Under the Corporations Act 2001, a person that has been validly appointed as a director of a company will be responsible for the management of that company and oversee the state of its affairs.
However, because a director’s role is concerned with the control of a company, there are circumstances when certain people, who exercise that same level of control, will also be regarded as a director of the company.
De Facto Directors
When a person acts in the capacity of a director even though they have not been appointed to that position, that person will be known as a “de facto director”.
To be regarded as a de facto director, the context of the operations and management of a company must be assessed. If a person exercises fundamental management action, this may indicate that the person has acted in the capacity of a director and will therefore be considered a de facto director. Examples of such action will depend on the size and circumstances surrounding each company, but may include decisions relating to significant investment opportunities, financial control or company direction.
Shadow Directors
In other circumstances, where the directors of a company are accustomed to act in accordance with another person’s instructions or wishes, that person will be considered a “shadow director”.
The idea of a shadow director is concerned with the influential control of a company without that person carrying out the management action themselves.
In Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd,1 the New South Wales Supreme Court had to determine whether a representative of Apple Computer Australia, as a creditor of Buzzle Operations, was considered a shadow director. This was an important determination because Buzzle Operations had been making payments to the Apple employee while they were insolvent. The consequence is that if the Apple employee was considered a shadow director, they would be in breach of their director’s duty to prevent insolvent trading and is therefore required to reimburse Buzzle Operations.
In coming to a decision, the Court found that Apple’s employee was not a shadow director because a causal connection did not exist between the instructions or wishes of the Apple employee and the action taken by the directors of Buzzle Operations. The Court indicated that where a creditor is merely exercising their rights by imposing conditions, it would not be sufficient to identify the creditor as a shadow director. The Court therefore indicated that in order for a person to be considered a shadow director, they must truly be considered a “puppet master controlling the actions of
the board.”
In a commercial sense, it is not uncommon for a person to be considered a shadow director. In circumstances where a husband or wife instructs the other who is appointed director of a company to exercise certain actions, that first person could be considered a director of the company and therefore subject to the legal obligations of a validly appointed director.
Despite this, it is important to note that a person will not be regarded as a shadow director merely because the directors act on advice given by the person in performance of functions attaching to the person’s professional capacity, or in the person’s business relationship with the directors or the company. This means that professionals that give advice, such as lawyers and accountants, will not be regarded as a shadow director.
What is the Difference?
There is little difference between each of the directors discussed above; however, de facto and shadow directors will only exist while they continue to exercise control or influence over a company. As such, while that control or influence exists, each type of director has the same legal responsibilities under common law and statute. Examples of the obligations imposed on directors include the exercise of their powers and discharge of their duties:
• with care and diligence;
• in good faith in the best interests of the company;
• for a proper purpose; and
• to prevent insolvent trading.
Accordingly, if a de facto or shadow director is in breach of these duties, they may be held liable even though that person has not been validly appointed.
By contrast, if there is a contrary intention under the Corporations Act, a person that is considered a de facto or shadow director will not be included in the term “director”.
Examples of these provisions include:
• the power to call meetings of a company’s members;
• signing minutes of meetings; and
• giving notice to the Australian Securities and Investments Commission of change of address.
Need Assistance?
All directors, including those people who may be classed as de facto or shadow directors, must be aware of their obligations and duties. If you have any questions about the role of a director or if you think you may be considered a de facto or shadow director please contact our office to discuss. 1 [2010] NSWSC 233.
