It is a basic principle of company law that a company has a separate legal identity to its members and directors/shadow directors are not liable for the actions of a company except in extreme circumstances – the corporate veil legal concept.
A shadow director is a person who acts in the capacity of a board member without formal appointment to the board of directors.
The High Court in a recent case held that the directors and the shadow director bear personal liability for the loss caused to the plaintiff by the company and that the corporate veil be lifted.
The directors of the company had signed a power of attorney in favour of one shadow director on the basis that they were nominee directors and he was the real owner of the company. This resulted in a fraud by the shadow director.
The Court stated that the fact that a director was legally empowered to grant a power of attorney to a third party did not mean that it was appropriate for that to be done in a particular case. It was not a defence where after granting the power of attorney, the directors did not examine to any extent the purpose for which the power of attorney was used.
The directors abrogated their duties as directors to the shadow directors who then used their position to defraud investors.
The Court concluded that it was likely that the fraud, using an Irish company in this manner, would not have occurred without the assistance (albeit unwitting) of Irish residents willing to act as directors and who took no steps to find out what the company was actually doing.
The directors assisted as they failed to observe the basic duties of a director to:
- inform themselves about the nature of their duties as director (or if they did, they ignored those duties);
- acquaint themselves with the affairs generally of the company, and
- exercise appropriate supervision or oversight at a board level in respect of the execution or discharge of whatever tasks or functions had been properly and appropriately delegated to others.
One of the directors was a student, had no role in the company and had been a director in name only. He abrogated entirely the running of the company to the shadow directors with a total lack of oversight of what the company was doing. The Court held that while he may not have appreciated that he was breaching his duty as a director ignorance of the law was not a defence.
Individuals should not be directors of an Irish company unless they are prepared to engage actively in the affairs of the company, understands their duties and always act in the best interest of the company. Failure to do so may result in the imposition of personal liability for liabilities of the company as well as being prevented from acting as a director or company secretary.