The Limbo of Shadow Directorship in India: The Indian Standard (Part 2)

[Dhruv is a student at National Law School of India University. The following post is in continuation of another post available here.]

The Indian statutory framework for shadow directors presents a notable contrast to the explicit codification found in English law. While inheriting the functional test for control, the Indian legislature, in the Companies Act 2013 (2013 Act), has opted for an implicit, liability-driven approach rather than one of direct definition. This legislative choice creates a significant paradox: the statutory language is borrowed directly from UK law, yet the jurisprudence that gives this language meaning has not been judicially imported. This disconnect has resulted in a jurisprudential gap, where the substance of the shadow director doctrine is present in the statutory books, but its application remains underdeveloped and uncertain. The 2013 Act provides no standalone definition for the term “shadow director,” an omission that remains despite recommendations from expert committees to address the issue directly. Instead, the 2013 Act captures the concept by embedding the functional test — “a person in accordance with whose directions or instructions the Board…is accustomed to act” into two key definitions. First, Section 2(59) includes such a person within the definition of an “officer”, serving as the primary statutory hook to bring them under the 2013 Act's ambit. Second, and more critically, Section 2(60)(v) includes the same conduct in the definition of an “officer who is in default”, which is the 2013 Act's primary enforcement mechanism for attaching vicarious liability for statutory contraventions.

When viewed through the lens of Re Hydrodam, this liability-driven approach would be exceptionally difficult to enforce. If Indian courts were to adopt the stringent, control-centric test articulated by Millett J, a claimant would need to prove that the board of directors (while in the UK, the standard set is for individual board members) had completely abdicated its independent will and exercised “no discretion or judgment of its own”. The “puppet master” analogy would become the standard, requiring evidence of a pattern of total subservience. In the Indian corporate context, where deference to promoters or influential stakeholders is common, proving that this deference amounts to a complete surrender of discretion would set an almost impossibly high evidentiary bar. The practical effect would be to render Sections 2(59) and 2(60)(v) largely toothless against all but the most overt and absolute forms of external control, leaving the nuanced and subtle forms of influence unregulated.

However, if the Indian framework is interpreted through the more evolved and pragmatic lens of Deverell, it becomes a far more potent tool. The Court of Appeal in Deverell shifted the focus from the board's subservience to the existence of “real influence” in the company's corporate affairs. Under this standard, it is not necessary to prove that the board cast itself in a subservient role or surrendered its discretion. Non-professional “advice”, if consistently followed, can be construed as a “direction or instruction”, and the influence need not be all-encompassing, but can be confined to key areas of corporate governance or finance. Adopting this “influence-centric” approach would allow Indian courts to look at the practical reality of corporate power dynamics. It would enable them to hold individuals accountable who, while not acting as “puppet masters”, nonetheless exert a decisive and consistent influence that causes the board to act in a particular way.

Indian Encounters with Shadow Directors

There are two prominent cases which deal with the idea of shadow directors in Indian company law, which are Ionic Metalliks, which is a division bench judgement of the Gujarat High Court and, perhaps the most detailed analysis of the shadow director concept to date occurred, not at the Supreme Court, but in the initial judgment by the Mumbai Bench of the National Company Law Tribunal (NCLT) in, Cyrus Investments Private Limited v. Tata Sons Limited. 

In Ionic Metalliks, the division bench while classifying the types of directors recognized within the 2013 Act defines shadow director as ‘A person, who is not appointed to the board, but on whose directions the board is accustomed to act, is liable as a director of the company, unless he or she is giving advice in his or her professional capacity’ and go on to suggest that a shadow director may be treated as an ‘officer in default’ under 2(60)(v) of the 2013 Act. The division bench omitted to do two things. First, the bench doesn’t cite the source from where they have imported this particular definition of ‘shadow director’, for it is a complete replica of the definition of an officer in default in 2(60)(v). Second, they have given the idea of shadow directors coming under an officer in default but they have not specified the conditions under which a ‘shadow director’ may be treated as an ‘officer in default’. This classification of directors has been cited multiple times by various high courts without scrutinizing the concerning absence of both primary authority for the classification and the requisite conditions for shadow director liability. Such judicial adoption, while establishing a de facto precedential value, perpetuates the original judgment's analytical gaps regarding the theoretical underpinning of shadow directorship and its relationship with officer-in-default liability.

In Cyrus Investment, however, there is a different issue with the application of the idea of shadow director. While the Tribunal directly cited and used the modern, influence-centric test from Secretary of State for Trade and Industry v Deverell, noting that the purpose of the law is to identify those with “real influence”, its analytical move, materially departed from Deverell. In Deverell, the Court of Appeal did not rely upon any mala fide / illegal intention; it underscored that “directions or instructions” are to be construed broadly to capture practical, habitually heeded influence, even if exercised through consensual consultation within group governance structures. The NCLT, by contrast, read in a hidden condition that only influence amounting to some form of improper domination would qualify an advice to be of a shadow director. This reasoning collapses the evidential assessment (Is the Board accustomed to act?) into a fault- laden requirement (Is the influence tainted?). This importation of illegality, that is neither found in the statutory text of Section 2(60)(v) nor sanctioned by Deverell, blunts the accountability purpose of the provision, which is to extend the net of “officer in default” to hidden governance participants irrespective of moral considerations. Moreover, the Bench stopped short of explicitly recognizing that, although the Indian Act omits the term “shadow director”, clause (v) functions as its substantive equivalent. Instead, it treated Deverell as persuasive only if aggravated circumstances exist, thereby narrowing a transplanted provision that should, under a faithful transposition approach, be read consistently  with its UK counterpart.

This illegality / mala fide intention importation as an essential requirement by the Mumbai Bench of NCLT was neither challenged in National Company Law Appellate Tribunal nor in the Supreme Court, coupled with the untimely death of Cyrus Mistry, has led to the solidification of a standard of shadow director, which finds its origin nowhere, in Indian corporate jurisprudence.

Conclusion

India’s import of the shadow director test, judicially narrowed by an unwarranted impropriety filter, undermines accountability. Aligning Section 2(60)(v) with Deverell’s influence standard through explicit codification and clarified duty attribution would close the jurisprudential gap, deter disguised control, and produce a coherent, functional Indian doctrine fit for modern governance.