The Limbo of Shadow Directorship in India: The English Benchmark (Part 1)

[Dhruv is a student at National Law School of India University.]

The concept of the “shadow director”, an individual who wields decisive influence over a company’s board without a formal appointment, presents a universal challenge to corporate governance. However, the legislative philosophies of the United Kingdom and India reveal a fundamental difference in addressing this issue. Section 251 of the UK Companies Act 2006 is a deliberate act of codification, the culmination of a long jurisprudential history designed to explicitly define and regulate those with “real influence” to ensure accountability follows control as discussed in House of Commons. Its purpose is proactive, in the sense, to identify a class of person and subject them to directorial duties. In contrast, the Indian approach is reactive and liability focused. The functional test for a shadow director is not housed in a standalone definition but is embedded within Section 2(60)(v) of the Companies Act 2013 (2013 Act), which defines an “officer who is in default”. The primary legislative impetus for this clause appears to be the creation of a safe harbor, its key feature is a carve-out to ensure that professionals, such as lawyers and consultants, are not inadvertently held liable for the company’s actions simply for giving advice in a professional capacity This distinction is critical for, where the UK sought to define a type of director, India sought to clarify a type of liability while importing the standard of English law and applying it in an intent based manner, creating a jurisprudential divergence in the process.

This blog will dissect this divergence through a comparative and analytical inquiry. The first part of the blog will establish the English jurisprudential benchmark, tracing the evolution of the shadow director test from the rigid “puppet master” standard in Re Hydrodam (Corby) Ltd to the more pragmatic “real influence” test in Secretary of State for Trade and Industry v. Deverell. It will also critically examine India's implicit statutory framework, highlighting approach of Sections 2(59) and 2(60) of the 2013 Act. The second part of the blog will analyze how Indian tribunal have approached this issue by modifying the UK doctrines, using the case of Tata Consultancy Services Limited v. Cyrus Investments Private Limited to introduce requirements which are neither present in the judgement nor in the English doctrines while at the same time, it will also emphasize the haphazard way various High Courts, while basing the idea on the case of Ionic Metalliks v. Union of India, have tried to introduce the idea of shadow director while at the same time not giving the same idea the reinforcement, it needed. The blog will conclude by arguing that this ambiguity necessitates legislative reform to forge a distinct and effective Indian jurisprudence on shadow directors.

To understand the divergence present in the Indian corporate governance with regard to shadow directors, it is important to understand the underpinnings of the same via the English case laws, which had a trajectory from a rigid, control centric model to a more pragmatic and flexible standard of influence. The idea of a shadow director, as explained in Re Hydrodam (Corby), is one who does not claim to act as a director but on the contrary, he claims not to be a director while giving instructions and advice to directors. He lurks in the shadows, hiding behind others, who, he claims, are the only directors of the company to the exclusion of himself.

Millett J, after formulating the definition of a shadow director, gave a stringent, four-part test for establishing shadow directorship. A claimant had to prove: “(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…; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act”. This four-part test will indicate, if successfully passed, a clear and complete abdication of directorial will, by showing a pattern of behaviour in which the board did not exercise any discretion or judgment of its own but acted in accordance with the directions of others. This creates a puppet-master relationship between the board and the one who is issuing directions to them, due to the test being highly control-centric in nature, which requires a complete surrender of decision-making abilities from the board.

This high threshold was significantly refined by the Court of Appeal in Secretary of State for Trade and Industry v Deverell. In this case, which involved disqualification proceedings against individuals who acted as consultants but wielded substantial influence, the court moved the focus away from the board's complete subservience to the nature of the influence exerted by the alleged shadow.

First, the court clarified that the purpose of the legislation is to identify individuals with “real influence in the corporate affairs of the company”. This shifted the inquiry from proving total control to demonstrating substantive influence. The court also downplayed the “lurking in the shadows” imagery, stating that a person could be prominently involved with the company and still a shadow director. Second, the court ruled that "directions or instructions" could also include non-professional advice. The court reasoned that because the law makes a specific exception for advice given by professionals (like lawyers or accountants), it implies that other, more general forms of advice were intended to be covered. The test was to be of objective nature, focusing on the effect of the communication and the pattern of compliance by the board. Third, and most critically, the court explicitly rejected the need to prove that the board had surrendered its discretion or adopted a “subservient role”. Morritt LJ opined that while such a finding would be sufficient, “it is not necessary to do so in all cases,” as such a requirement would impose “a qualification beyond that justified by the statutory language”. Hence, the court confirmed that the influence need not be all-encompassing; it is sufficient if the board is accustomed to acting on instructions  in  relation  to  key  areas  of  corporate  governance  or  finance.