The concept of shadow director in Maltese and foreign company law

Abstract

The imposition of penalties on validly appointed directors for offences committed under, inter alia, the Companies Act shook the fundamental principle of company law that directors or managers of companies may enjoy the corporate privilege of limited liability. The victims of improper corporate behaviour are ultimately the shareholders and creditors. The provisions of the Companies, are therefore intended for their protection. Why, then do the Companies Act provisions continue to allow in certain instances, shadow directors to escape without penalty when they are in violation of the protections offered to shareholders and creditors? With the above scenario in the background, this dissertation sets out to offer a critical appraisal of the concept of shadow directorship rather than a description of existing statutory rules and case law on the subject. It will, nevertheless attempt to set out the rules in sufficient detail to facilitate understanding of the framework in force. The concept of shadow director is a subject of increasing importance not merely in its own right but because it impinges on a host of other sectors such as company, insolvency, tort and criminal law as well as corporate governance issues. It is essential, therefore, that the development of this concept proceeds with a sense of purpose. If this is lacking, then this study is liable to be marked by inconsistencies of reasoning. Chapter 1 explores the background and history of the concept of shadow director with special reference to comparative law. This chapter aims to set out the ground by touching on the arguments to be developed later on through the dissertation. Chapter 2 then focuses on the definition of shadow directors and endeavours to outline the fundamental distinctive characteristics of de iure, de facto and shadow directors. Due regard is also given to the practical differences between de iure directors and shadow directors. Chapter 3 is the central chapter on shadow directorship which deals, from a comparative perspective, with duties and responsibilities of shadow directors: covering both statutory and common law duties. Chapter 4 pays special attention to the liability of shadow directors. It delves into the civil liability, involving inter alia a discussion on the imposition of personal liability on shadow directors and criminal liability. This chapter explores also the issue of disqualification in relation to shadow directors. The study is supplemented by a comparative analysis. I conclude by opining that it is time to take a fresh look more generally at the law relating to shadow directors. Focus is reverted onto the shortcomings of the Companies Act, 1995 and recommendations for reform are also included.