What Is A Shadow Director?
What is a shadow director
A shadow director is a director who:
- Is not formally appointed by the company;
- Are usually the ones who are controlling/ commanding the formally appointed directors (de jure directors) in the background; and
- The instructions given by them are usually followed and carried out by members of the board of directors of the company.
In Sazean Engineering & Construction Sdn Bhd v Bumi Bersatu Sdn Bhd, the court described such person as a rather sinister individual who is in actuality a ‘puppeteer’ i.e. he who pulls the strings and his puppets will dance to the music/ tune he played.
The law concerning this topic
Question: Is the term shadow director defined under the law?
Answer: No. However, this is rectified by an all-encompassing definition under Section 2 of the Companies Act:
“…“director” includes any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director.”
Question: How does the court determine if a person is a shadow director?
Answer: In the high court case of Peninsular Fibre Industries Sdn Bhd v Tan Yoke Chin, the court noted that to determine if a person is a shadow director of a company, the facts of each case would have to be examined on its own. However, some of the telltale signs (whether a person is a shadow director) are as follow:
- There is evidence of a controlling or commanding role exercised by the shadow director over the de jure directors;
- The person was responsible for giving directions and instructions in the capacity as the director of the company to the board of directors of the company;
- The directions and instructions had been complied with by the de jure directors of the company; and
- The de jure directors did not exercise any discretion or independent judgment but were merely complying with the instructions and or directions of that particular person.
Question: Does the shadow director owe a fiduciary duty towards the company (in case if things go wrong)?
Answer: Section 196 (4)(b) of the Act stipulates that a substitute or an alternate director would not qualify as a director for the purpose of filling in a mandatory vacancy in the event the number of the remaining directors is to dip below the minimum number allowed by law. However, this does not mean that a shadow director can do as he pleases and fancies without any consequences. This was observed in the court of appeal case of Sazean Engineering & Construction Sdn Bhd, where the court noted that:
“But, this informal or de facto and shadow director are treated as a director under the CA 1965 for the purpose of attaching liability on them as, by their conduct, the law attaches on them a fiduciary duty which they owe to the company which they seek to control or ‘orchestrate’.”
Question: Does that mean that a person is barred from giving any advice (at all) to a company (assuming that he does, he might be considered a shadow director)?
Answer: Not at all. This was confirmed in the high court case of Ravichanthiran a/l Ganesan v Percetakan Wawasan Maju Sdn Bhd & Ors (which adopted the principles laid down in the English case of Re Unisoft Group Limited (No 3)), where the court stated that:
- A person is not deemed a shadow director by reason only that the directors on advice given by him in a professional capacity, unless if the board of the company is one person only and that person is a ‘cat’s paw’ for an outsider.
- Unless the whole of the board, or at the very least a governing majority of it is accustomed to act on the directions of an outsider, such an outsider cannot be a shadow director.
- There must be multiple instances where the person has given instructions/ commands to the directors of the company before a person could be even considered to be a shadow director.