Do companies actually require a natural director or is Section 155 not worth the paper it is written on?

Under the Companies Act 2006 section 155 all companies are required to have at least one natural director. This is different from the common law position which allowed companies to have a sole corporate director (i.e. a company itself being a director) as established in the case of Bulawayo [1907] 2 Ch 458.

For any rule there has to be deterrent or incentive to follow it. Section 156 gives the Secretary of State power to give direction to any company where it does not satisfy this requirement. Section 156(6) makes it an offence for failure to comply with that director and is committed by every officer in default including shadow directors.

But what if the company is simply a sole corporate director that has no officers and no other directors? How can anyone commit the offence?

Naturally one may assume, well it should be the one who controls the corporate director and thus makes them a shadow director.

Unfortunately that natural assumption is incorrect according to the courts of first instance and Court of Appeal. On a number of occasions courts have categorically denied that an individual who controls a corporate director is a shadow director "without more". What the courts have meant by without more is that it means that the individual must not simply be performing the functions of a de jure director (i.e. someone formally appointed) at another company, or simply discharging the functions of the corporate director in that capacity. For case examples of this denial see Re Hydrodam [1994] BCC 161 or Secretary of State for Trade and Industry v Hall and Nuttall [2006] EWHC 1995 (Ch)

Thus the courts have not denied that on the facts it is possible for someone to be classed as a shadow director. However, it seems fanciful that it will ever be the case on the facts when in the recent case of Holland [2009] EWCA Civ 625 at first appeal, better known for the Supreme Court ruling [2010] UKSC 51, the court found the individual was not a de facto director despite being the guiding mind behind the company and the only one involved in the process. It is most likely that the court also affirmed Holland would not have been a shadow director either if the liability in question extended to shadow directors. The obiter comments from the Court of Appeal seem to suggest as much.

Thus, whilst the common law reached the position that an individual who controls the corporate director is prima facie not a shadow director, it is possible that Parliament have altered that position through section 156(6) otherwise the deterrent of ensuring one natural director will have no substance.

However such a stance does not pierce the corporate veil, i.e. treating the individual and the corporate director as one. It recognises that section 251 of the Companies Act 2006 is designed to catch those trying to usurp the position of director without formal appoint. Section 251 defines a shadow director as someone who the de jure directors have become accustomed to act on their direction and instruction. Thus the courts would be recognising that the corporate director as a separate legal entity has become accustomed to act on the individual's instruction and direction.

Despite this the courts may still be reluctant to find as much since they were unwilling to extend the concept of de facto directorship in the Supreme Court case of Holland on the basis, inter alia, that to do so would be to say all individuals who control corporate directors are de facto directors. Thus the same would apply here that to rule as such would be to say all individuals who control corporate directors are shadow directors regardless of whether they have instructed or directed them. However, this may be defeated on the basis that shadow directorship is case sensitive and it is not to say it does extend it for every case. This would effectively reverse the ratio from Hydrodam that without more someone is not a shadow director. This is because it would create the assumption that someone controlling a corporate director is a shadow director unless shown they did not instruct or direct them, rather than the other way round that someone is not a shadow director without more i.e. they did instruct or direct the corporate director.

The distinction is very artificial that has been created by the common law and section 155 attempts to remedy that through the requirement of having one natural director responsible for every company. However, if that requirement is to have substance it must be acknowledged that someone who controls a corporate director is in some capacity connected to that company, and is suggest that connection is through shadow directorship, otherwise the common law principles will prevent that enforcement.