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The concept of shadow director was discussed in detail in this case. This case is an old UK Company Law case. It has an interesting take on the concept which was relatively new at the time. A shadow director was differentiated from a de facto director and other kinds of directors in this case.
Hydro dam (Cordby) Ltd. was a subsidiary company having two corporate directors. This subsidiary company was wholly owned by the Landsaver MCP Ltd., the parent company. Landsaver MCP Ltd. was also a subsidiary company whollyowned by Midland City Partnerships Ltd. This company in turn was wholly owned by Eagle Trust PLC, the final parent company in this case. This Eagle Trust PLC was a television conglomerate chaired by two people – David James and Baron James of Blackheath.
The company was undergoing compulsory liquidation, and during the process, the official liquidator brought applications against the two directors of Eagle Trust PLC, under Section 214 of the 1986 Act for Wrongful Trading against the 14 defendants in total. This application by the official liquidator was against Eagle Trust and all of its directors.
The official liquidator put forward the claim that the alleged director of the Eagle Trust i.e., Leslie Thomas and Dr. Hardwick were indeed shadow directors under the Companies Act 2006 (hereinafter referred as ‘the Act’), and were liable as per the provisions of Section 251 of the Act. However, the two directors denied the allegations, and applied for striking down the proceedings against them.
Whether the two directors are shadow directors, under the provisions of Section 251 of the Act?
The Court held that the directors of the parent company, alleged to be the shadow directors of the subsidiary company were not so. Merely being on the board of the parent company would not make one by default a shadow director for the subsidiary company as well. Rather, the court opined that there is a need to show that the alleged shadow director was involved in the instruction and guidance of the board of the subsidiary company to satisfy the court that the alleged persons were acting as shadow directors of the subsidiary company. In the eyes of the Court, the liquidator who had filed these applications before the Court alleging misconduct and that the directors were shadow directors under Section 251 of the Act, had in reality failed to produce before the Court abundant evidence in order to support the fact that there had been interference and guidance by the alleged directors in the conduct of the subsidiary company, or for the fact that the directors of Eagle Trust PLC were also the directors of the Hydrodam Ltd. at any point of time.
The judges stated that to identify a shadow director or a de jure director, the first step needed to be followed was to segregate the de jure directors from the de facto directors. After that, it was needed to establish that any direction on the part of the directors arose, which need to then be proven before the Court. However, that is not all. In addition to that, the Court also demands that there it is also to be proved that the real directors of the subsidiary company acted in accordance with the directions which were relayed to them, and also that it was not a first time, rather the original directors of the subsidiary company were used to acting according to the directions relayed to them. Only after satisfying these criteria, a person can be classified as a shadow director. However, the Court did not find any of these criteria satisfied in the case of the defendant directors of the Eagle trust PLC., which led the court to dismiss the application filed by the official liquidator against the directors of Eagle Trust PLC.
The Court acted according to the application filed by the directors of Eagle Trust PLC, wherein they had requested the proceedings against them to be quashed. The court dismissed the application, holding that the alleged directors of Eagle Trust PLC were indeed not the shadow directors since there was not sufficient evidence for the same to be proven.