What is 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.
The Law Concerning This Topic
|Is the term ‘shadow director’ specifically defined under the law?||While they are not specifically defined under any laws, the definition under Section 2 of the Companies Act3 seeks to rectify the problem with an all-encompassing definition:|
“…“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.”
|How does the court establish if a person is a shadow director vice versa?||In the high court case of Penisular Fibre Industries Sdn Bhd v Tan Yoke Chin4, 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 are as follow5:
|If the court successfully establishes a person as a shadow director, does the shadow director owes a fiduciary duty towards the company (in case things go south)?||The law6 stipulated that a substitute or an alternate director would not qualify as a director for the purpose fo 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 Bhd7, 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 ‘orchestrate8’.”
|Does that mean that a person is barred from giving any advice (at all) to a company?||Not at all. This was confirmed in the high court case of Ravichanthiran a/l Ganesan v Percetakan Wawasan Maju Sdn Bhd & Ors9 (which adopted the principles laid down in the English case of Re Unisoft Group Limited (No 3)10), where the court stated that11:|
You can find out more about Director’s Duty here – Director’s Duty to Disclose of Personal Interest
1. Sazean Engineering & Construction Sdn Bhd v Bumi Bersatu Sdn Bhd  1 LNS 898.
2. Walter Woon, Company law, Second Edition.
3. 2016 (previously section 4, Companies Act 1965).
4.  1 LNS 119.
5. Ibid, Paragraph 25.
6. Section 196 (4)(b), Companies Act 2016 (previously Section 122(2), Companies Act 1965).
7.  1 LNS 898.
8. Ibid, Paragraph 18.
9.  8 MLJ 450.
10.  1 BCLC 609.
11. Ravichanthiran a/l Ganesan v Percetakan Wawasan Maju Sdn Bhd & Ors  8 MLJ 450, at paragraph 19.