider another provision of the CAMA which deserves to be reviewed. Meanwhile, should you have any comments on this discussion on shadow directors, kindly share them in the comments area of this post below. If you are already a registered user, you will be required to log in to comment on this post; otherwise, you will have to register before posting your comment. Registration is simple and FREE.

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3 comments on “Companies and Allied Matters Act: Shadow directors revealed
  1. dehjii says:

    The concept of ‘Shadow Director’ appears to me, solely a precautionary measure of corporate governance. In the sense that it only becomes important in situations of irregularity on governance which incidentally leads to the process of ‘lifting the veil’.
    The consequence then being that the status of a ‘director’ will be conferred on the ‘shadow director’ for the purpose of liability flowing from breach of duties of a director.
    The concept of Alternate Directorship i reckon would ordinarily have catered for the functioning of a ‘Shadow Director’ and in terms of liability as there is already a disclosed principal.
    In essence the shadow directorship runs ahead of ‘those’ who might for one reason or the other (usually unethical reasons)want to formally avoid the directorship title while concurrently functioning as one.
    As a suggestion for reform, the concept of ‘Alternate Director’ which is a widely acclaimed concept in corporate governance, though well acknowledged in the Nigerian corporate practice, it need be more specifically pronounced in the CAMA.

  2. Omofagsec1990 says:

    I do not feel that shadow directors are often unwilling Directors. In practice, I find that this category of directorship is a product of various circumstances. It may be as a result of certain restrictions arising from statutes or conventions such as competition law, conflict of interest or employment rules. The necessity could even arise from tenure rules for certain industries or categories of companies. Sometimes persons may be barred from holding Directorships as penalties for misconduct or impropriety. Such people could operate as Shadow Directors in enterprises where they have controlling interest. Public Servants must of necessity be careful in being visible in private ventures even though they are not estopped from investing in the capital market or other securities, from their legitimate earnings. Age in the case of publicly quoted companies, can limit the right of a substantial investor to sit on the Board of the relevant company.
    On the fact that the collectiveness of actions must be proved before a Shadow Director can be implicated, I agree absolutely. Board decisions are usually based on the consensus or the majority doctrine. Where no poll is demanded, a simple majority of votes is all that is required for Board decisions. When there is a tie in votes, then the Chairman can use his casting vote. It is however difficult to prove the contributions of a Shadow Director, if instructions are passed verbally.

  3. fabulux diva says:

    According to sec 245, this kind of directors is not obvious. They are only recognised in the eyes of the law. The instruction must be necessary for all directors to be accustomed to it.

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