Shadow Director: Who are They and What are Their Duty?

What is Shadow Director

A shadow director is a director who: 

  1. Is not formally appointed by the company;
  2. Are usually the ones who are controlling/ commanding the formally appointed directors (de jure directors) in the background; and
  3. The instructions given by them are usually followed and carried out by members of the board of directors of the company.

The court1 further described such person2 as a rather sinister individual who is in actuality a ‘puppeteer’, who pulls the strings and his puppets will dance to the music/ tune he played.

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:

  1. There is evidence of a controlling or commanding role exercised by the shadow director over the de jure directors;
  2. 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;
  3. The directions and instructions had been complied with by the de jure directors of the company; and
  4. 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.
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:

  1. 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.
  2. Unless the whole of the board, or at the very least a governing majority of it are accustomed to act on the directions of an outsider, such an outsider cannot be a shadow director.
  3. 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.

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 [2018] 1 LNS 898.
2. Walter Woon, Company law, Second Edition.
3. 2016 (previously section 4, Companies Act 1965).
4. [2013] 1 LNS 119.
5. Ibid, Paragraph 25.
6. Section 196 (4)(b), Companies Act 2016 (previously Section 122(2), Companies Act 1965).
7. [2018] 1 LNS 898.
8. Ibid, Paragraph 18.
9. [2008] 8 MLJ 450.
10. [1994] 1 BCLC 609.
11. Ravichanthiran a/l Ganesan v Percetakan Wawasan Maju Sdn Bhd & Ors [2008] 8 MLJ 450, at paragraph 19.

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