In brief

A person found to be a Shadow director or officer of a company may be liable for breach of director’s/officer’s duties including trading whilst insolvent by a court, despite not being recorded on the ASIC register or being formally appointed to the position of Shadow director.

Who needs to read this article

  • In-house Counsel
  • CFO and other executives who report to and advise the board
  • Hands-on accountants
  • All those involved in the management of a company regardless of whether or not they are registered or validly appointed as a director

What you need to know

Who may be a Shadow/De-facto Director?

  • A person who acts in the position of a director even though they have not been formally appointed as a director (commonly known as de-facto directors); or a person or corporation upon whose wishes the directors of a company are accustomed to act in accordance with (commonly known as a Shadow Director).
  • Individuals as well as companies may be ‘shadow directors’ (e.g. a parent company may be deemed a Shadow Director of its subsidiary).
  • The Courts don’t really differentiate between Shadow Directors and De-facto Directors anymore and have said that the terms are interchangeable.

Who is not a Shadow Director?

  • It is unlikely that a professional advisor will be considered to be a Shadow/De-facto Director unless they are doing something more than passively providing professional advice.
  • A third party insisting on particular commercial terms will not be a Shadow Director provided the Company Directors still exercise their own judgment as to whether or not to accept the terms. The same would apply in respect of a lender.

What are the consequences of being a Shadow Director?

  • In addition to any liability as an officer of a company, a Shadow or/De-facto Director may also be liable for trading whilst insolvent pursuant to s 588G of the Corporations Act 2001 (Cth).

Who may be Shadow Officer?

A person who makes, or participates in making, a decision that may affect the whole, or a substantial part, of the business of a corporation, or who has the capacity to affect significantly the corporation’s financial standing. This may include:

  • A company secretary
  • In-house Counsel
  • An advisor/consultant upon whose instructions or wishes the board is accustomed to act (eg an accountant)
  • A CFO or Chairman

Who is not a Shadow Officer?

  • A manager who only reports to the board and has no influence over board decisions or the company’s financial standing.

What are the consequences?

An officer of a company, including a Shadow Officer, owes duties to the company for which he or she works. These duties are set out in s 180-183 of the Corporations Act 2001 (Cth). A breach of those duties may result in personal liability for that breach and depending on the breach, may result in a claim of $100,000+.

Key points

The Courts are at pains to state that in determining whether a person or corporation will be deemed a Shadow Director or officer, all facts need to be taken into consideration and as such, the determination is very much on a case-by-case basis.

Having said that, the following should be considered:

  • Make sure that the board ultimately makes their own decision and doesn’t just blindly rely on the recommendations of in-house counsel or other professional advisors.
  • Be careful when directing subsidiaries – you can recommend, but ultimately the decision needs to be made independently by the company’s director/s.
  • In-house counsel should provide advice, rather than direct the affairs of the company.
  • Ideally, in-house counsel should not be a member of the board, as this blurs the lines between being an advisor and instructor.
  • Set clear guidelines and parameters for management and in-house counsel so it is clear where their influence ceases and where the control is solely in the hands of the board.

Conclusion

If you are involved in the management of a company you need to be aware of your responsibilities and the consequential liabilities you may face. It should be noted that some insurance policies will not cover professional advisors for any liability incurred as a result of being found to be a shadow director or officer. Likewise, Directors and Officers insurance does not usually extend to shadow directors or officers. Ignorance is not an excuse: understanding your position within a company could save you from financial and reputational ruin.

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