Company Law, Directors, Infants
By Henry Tobechukwu Ibekwe
Esq. LLB(Hons.) BL (Hons.)
Introduction
Recently, a discussion arose in my workplace as to whether an infant or a company could be a shadow director. Around the same time too, while scrolling through a Lawyer’s WhatsApp group, I saw the same question by a colleague bordering on whether a Corporate Body can lawfully be a Shadow Director. It appears that there is a lot of confusion on the subject as some are arguing that the requirements and qualifications of being a Director are one and same with that of being a Shadow Director. This paper makes a distinction between the two and answers the question of whether an infant or Company can be a Shadow Director.
Who is a director?
According to Section 269(1) of the Companies and Allied Matters Act 2020 (hereinafter referred to as CAMA); A director is anyone appointed to direct and manage the business of the company. Section 269(3) prescribes the punishment for a person not duly appointed as a director holding himself as such. There is also a punishment for the Company in S. 269(4) if the Company holds out a person not duly appointed as a director. Flowing from the above, it is clear that the Law requires that a person be duly appointed before He is considered to be a director.
Who can be appointed a director?
Anyone can be appointed a director in accordance with the provisions of the Articles and the Companies and Allied Matters Act except they are disqualified under Section 283 of CAMA. According to the said section, the following persons are disqualified:
An infant that is - a person under the age of 18 years.
A Lunatic or person of unsound mind.
A person suspended or removed under Section 288 of CAMA.
A Person disqualified under Sections 279, 280, 284 of the Act.
A Corporation other than its representative appointed to the board for a given term.
Judging from the above, it is obvious that an Infant can never be an officially appointed Director. A Corporation, though an artificial person under the law, cannot also be a director – only a representative of a Corporation can be officially appointed. The question now is: Are the Laws different when it comes to Shadow Directors?
Difference be an official director and a shadow director
Whereas a Director is one who is duly appointed to manage the business of the Company, A Shadow Director is one who controls and wields influence over the Directors. Under the common law, a Shadow Director does not ordinarily owe fiduciary duties to the company as decided in the case of Ultraframe (UK) Ltd v Fielding 1 whereas an official director owes fiduciary duties to the Company as outlined under Section 305 of Companies and Allied Matter Black’s Law Dictionary 2nd edition defines a Shadow Director as “a Director who is not technically with the firm but is a major shareholder but doesn’t take part in governing the firm but whose instructions are complied with.” A shadow director is neither officially appointed nor officially removed but is known to Law as being able to give orders to the Official Directors of a Company. A Shadow director is defined under Section 270 of CAMA 2020 as any person on whose instructions and directions, the Directors are accustomed to act. Let me reproduce Section 270 of CAMA for proper perspective. It states as follows:
Without prejudice to the provisions of sections 269 and 276 of this Act, and for the purposes of sections 279, 301 and 307 of this Act, “director” shall include any person on whose instructions and directions the Directors are accustomed to act.
Subject to sections 301, 306 and 307 of this Act, nothing contained in section 276 of this Act is deemed to derogate from the duties or liabilities of the duly appointed directors.
Where a person in his professional capacity gives advice and a director acts on it, that shall not be construed to make such a person under this Act a person in accordance with whose directions or instructions the director of a company is accustomed to act
Let me quickly state that based on Section 270(3), a Professional giving advice in his professional capacity is not a Shadow director. It does not matter if the Directors are accustomed to act on the advice.
A cursory look at the Section however reveals the Phrase “Without prejudice to the provisions of Section 269 and 276 of this Act”. First of all, the term “without prejudice” according to Leonie Savoury 2 simply means “without detriment to an existing legal right”. In other words, the law does not intend that anything said in this current section should affect or derogate from the provisions of Section 269 and 276. It is worthy of note that Section 269 of CAMA defines who a director is and prescribes the punishment for Intermeddler directors while Section 276 outlines the liabilities of such intermeddler directors. Section 270 CAMA is then saying that those definitions remain as stated and should not be changed; However, for the purpose of interpreting Section 279, 301 and 307 – Both Shadow Directors and officially appointed Directors are all to be regarded as Directors. It means that For Section 279, 301 and 307, Shadow Directors are Directors, but for other sections, they are not.
