The 2016 collapse of British Home Stores (BHS) remains a litigation engine. The latest chapter, however, raises a question that transcends the minutiae of the case and has universal applicability – can someone who was never formally appointed a director nevertheless be treated as one or be made personally liable for their conduct and decisions? It seems that, as far as company law in England and Wales is concerned, what you do in professional life matters.

What is a shadow or de facto director?

The law recognises that companies are not always run only by the people formally appointed to the board, and it recognises two further categories. A “de facto” director is someone who acts as a director – i.e. is part of the company’s governing structure through taking director-level decisions – even though they were never formally appointed. A “shadow” director, as defined in the Companies Act 2006, is a person who, “in accordance with whose directions or instructions the directors of the company are accustomed to act”, is a figure in the background whose wishes the board routinely follows.

Both forms of quasi-director may carry many of the same duties of loyalty and good faith as an appointed director, and may face personal liability if things go wrong. A de facto director owes the full set of duties. For a shadow director, the Companies Act applies the general duties only so far as they are capable of applying, and how far that goes is not fully settled. Liability for wrongful trading, and disqualification as a director, can apply to both. There is, however, an important carve-out for advisers, given that a person is not a shadow director merely because the board acts on advice they give in a professional capacity, as offering genuine professional advice does not necessarily make you a director. That carve-out applies only to shadow director status. It does not protect an adviser who in reality acts as a director. The risk arises when you cross the line from advising decision-makers to actually becoming the decision-maker.

The BHS claim:

This question forms the crux of the current case. BHS failed in 2016 with the loss of around 11,000 jobs and a pension deficit running into hundreds of millions, with earlier proceedings having already seen former directors being ordered to pay large sums in 2024. Those orders were for wrongful trading (carrying on trading when there was no reasonable prospect of avoiding insolvent liquidation or administration) and for “trading misfeasance” (causing the company to trade in breach of the directors’ duty to take creditors’ interests into account).

In the latest High Court trial, the liquidators are pursuing a city lawyer for more than £10m, alleging that he was, in substance, a director “in all but name”, acting as a central figure in management despite never having been formally appointed. The allegations point to such practices as working full-time at its headquarters, attending no fewer than 39 board meetings, and being paid, through service companies, more than the chief executive. The lawyer in question denies the allegations, maintaining that he was acting only in an advisory capacity rather than as a decision-maker, countering that the claim rests on a distorted characterisation of the evidence. It must be emphasised that the allegations are as yet unproven, and it will be for the court to decide which side of the line his conduct fell.

Implications:

In summary:

• BHS’s liquidators are suing a city lawyer for over £10m, asserting that he acted as a director “in all but name”.
• The defendant allegedly worked full-time at HQ, attended 39 board meetings and was paid more than the CEO, although the defendant maintains that he acted only in an advisory capacity.
• You cannot advise a board and direct it. Advice is protected, but taking the decisions the board then rubber-stamps is not.
• Those who cross the line between advice and direction may face the same personal liability as an appointed director.

The case serves as a clear warning to anyone closely involved in a company that they do not formally run, including not only professional advisers such as lawyers, accountants and consultants, but also investors, lenders, dominant shareholders and family members who operate behind the scenes. Merely exercising ordinary contractual or ownership rights does not make someone a shadow director, but directing the board’s decisions can. If your involvement goes beyond giving advice and strays into directing the company, taking or dictating the decisions the board then simply implements, then you risk being treated as a “director in law”, with a director’s duties. These include acting in the company’s interests. Once the company is insolvent or bordering on insolvency, or insolvent liquidation or administration is probable, directors must also weigh creditors’ interests, and those interests take priority once insolvent liquidation or administration becomes unavoidable.

The consequences of the BHS litigation are far from theoretical. A shadow or de facto director can be pursued, just like an appointed one, for breach of duty, for misfeasance, or for wrongful trading. Wrongful trading means continuing to trade when they knew, or should have concluded, that insolvent liquidation or administration could not reasonably be avoided, unless they took every step to minimise losses to creditors. These claims are normally brought by the liquidator or administrator, not by individual creditors. As the BHS debacle demonstrates, the sums involved can be very large, and they may fall personally on the individual.

Statutory protection for advisers is real, though limited. It covers advice given in a professional capacity, and only in relation to shadow director status. It does not extend to taking over the running of the business. The practical discipline is to keep an advisory role as such, give the board options and let it make decisions, and avoid the trappings of executive power such as full-time involvement, signing authority and executive-level pay. These are warning signs, not a legal test, because courts look at the whole picture. Make sure the directors really do make their own decisions and that the records accurately reflect this, because records cannot cure what actually happened. Anyone who is, in reality, running a company they have chosen not to be appointed to should understand that the label changes nothing, as the law looks at what you actually do.

Disclaimer: This simplified summary of a UK legal case is for general information only. It is based on a claim issued in the High Court; the allegations are unproven, and the claim is at an early stage. It is not legal advice, may omit important detail, and may not reflect later developments or appeals. Please read the full judgement and seek professional legal advice before acting.