Author :- Adv. Kulin Dave

Can the Company take the Directors off the Board and make them special observers/shadow directors?

It is possible under the law to take the Directors off the Board and make them special observers. One of the options which shall be considered is to appoint them as an Officer or a Shadow Director. Per section 2(59) of the Act an “officer” includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the Directors is or are accustomed to Act. An officer under Section 2(59) is a shadow director who is not appointed to the Board but on whose direction the Board is accustomed to act is liable as a director of the Company unless he or she is giving advice in his or her professional capacity. For the purpose of ease, we have outlined certain FAQs below in relation to the Shadow Director.

How to appoint a shadow director?

Articles of Association of the Company need to be amended to include the provision of Shadow Director including his roles and duties. A resolution has to be passed by the Company to this effect stating the name of the person to be appointed as a Shadow Director his/her roles, duties and remuneration to be paid. Post this resolution, prescribed forms needs to be filed before the Registrar of Companies.

There needs to be a quorum, if there are no Directors from Company’s side and only special observers, how do we manage quorum?                    

The quorum of the meeting as per the Act shall be limited to the Directors and thus the Shadow Director presence/absence shall not be considered for the purpose of the quorum. The Articles of Association can be amended to include presence of the Shadow Director in every Board Meetings. 

What are the role and duties of shadow director?

The role and duties of the Shadow Director shall be as decided by the Board of Directors and Shareholders. The duties shall include but not be limited to statutory duties, fiduciary duties relating to duty of good faith and acting in the company’s interest nor does he directly deal with the assets of the Company. Act places restrictions on any property related and financial transactions between that particular Company and the Shadow Director, or with any person who is related to the Shadow Director.

Can shadow directors veto the resolution passed by the Board of Directors?

No, a Shadow Director cannot veto it. In fact, reference may be drawn to the decision of England and Wales High court (CD) in Ultraframe (UK) Ltd. V.Gary Fielding, North Star systems ltd & Ors. where it was held that that the statutory definition of “shadow director” has been enacted for specific purposes of company legislation. These include many prohibitions relating to transactions between companies and their directors; duties of disclosure and liability for wrongful trading or to the making of disqualification orders. There is no specific statutory provision that says that a shadow director owes the same duties to a company as a de jure or de facto director.The term “shadow director” is a limited statutory concept, not a concept of the general law. From its statutory use, it is clear that the expression is used for far narrower purposes than the definition of a “director”, even where that definition is extended.

What are the liabilities of the shadow director?

Section 2(60) of the Companies Act, 2013states that Shadow director shall be liable to any punishment or penalty by the way of imprisonment, fine or otherwise as may be prescribed under the Companies Act, 2013 for any acts of such shadow director in default liable for penal action for violation of any duties as per Articles of Association.

Best way to safeguard them?

Option 1The aforementioned solution in questions (a) and (b) is an alternate option. The Company can also opt for Directors and Officers Liability Insurance to safeguard its directors from civil as well as certain criminal liabilities arising out of wrongful acts in their managerial capacity. It also applies to former, present and future members of the Board of Directors of the Company, the management and any employee performing a managerial or supervisory role. Companies providing Directors and Officers Liability Insurance are Tata AIG Insurance, Oriental Insurance, Marsh Insurance and several others.

Option 2- Deed of indemnity can be signed between the directors or officers and the Company that indemnifies the director or officer to the maximum extent permitted by law in respect of legal proceeding and any claims made against that director or officer. The Deed of Indemnity should continue to in force even after the director or officer ceases to be a director or officer of the company.

Is there a way that the Company do not have nominee directors at all and only have shadow directors?

As per the Act, it is mandatory for a private limited company to have minimum 2 directors at all times. Shadow directors are not director of a company but merely an officer of the Company who has control over the Board of Directors. Thus, by removing nominee directors and appointing Shadow Directors will directly violate the mandate of minimum directors of company thus violation of the Act. An alternative to this is that a company can have one executive director and one non-executive director. This will suffice the mandate of the quorum under the Act. A non-executive director is a person who is not falling in conditions of definition of ‘Executive Director’. Therefore, one can opine that all the Directors except ‘Whole Time Director’ and “Managing Director’ shall be considered as Non- Executive Director. Ministry of Corporate Affairs vide its circular no.No.2/13/2003/CL- V dated 25th March, 2011 exempts non-executive directors from any liabilities not arrayed as delinquent directors