Liquidator fails to prove that businessman was a shadow director

A liquidator has failed to prove that a businessman had acted as a shadow director of a company and was therefore liable for paying compensation for breaches of duty. 

Sam Lyon Head of Corporate & Commercial reports on this recent case.

The case involved three related companies in liquidation.  

The liquidator brought claims against a director of one of the companies for alleged breaches of his duties, and for declarations that certain payments had been transactions at an undervalue within the Insolvency Act 1986.  

It also brought a claim against a businessman, Mr Smith, who it alleged had acted as a de facto or shadow director of one of the companies and had allowed the companies to make payments to him. 

The liquidator provided almost no records or documentation from any party in relation to the companies. Smith and the director both suffered from forms of dementia. 

The High Court rejected the claims against the director and Smith. 

It held that, while Smith’s evidence that he was not involved with the companies, was neither truthful nor correct, that was insufficient to prove that he had acted as a shadow director.  

The liquidator had provided no evidence of what he did or the role he played within the companies.  

The companies’ businesses were closely related and the fact that Smith had worked cooperatively and collegiately with a director, even arranging for him to be a signatory on the companies’ bank mandate, fell short of proving that he had been directing the affairs of the companies or had been acting on an equal footing with directors. 

The fact that a person was consulted about directorial decisions or that their approval was sought did not make them a director: it had to be shown that they had assumed the status and functions of a company director and had exercised real influence over the corporate governance of the company. 

The claims against the director were also rejected. The liquidator had not alleged that he had personally benefited from any of the payments, or that he had acted unreasonably. His dementia was likely to have played a significant part in his inability to remember or explain the payments.  

There was no documentary or other evidence before the court which would enable it to identify which payments were legitimate and which were not. Consequently, there was no reasonable basis upon which the director could be ordered to pay compensation for transactions which might have had a legitimate business purpose.  

If you would like more information about the issues raised in this article or any aspect of company law, please contact Sam on 01228 516634.