Hong Kong has in recent years adopted a more robust approach in making officers managing the companies criminally liable, rather than the companies themselves, which are only tools for the commission of offences by those controlling them. One of the many examples is the amendment made to the statutory definition of the term ‘shadow director’ in 2003.

Who is a shadow director?

Pursuant to section 2 of the Companies Ordinance (Cap. 32) (“CO”), a shadow director in relation to a company, means a person in accordance with whose directions or instructions the directors or a majority of the directors of the company are accustomed to act. Although termed as a ‘shadow director’, a shadow director, however, does not have to lurk in the shadow all the time. It is not necessary to prove that the influence is always concealed as if it is one of the ingredients of the term.

Directions and Instructions

These refer to the ‘communications’ between the alleged shadow director and the majority of directors which can be in writing or conducted orally, and it can either be formal or informal. Whether a particular communication constitutes a ‘direction’ or an ‘instruction’ is a question of fact and it is to be ascertained objectively.

Ability to influence the majority

A person is not a shadow director if only a minority number of directors of a company are accustomed to act upon his instructions. In Re Hydrodan (Corby) Ltd [1994] BCC 161, Millett J (as he then was) considered the following questions necessary to be answered and proved in establishing a person as a shadow director of the company:

(1)          who are the directors of the company, whether de facto or de jure;

(2)          that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so;

(3)          that those directors acted in accordance with such directions; and

(4)          that they were accustomed so to act.

‘Accustomed to act’ means a regular course of conduct

In Re Unisoft Group Ltd (No.3) [1994] 1 BCLC 609 at 620, Harman J further stated that ‘accustomed to act’ must refer to acts not on one individual occasion but over a period of time and as a regular course of conduct. It is not necessary to show that the alleged shadow director has influence over all the corporate activities of the company. It needs not be that the board of directors exercises no discretion of their own. It is enough to show that the alleged shadow director has some real influence over the way in which the board of directors acts.

Professionals may be held shadow directors

A professional adviser may be considered a shadow director if he is communicating something more than just professional advice.

In Re Tasbian (No. 3) Official Receiver v Nixon [1993] BCLC 297, in refusing to strike out a case on the allegation that a chartered accountant a de facto or alternatively a shadow director, the Court’s emphasis was laid on the fact that the chartered accountant was a signatory to the bank accounts of the company and that he controlled how the funds of the company may be employed. The motive of the alleged shadow director for monitoring the company’s trading and controlling the operation of its bank account was irrelevant.

In a recent case Moulin Global Eyecare Holdings Ltd (In Liquidation) and others v. Oliva Lee Sin Mei [2009] 3 HKLRD 265, the liquidators of the company contended that a Canadian-trained lawyer who was the non-executive director, and also a member of the audit and remuneration committees of the company a shadow director. Although their view was not shared by the court, the court did examine the concentration of the board members as to whether they were accustomed to act in accordance with the alleged shadow director’s directions and her ability to exercise any real influence over the affairs of the companies. It was held in that case the alleged shadow director was no more or less than professional ‘hired-help’ to provide respectability to the membership of the board of the companies.

Therefore, persons such as professional advisers should stay alert when he/she is controlling the company’s affairs in a manner going beyond the province of a company’s professional advisor and in such a manner as to make him/her either a shadow or a de facto director because they, although not validly appointed as a de jure director, can also be made liable as a director of the company.