The concept of a Shadow Director sounds ambiguous, but as it turns out, the obligations are pretty clear-cut. In this article we will firstly explain what a shadow director is, then discuss their obligations and how a Court can determine someone to be one – even if they don’t know it.
Identifying a Shadow Director
‘Shadow Director’ is not a term specifically defined in the Corporations Act 2001 (Cth). Rather it is a determination made by the Courts when someone is alleged to have carried out the functions of a company director without being officially registered as one.
What Functions do they Perform?
A director is generally defined as someone who manages the business decisions of a company. It is worth noting that they are different from members of the company, in that whilst they may also have shares in the company, members do not tend to make the day-to-day decisions affecting the company.
Someone may be determined to be a Shadow Director if they exercise the powers of a director, that is, they influence or make decisions that concern the company.
Shadow Director’s Duties
The duties of a Shadow Director are the same as those of a Director, which include:
- Care and diligence
- Good faith
- Not to improperly use position for personal gain
- Not to improperly use information for personal gain
- Not trading whilst the company is insolvent
- Keeping books and records
Exceptions
However, it is common that a person external to the company will provide advice to directors, on which the directors act. Similarly, there are circumstances where a person may make decisions about the company but be considered a director under the Act. These include:
- Where the directors act on advice given by the person in the proper performance of functions attaching to their person’s professional capacity
- A Person’s business relationship with the directors or the company or body
A good example of this is where directors base their decisions on the advice provided by an Accountant or Lawyer. Although company decisions may be based on this advice, the person cannot be deemed to be a director as this advice is provided as part of their job. You do not have to be concerned if your company regularly retains and acts on the advice of a lawyer or accountant. Conversely, acting on this advice is normally in the best interests of your company.
When does this all come to light?
Shadow Directors are normally only ‘brought to light’ when there are proceedings in place. Most often this occurs where a liquidator is seeking to commence proceedings against the Directors of an insolvent company, and will try and determine if the directors have breached any of their duties.
It is worth noting however, that just because someone who is not listed as a Director wields significant influence over the company, that does not mean that a Court will find them to be a Shadow Director, as was the case in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011]. Here, it was found that because Buzzle had consented to Apple imposing conditions which influenced company decisions, Apple were not shadow directors of the company – as Buzzle were still technically autonomous.
It is important to understand not only the strict duties that company directors have to abide by, but also that these can apply to someone who is not a designated director because the penalties can be severe.
