Are you in deeper water than you realise?
You may step up as a director for a variety of reasons. What if you advise the company directors on what to do? What if you attend board meetings? What if you represent a corporate shareholder in discussions? But what you may not realise is that in stepping up you are at risk of falling into the grey area of ‘quasi-director’. This may be bad news as if you are found to be a quasi-director you could be held responsible for your actions as if you were a company director but have no protection or recourse to funds to solve the problem.
Types of ‘quasi-director’
There are several scenarios where someone assisting the directors may be held to account as a company director themselves. Some are more obvious than others.
An independent adviser who usually devotes only part of their time to the affairs of the company but is neither a formal director nor an employee of the company.
Non-executive directors are treated as directors so owe fiduciary duties to the company. However, the steps that they will be expected to take to fulfil their duty to exercise reasonable care, skill and diligence will vary. Where a non-executive director has specialist knowledge, they will be subject to a higher threshold.
At a minimum, a non executive director must take reasonable steps to put himself in a position to guide and monitor the management of the company.
Analogous to a shareholder proxy, an alternate is appointed by an individual director to act in that director’s place at meetings. There is no statutory provision for a director of a private limited company to appoint an alternate. So a director can only appoint an alternate if the Articles or shareholder’s agreement provide for it.
If the company has Model Articles, there is no right to appoint an alternate.
Broadly, an alternate is a company director temporarily. When you are acting as a director, you have the rights and duties of a director. The role of alternate is however limited to exercising directors’ powers at board meetings.
When you are not acting as a company director you have no legal status within the company as a decision-maker.
An observer on behalf of a minority shareholder is permitted to attend and participate in board meetings but, unlike an alternate, cannot vote.
An observer is not a formal member of the board so will not owe fiduciary duties to the company. However, an observer will usually owe confidentiality obligations.
Nominee for corporate shareholder
One step further than appointing an observer, an individual is nominated on behalf of a corporate shareholder to represent its’ interests. The nominee director is free to exercise their judgment in the way they see fit.
Despite being appointed by an individual shareholder, as a director on the board the nominee must still act in the best interests of the company, not the shareholder that nominated the director. To do so would be unlawful.
Shareholders may unanimously agree to dilute the nominee director’s fiduciary duties so that they owe lesser duties to the company.
As with an observer position, a nominee owes confidentiality obligations to the company. So even where a director is nominated by a shareholder, he cannot disclose to that shareholder any confidential information relating to the company which has been gained by him as a result of his position as nominee.
If the company directors act in accordance with your instructions you will likely be a shadow director. A shadow director owes the same general duties and responsibilities as an appointed company director.
This position arises by circumstance so a majority shareholder, management consultant or director of another group company may not be aware that they are in fact acting as a shadow director.
‘I didn’t know I was acting as a director’
Unfortunately you will not avoid liability even if you genuinely believed you were not acting as a company director.
However, the court will often take into account the governance structure and circumstances of the company, so your actions will be considered in their context.
Does giving a director advice always mean I will have director’s liabilities?
No, the fact that a person is consulted about board decisions does not in general make them a director because they are not making the decisions – this is still done independently by the board.
When will a ‘quasi-director’ be held liable?
Unless you are merely an observer, many of the risks that are faced by statutory directors are also risks for quasi-directors. Risk areas include:
• Fraudulent or wrongful trading;
• Director disqualification; and
• Asset freezing claims.
Quasi-directors can also be subject to claims of unfair prejudice by minority shareholders. There can also be liability under personal guarantees.