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DE FACTO DIRECTOR LIABILITY

Did you know de facto and shadow directors can be liable for breaches of the Corporations Act?

In light of the corporate failures of the past year, company directors are increasingly under pressure from regulators and governments as shareholders and the public demand greater accountability and transparency from them.

The law provides for company directors to be held personally liable - in some circumstances - for financial transactions made by the company. Corporate regulators are now cracking down on this law.

Companies and those controlling them need to be aware that the Corporations Act defines "director" to include de facto and shadow directors. Liability for contraventions of the Corporations Act, including the obligations and duties imposed on directors can extend to people who are involved in a company even if they are not officially appointed a director.

What is a de facto director?

- a person who is appointed to the position of a director, regardless of the name that is given to the position
- a person who is not validly appointed as a director but who acts in the position of a director
-- whether a person acts as a director

"will often be a question of degree, and requires a consideration of the duties performed by that person in the context of the operations and circumstances of the particular company concerned". Source: Madgwick J of Federal Court in DCT v Austin (1998).

What are the characteristics of a de facto director?

A necessary condition of acting as a director, whether properly appointed or not, is that they exercise 'top-level management functions'. For example, engaging in contractual negotiation on behalf of a company.

What is a shadow director?

- A shadow director is a person in accordance with those instructions or wishes the directors of the company are accustomed to act.
- A person is not a shadow director because the directors act on advice given by that person because of his or her professional capacity or because of the person’s business relationship with the directors of the company.
- The law relating to shadow directors aims to identify those, other than professional advisers, with real influence in the corporate affairs of the company. However, it is not necessary that such influence is exercised over the whole field of its corporate activities or that directions or instructions are provided for all matters involving the board.

What are the characteristics of a shadow director?

- a person may be a shadow director even if he or she does not take any steps to conceal the role he or she plays in the affairs of the company
- a company can be a shadow director even though it cannot be appointed a director
- an administrator of a deed can be a shadow director, depending on the terms of the deed

The law relating to de facto and shadow directors does not reverse the requirements under the Corporations Act.

For example, the requirement for a minimum number of directors only refers to validly appointed directors. In addition, shadow and de facto directors are specifically not included as directors under the Act for the purpose of:

- calling a meeting of the company’s members
- signing minutes of meeting
- notifying ASIC of change of address