Shadow Directors

By on 17 Aug, 2022

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What is a Shadow or De Facto Director

and What are the Associated Risks?

A shadow or de facto director is somebody whom the law deems to be a director due to the authority or control they exercise over a company. Shadow or de factor director is therefore someone who acts and exerts similar powers as a director but who has not been formally appointed and registered as the company director.

We know the responsibilities and duties of appointed company directors, discussed at length in our previous article “Directors Duties in Australia”. However, an individual who has not been validly appointed as a director of a company may nonetheless be considered a director of that company if they have authority to the extent that the directors are regularly acting in accordance with the individual’s directions or requests.

This article explains the circumstances by which the law may consider you to be a shadow director and the consequences of this. 

Section 9 of the Corporations Act 2001 (Cth) (the Act) defines “officer” of a corporation” as:

(a) a director or secretary of the corporation; or
(b) a person:

(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation’s financial standing; or
(iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation); or …

In the matter of ASIC v King [2020] HCA 4, the High Court clarified the definition of “officer” under s 9(b)(ii), confirming it extends beyond formal office holders to persons involved in management decisions that have a substantial impact on the company. The High Court’s decision has since been applied in subsequent judgments (see below).

Some examples of actions that could be considered shadow or de facto director:  

The risk of shadow or de facto directorship extends to companies and lenders who take effective control of a business by exerting sufficient commercial pressure. In such a scenario, there is a risk that the company or the ender would be regarded as a shadow director of the company they control.  

The leading case whether a company or a lender could be a shadow director was covered in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd. In that case, it was alleged that Apple Computer was a shadow director of Buzzle, as the directors of Buzzle were accustomed to act in accordance with Apple’s instructions or wishes. At 231, White J noted

‘… Before express provision was made that only individuals could be appointed as directors, it was possible for a company to be so appointed (In re Bulawayo Market and Offices Co Ltd [1907] 2 Ch 458 at 463). There is nothing inherently incongruous with a body corporate being a de facto or shadow director.’

Professional Advisors

Not everybody who advises a company director or board will be regarded as a shadow director. Professional advisors such as accountants, lawyers, and consultants often give counsel in the proper performance of their role. A board or a company director relying on such advice when proposing resolutions does not mean these counsellors are shadow directors. Section 9 of the Act specifies that an individual providing advice in a professional advisory capacity will not be deemed to be a shadow or de facto director.

The fact that the directors or the board of the company follow the advice of external third parties does not necessarily establish the existence of a shadow directorship as ‘advice’ differs from ‘directions or instruction’.

Consequences

An individual or a company who is a shadow director of a company will be required to observe the duties of a director under the Act. These duties comprise, but are not limited to, the general duties set out in Part 2D.1 Duties And Powers of the Act.

Moreso, the shadow director must comply with the company’s constitution and any specific laws and act in the shareholders’ best interests, ensure the company is not trading while insolvent, and not improperly use their position to benefit themselves or someone else or to cause detriment to the company.

Recommendations

It is therefore very important for individuals and companies to be aware of their relationship with, and influence over, the board of a company, and understand the risk of being deemed to be a director of that company. Some practical steps that can help mitigate the risk of being a shadow director include:

Designation as a shadow or de factor director can result in significant pecuniary penalties and disqualification orders, especially when there is a breach of fiduciary duties. The shadow or de facto director can personally be liable to the company, its shareholders, creditors, or other third parties. Seeking proper advice can alienate unnecessary serious risks.  

By Gregory Atamian JJN Associates – Accountants Tax Advisors

Photo By: Fleur, The BS Team – Newport Beach Creek, NSW

The content and the references made in this article are correct as at the publication date and are for general information and should not be relied upon as advice. If you wish to seek particular advice, call us on 02 9997 4000.

Notes & Downloads

Bond Law Review Hobson, Michael D — “The Law of Shadow Directorships” [1998] BondLawRw 12; (1998) 10(2) Bond Law Review 184





Matters subsequent to the ASIC v King where the broad interpretation of “officer” was applied”: