Restrictions on who can be a director
- What groups of people are prevented by law from being a director?
- What groups of people may be prevented by the articles from being a director?
- Are there any age restrictions?
- Can a bankrupt be a company director?
- De facto and shadow directors
- What is a de facto director?
- I use the word 'director' as a courtesy title. What are the possible consequences?
- What is a shadow director?
- Can you give me some examples of when a person is or is not a shadow director?
- What are the consequences of a company having a shadow director?
What groups of people are prevented by law from being a director?
A person belonging to one of the following groups cannot be a director:
A person disqualified under the Company Directors Disqualification Act 1986
This is available to the court on conviction for certain offences under the Act. It is only for certain offences and not for general crime. The maximum possible period of disqualification is 15 years. Disqualification is also available to the court as a consequence of certain behaviour involved in insolvency and on application by BIS after an investigation. In some circumstances a director may agree to accept disqualification without facing prosecution.
An undercharged bankrupt
The court may make an exception but this is rare.
The auditor of the company or any group company
What groups of people may be prevented by the articles from being a director?
The key phrase is 'may be prevented' and there are numerous possibilities. Neither Table A nor the new model articles make any restrictions. The following three examples are among those sometimes encountered:
A share qualification
This means that a director must own or acquire a specified number of shares in the company.
A nationality qualification
This means that only a British citizen (or citizen of another specified country) can be a director.
A residence qualification
This means that a director must reside in a specified area.
All sorts of requirements are possible and may occasionally be found.
Are there any age restrictions?
There is a minimum age of 16. It is possible for a minor (over the age of 16) to be a director but there are practical difficulties. This is because minors cannot be held legally liable for many of their actions and contracts. There is no upper age limit imposed by law.
Can a bankrupt be a company director?
An undischarged bankrupt cannot be a director and cannot directly or indirectly take part in the management of a company. A director is automatically disqualified when a bankruptcy order is made. A court can make an exception for a specified company in exceptional cases.
De facto and shadow directors
What is a de facto director?
All directors should be properly appointed in accordance with legal requirements and the provisions of the company's articles. However, it is possible to be a director without having been properly appointed. Section 1261 of the Act states 'includes any person occupying in relation to it the position of a director (by whatever name called)'. The name given is immaterial. They may be known as governors or some other title, but if they do a director's job, they are directors.
Each case must be assessed on its individual facts but, for example, if a person attends board meetings and votes, he is almost certainly a director. If a person is widely accepted as a director by staff, customers and others, he probably is a director. Such persons will have taken on the obligations of directorship, even though they have not been properly appointed and not reported to Companies House. They may not know that they are directors and may not wish to be directors.
I use the word 'director' as a courtesy title. What are the possible consequences?
The use of the word 'director' as a courtesy title is quite common, usually with the permission of the 'real directors'. It may be done to please the person concerned and is often done to impress customers or other business contacts. It is a dangerous practice and the writer recommends that it not be done, but he has never succeeded in persuading anyone to stop doing it.
It is widely thought that Sales Director means a board member in the legal sense, but that Director of Sales means a senior sales executive who is not actually a director in the legal sense. However, this cannot necessarily be relied upon. Not everyone is aware of the convention, nor is there any reason why they should be. The use of the word 'director' implies that a person is a director. There must be a risk that a person using the courtesy title has taken on the responsibilities and that third parties can rely on his authority to commit the company.
What is a shadow director?
Section 1261 of the Act states:
'any person in accordance with whose directions or instructions (not being advice given in a professional capacity) the directors of the body are accustomed to act.'
This means a person who is not on the board but who tells the directors what to do and they do it. Such a person is not a shadow director if he tells the directors what to do and they do not do it.
Can you give me some examples of when a person is or is not a shadow director?
It can be a very fine line. It perhaps most commonly happens to a person who is not on the board but is a major shareholder. If such a person gives instructions to the directors and they regularly accept them, he will be a shadow director. Directors, of course, do not have to accept the instructions, though the shareholder may take steps to replace them. Perhaps the shareholder gives advice to the directors, and perhaps after exercising independent judgment the directors accept the advice. This would almost certainly not make the shareholder a shadow director.
There are other possibilities. To be rather flippant, a gangster running a protection racket and frightening the directors could be a shadow director. Professional advisers can be shadow directors, especially if the company faces financial difficulties, but it does not often happen. This is because they usually understand the risks and are careful to give advice rather than instructions.
What are the consequences of a company having a shadow director?
Having a shadow director is a bad idea. It is bad for the company, bad for the properly appointed directors and bad for the shadow director. Many of the provisions of the Act and of some other Acts apply equally to shadow directors as to other directors. The provisions of the Insolvency Act apply to shadow directors as to other directors and these can lead to a shadow director being personally liable for the consequences of wrongful trading. A person disqualified under the provisions of the Company Directors Disqualification Act 1986 commits an offence if he acts as a shadow director.