The implication of the foregoing is that all the requirements concerning Official Directors (including the requirements as to disqualifications) are not applicable to Shadow Directors except the requirements contained in Section 279, 301 and 307. You might be curious as to what is contained in Section 279, 301 and 307
Section 279 provides to the effect that an insolvent person acting as a Director commits an offence and prescribes punishment for it. In essence, an insolvent person cannot be a shadow director since the meaning of Directors in this section includes Shadow Directors.
Section 301 provides for register of Directors’ Shareholding. In this section, A company is required to keep a register showing the number, description and amount of shares and debentures held by the Directors. The details include same as held by the Directors in the Company, a subsidiary of the company, the holding Company or a different subsidiary of the holding company. What this means is that: details of Shadow Directors must be included in such a register because for this section, the law considers Shadow directors as Directors.
Lastly Section 307 provides for multiple directorships. The Law forbids a person holding multiple directorships from derogating from his fiduciary duty to each company. The Law also forbids and punishes a person being a director of over five companies. In this section, Director includes Shadow directors. In other words, in determining multiple directorships, the law does not only count officially appointed Directors, it also counts Shadow directors. It means that if I am a shadow director of 6 Companies or I am an official director of four companies and a shadow Director of three, I have contravened Section 307 of CAMA.
However, In all other instances, the word “director” does not include Shadow Director. I rely on the Latin maxim “expressio unius est exclusio alterius” meaning that Express mention of one thing is to the exclusion of the other. The Law properly defined who a director is and only mentioned three instances where a Shadow Director should be regarded as a Director. It means that on a normal day, the word ‘Director’ should not have the same meaning and definitely not the same requirements of appointment as that of a Shadow Director.
Instances where an infant or company can be a shadow director
The preliminary definitions of who can be referred to as a Shadow director shows that a Shadow director ought to be a Person with Significant control or a major Shareholder in a company. Can an infant or a Company be such a person? By the provisions of Section 18(1) of the Companies and Allied Matters Act 2020, any two or more persons may form and incorporate a company by complying with the requirements of the Act in respect of registration of the company. Persons here include Corporations or Companies. It is trite in law that a Company is an artificial person as declared by Lord Denning MR in case of Salomon v. Salomon. 3 It is therefore very clear that a Company can legally form another Company as it is considered an artificial person in the eyes of the Law. Any person that forms or joins in the formation of another company is said to be a member or shareholder. So a holding company is defined by Section 381 of CAMA as a member of a subsidiary company that also controls the composition of its board of directors and holds more than 50% in nominal value of its equity share capital. If a person controls the composition of board of directors of a company, he controls the board of directors in a way too. Therefore, such a holding company is usually a shadow director. In the case of Re PFTZM Ltd 4. The Court indicated that a Corporate body could be identified as a Shadow Director.
Furthermore, the provisions of Section 20(2) of the Companies and Allied Matters Act 2020 allows infants (an individual less than 18 years of age) to join in the formation of a company if two other Adults not disqualified under Section 20(1) have subscribed to the memorandum. In other words, an infant can own shares in a company and perhaps even own majority shares as long as He has other two adults who are equally members. Again, flowing from the above discussions, there’s nothing under the Companies and Allied Matters Act 2020 that says an infant cannot customarily give instructions and directions to the Board of a company he co-owns; especially where He is a majority shareholder.
Conclusion
Based on the foregoing, it is clear that the rules guiding who can be a Shadow director and who can be a Director are very different. Shadow directors are not officially appointed or officially removed but the law recognizes their prerogative of giving instructions to properly appointed directors. Moreover, the Law does not classify Shadow Directors under the same category as official directors save as it pertains to Section 279, 301 and 307 of CAMA.
In view of this, it appears that except for an insolvent person, anyone can be a Shadow Director including infants and Companies. In my opinion, there is nothing in the Companies and Allied Matters Act or in fact any other regulation that suggests otherwise.
End Notes
(2005) EWHC 1638 (Ch)
Leonie Savoury – ‘Without Prejudice, cutting through the Legal Jargons’ https://tiger-law.com/withoutprejudice-cutting-through-the-legal-jargon/ (accessed March 28,2023)
(1896) UKHL 1 4
(1995) BCC 280
Originally published by Henry Tobechukwu Ibekwe on LinkedIn
Reach Henry Tobechukwu Ibekwe on LinkedIn.
Oyemaja Law.