Shadow Directors In India: Examining Liability Under Company Law
Shivangi Lachhiramka, LL.B. (Hons.), O.P. Jindal Global University
ABSTRACT
In the usual conception, the decision makers in the corporation are the persons who have the title of the Board of Directors. But that’s not quite right. There is another set of persons that influences the decisions taken by the Board. Such persons are called as ‘Shadow Directors’. While the notion of shadow director has not been specifically defined under Indian legislation, by virtue of Section 251(1) of the Companies Act 2006 of the UK, the concept has been defined as a person in respect to whom the director of the company is accustomed to act in accordance with his/her directives or instructions. It is also intriguing to see if the notion of “accustomed to act” also impacts Indian jurisprudence. The fundamental issue, however, is whether or not these persons have any responsibility whatsoever, and if so, to what degree, should the Company face consequences as an impact of their proposal.
On a close scrutiny of the Indian law, there are a few clauses that tacitly deal with this issue. Relevant to us are: Sections 2(59), 2(60), 2(69) and 2(76) of the Companies Act, 2013, defining the words "Officers", "Officers in default", "Promoters" and "Related Parties" correspondingly. This paper specifically asks when a promoter within the meaning of Section 2(69), particularly under its third limb, which already acknowledges de facto control over company affairs, crosses the threshold into shadow directorship, a distinction which has important consequences for liability and which Indian courts have yet to resolve consistently. These laws are intended to cover within their purview any informal body which influences a Company. The paper also has a mention of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and points out a specific gap in Regulation 4(2)(f) and 26 which do not, as they are, cover those who have informal control without any formal title. The Insolvency and Bankruptcy Code, 2016 is also discussed as the most practically relevant forum in which questions of shadow directorship arise in India today, Sections 66 and 69 of the IBC, read with the Supreme Court’s reasoning in ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, provide a doctrinal basis to hold de facto controllers liable for insolvency-related violations, although there is a dearth of reported NCLT decisions applying this framework to shadow directors in fraudulent trading proceedings.
