Determining who is treated in law as a company director is not always straightforward. In many organisations, particularly those that grow quickly or operate with informal management structures, authority does not always correspond with formal appointments.
UK company law therefore looks at the substance of an individual’s role rather than the title they hold. People who participate in strategic or financial decision-making may acquire the responsibilities and liabilities of directorship even if they have never been appointed to the board.
The widespread use of director-level job titles is a frequent source of difficulty
For accountants involved in statutory reporting, governance reviews or restructuring work, this distinction is significant. The identification of de facto and shadow directors determines who is subject to statutory duties, who may face liability during insolvency and who may be exposed to disqualification.
These issues tend to come to the surface at moments of organisational difficulty, when decision-making has been informal or undocumented for some time. Therefore, a clear understanding of how director status arises in law, and the risks that follow, is essential for effective advisory work.
De facto and shadow
UK law recognises two categories of non-appointed directors. A de facto director is someone who carries out functions that would normally be exercised by a director. This may include involvement in strategy, negotiation with key third parties or directing senior managers. A shadow director is someone whose instructions the board habitually follows, even if that individual takes no outward role in the company.
The courts examine factual evidence to determine whether an individual falls into one of these categories. Indicators include involvement in major decisions, access to confidential financial information, influence over budgets and staffing, and how third parties perceive the person’s authority. A lack of registration at Companies House does not prevent a finding that someone has acted as a director.
Both de facto and shadow directors are subject to the general duties set out in the Companies Act 2006, including the duties to promote the success of the company, to exercise independent judgment, to avoid conflicts of interest, and to act with reasonable care, skill and diligence. Individuals who fall into these categories may not appreciate that these duties apply to them, which increases the risk of inadvertent breach.
Consequences
Where a de facto or shadow director breaches a statutory duty, they are exposed to the same remedies as an appointed director. They may be required to compensate the company for loss or return any benefit obtained through the breach. These claims often arise during shareholder disputes, ownership transitions and financial investigations.
De facto or shadow directors can be personally exposed to costs and liabilities
Reputational impact can be significant. Findings of a breach may appear in public judgments or insolvency practitioner reports, affecting an individual’s suitability for senior roles.
Insurance protection may be limited. Directors’ and officers’ liability policies commonly apply only to formally appointed directors, leaving de facto or shadow directors personally exposed to costs and liabilities.
Insolvency exposure
Exposure increases when a company enters insolvency. Insolvency practitioners examine the conduct of those who influenced decisions in the period leading up to insolvency. Personal liability can arise where behaviour has caused harm to creditors.
A de facto or shadow director may face a wrongful trading claim if they continued to trade when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation or administration. The court can order them to contribute personally to the company’s assets. Fraudulent trading, which involves intent to defraud creditors, can lead to civil liability and potentially criminal consequences.
Misalignment between nominal authority and actual decision-making can undermine audit evidence
Disqualification is a further risk. Under the Company Directors Disqualification Act 1986, an individual may be barred from acting as a director for up to 15 years if their conduct renders them unfit to manage a company. These orders are public and can have long-term consequences for professional credibility.
For accountants advising distressed businesses, identifying early those individuals whose conduct may amount to directorship provides clarity for restructuring discussions and decisions on cessation of trading.
Job titles
The widespread use of director-level job titles is a frequent source of difficulty. Many companies apply titles such as operations director or commercial director to denote seniority rather than board status. However, titles used in communication with third parties can be treated as representations of authority.
If the individual carries a title like this and is involved in significant decisions or negotiations, this may mean they are viewed as a de facto director. This can complicate contract enforceability and employment disputes, particularly where the individual argues that the title implied greater authority or remuneration than was provided.
Accountants’ role
Accountants are often well placed to identify inconsistencies between formal governance structures and the practical reality of how decisions are made. During audit work, accounts preparation, advisory mandates or insolvency appointments, it is common to encounter individuals who exert influence without having a formal appointment. Advisers should recommend appropriate steps, such as formalising the role, adjusting responsibilities or obtaining legal guidance.
Clear governance structures also support accurate financial reporting and risk management. Misalignment between nominal authority and actual decision-making can undermine audit evidence, weaken internal controls and increase exposure for both the company and affected individuals.
Accountants advising companies need an accurate understanding of these concepts
The distinction between formal and informal directorship is not a narrow technical issue. It determines who owes statutory duties, who may face personal liability and who may be scrutinised during insolvency.
Accountants advising companies at all stages of their development need an accurate understanding of these concepts. Ensuring that legal status reflects practical authority remains one of the most effective ways to protect both organisations and the individuals who guide them.
More information
See the AB article ‘Governance rules shift’ looking at the governance rules for company directors that came into force in January 2025
