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Shadow Director

I have been approached to act for a company by the person who ultimately controls every facet of it. He is a bankrupt and has installed a third party to act as director of the company. He is effectively acting as a shadow director and has full control of all finances and decisions etc. My questions (i) Is this an issue which the current agent should make me aware of when professional clearance is requested? (ii) Is this a compelling reason not to accept appointment?

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What an odd question

"Is this an issue which the current agent should make me aware of when professional clearance is requested?"

Well!  Yes, it is, but you already know about it, so what does it matter what the current agent may say?

 

"Is this a compelling reason not to accept appointment?"

As far as I am aware, undischarged bankrupts may not serve officially as directors of companies, but others more familiar than I am with the law will know if this extends to shadow directors.  Even if it doesn't, I would not wish to act in these circumstances.

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Shadow Directors

In real life, I can count on one hand the number of times that "Shadow Directors" have been acknowledged to exist.

The usual work around seems to be that the undischarged bankrupt is given a fancy management title that stops short of director but gives authority for the day to day running of the business.

Usually the patsy is a family member who also happens to hold the shares.

The ethics and legalities are infinitely more complicated and I won't even try to comment on them. I would imagine though that there are few accountants in practice on here who don't have as clients companies where the wife holds the shares and signs the accounts while the husband works for her.

  

   

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In simple terms the law of bankruptcy is explicit

 You cannot be a company director while your bankruptcy remains undischarged. Furthermore, you are legally prohibited from managing, forming or promoting a limited company unless you have the explicit permission of the court (my italics) 

My advice is do not accept instructions

 

 

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Undischarged bankrupt

If the person who approached you is currently an undischarged bankrupt then it would appear that he is contravening s11 Company Directors Disqualification Act 1986.  The operative words from s11 are:

"It is an offence for a person who is an undischarged bankrupt to act as director of, or directly or indirectly to take part in or be concerned in the promotion, formation or management of, a company, except with the leave of the court".

The maximum penalty is 2 years imprisonment and / or a fine plus personal liability for debts of the company.

I would say that a company employee who merely takes instructions from others does not 'take part in or be concerned in' the management of a company.  But a person who, for example, has authority on behalf of the company to negotiate and agree contracts with suppliers or customers, or negotiate and agree bank facilities etc is 'taking part in or concerned in' the management of the company.

By seeking to agree terms for you to act as the company's external accountant (and so be a supplier to the company) this person is committing an offence under s11.  It does not matter whether he describes himself as a director, shadow director, manager, or tea boy, he has crossed the line as far as s11 is concerned.

So I suggest you do not accept appointment and you consider your obligations to make a Suspicious Activity Report under s330 PoCA 2002 / MLR 2007.

David

P.S.  From a Court of Appeal judgment:

This appellant, whom we shall call Mr Seager, had been the director of a small family company called Tabline Ltd. On 25 June 2003 he resigned his directorship and his wife and son were appointed directors in his stead. On 4 September 2003 he signed a 5 years disqualification undertaking, which became operative on 29 September 2003. That prevented Mr Seager from taking part or being concerned in the promotion, formation, or management of any company. He signed this undertaking after he was threatened with disqualification proceedings because of the poor financial record of the previous company of which he had been a director. That previous company had been wound up with large debts to their creditors. It was believed that Tabline was, effectively, being used as a vehicle to run the remaining business of the former company.However, Mr Seager continued to be involved in running Tabline. In particular he negotiated a lease with the landlords of Tabline, the Kimoto group. In doing so Mr Seager signed letters of agreement and a company cheque. After Tabline had become tenants of Kimoto, it defaulted on payments of rent.During all this time neither Tabline's bankers, Lloyds TSB, nor its accountants, knew that Mr Seager had resigned as a director of the company. They continued to deal with him as before. However, on 7 July 2004 Tabline entered a creditors' voluntary liquidation, with an estimated deficiency of over £1 million. When Mr Seager was interviewed, he accepted that he had been involved with Tabline. However, he said that he worked as an employee at the direction of his son.The Particulars of Offence on the Indictment stated that Mr Seager had taken part in the promotion, formation and management of Tabline between 29 September 2003 and 7 July 2004, being a person disqualified from doing so by his undertaking to the Court, and doing so without the leave of the Court. The Crown did not allege that Mr Seager had been dishonest. Nor did the Crown assert that any particular loss to Tabline had resulted from his actions as carrying on as a shadow director of the company.

Mr Seagar was convicted.

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