Is your business struggling to figure out what a nominee director does or how such a director can impact your business?

As an Australian business owner, managing the ever-changing legal landscape can be overwhelming, especially when it comes to understanding the role of a nominee director. You might be wondering: what exactly are their responsibilities, and how do they fit into your company’s corporate governance structure?

Or perhaps you’re considering appointing a nominee director but don’t fully understand the legal and practical implications of such an appointment? 

From potential liabilities to compliance issues, failure to understand the role of a nominee director can lead to costly consequences for the company where they act and the person who makes the appointment. 

This article aims to clear up the confusion by outlining the critical features of nominee directors, their duties, and legal obligations.

Read along! 

What is a nominee director?

In the Australian business landscape, a nominee director is an individual appointed by a specific shareholder, investor, or external entity to represent their interests on a company’s board. While the nominee director acts on behalf of the nominating party, they are still bound by law to act in the best interests of the company as a whole.

How a Nominee Director Differs from Other Directors

Regular directors are appointed to manage the company’s overall direction. Their primary duty is to act in the company’s best interests.

Nominee directors, on the other hand, are specifically appointed to protect the interests of the nominating party. However, they must still comply with their legal duties and prioritise the company’s interests over those of the nominator. In other words, if there’s any conflict between the interests of the nominating party and the legal obligations to the company, the nominee director must consider the interests of the company above any other competing interest, including those of the nominating party. 

Like other types of directors, the actions of nominee directors in Australia are governed by the Corporations Act 2001. While the law does not specifically define the term “nominee director,” it refers to directors appointed to represent the interests of specific shareholders or debenture holders (creditors). Such directors are required to use their powers responsibly and ensure that their decisions benefit the company as a whole.

So if a nominee director has been appointed to your company’s board by someone other than you, as a business owner, you don’t need to worry about the nominee director sabotaging your company. Your company is protected by law, and the nominee director could face legal consequences if they act against your company’s interests.

On the other hand, if you’re considering appointing a nominee director, you should consider their limitations since they can only act in your interest if it aligns with the company’s goals.

Role and responsibilities of a nominee director

A nominee director generally has the same roles and responsibilities as other types of directors:

• Fiduciary Duty: A nominee director has a fiduciary duty to the company for whom they serve as directors. This means they must act in good faith and the company’s best interests, prioritising its welfare over personal or external interests.
• Board Participation: A nominee director is required to participate in board meetings and discussions, providing insights and perspectives that reflect the interests of the appointing party while considering the broader company context. They must advocate for policies and strategies that benefit the company, even if these may not always align with the appointing party’s immediate interests.
• Compliance and Governance: They must ensure that the company adheres to relevant laws, regulations, and corporate governance practices, including maintaining accurate records and filing necessary documentation.
• Decision Making: A nominee director is expected to make decisions based on adequate information and due diligence, ensuring they understand the implications of their actions for both the company and the appointing party. They must also actively assess and manage risks involved in each decision made on behalf of the company, contributing to its long-term success.

While discharging these duties, nominee directors must disclose any potential conflicts between their duties to the company and their responsibilities to the appointing party. They must also balance situations where the interests of the appointing party may clash with the needs of the company, ensuring that they do not improperly prioritise one over the other.

Why appoint a nominee director in Australia?

Appointing a nominee director in Australia can be a strategic move for businesses and investors in several scenarios. Here are some common reasons for appointing one:

• To Meet the Resident Director Requirement: Foreign companies or individuals may appoint a nominee director when they invest in an Australian company but lack local representation or form an entirely new company. Since Australian law requires at least one director to be a resident, the nominee director fulfils this requirement while the foreign shareholders retain control over decision-making.
• Investor Protection: In some cases, investors may appoint a nominee director to represent their interests on the board. This ensures that their voice is heard in key decisions, providing oversight and control over their investment without direct involvement in day-to-day operations. A real-life example of such a situation is the recent move by superannuation fund company HESTA to gain board seats to which they could appoint nominee directors in Woodside Energy, where they have substantial investments. 
• Maintaining Anonymity: Some businesses or individuals prefer to keep their identities private, especially when forming a company or conducting business. Appointing a nominee director allows them to remain anonymous while having their interests in the company represented..

In all these scenarios, the nominee director acts by the instructions of the appointing party but must also comply with the directorial duties under Australian corporate law.

Nominee director risks and legal liabilities

Nominee directors in Australia face significant professional and personal risks and liabilities to their position.

Here are the key risks and legal consequences for nominee directors under Australian law:

• Fiduciary Duty Conflicts: Nominee directors must navigate potential conflicts between the interests of the company and the party that nominated them. While acting in the best interests of the company is paramount, ignoring the nominator’s interests could strain relationships or lead to legal action from the nominator. Conversely, prioritising the nominator’s interests over those of the company breaches fiduciary duties under the Corporations Act 2001, which could lead to legal sanctions/penalties.
• Personal Liability: Under certain circumstances, nominee directors may be held personally liable for the company’s actions or debts. These situations include:
  • Insolvent Trading: Directors may be personally liable for a company’s debts if they allow the company to incur debts or trade while it is insolvent or likely to become insolvent.
  • Breach of Fiduciary Duties: If nominee directors breach their duties (e.g., by acting only in the interests of the appointing party), they could face personal liability for damages or compensation to the company.
  • Failure to Perform: A director who fails to perform their duties may face serious criminal and civil penalties and may be personally liable to compensate the company for any losses it suffered due to their actions. 
• Disqualification: Directors, including nominee directors, may be disqualified from managing corporations if they are found to have breached their duties or engaged in illegal activities, particularly related to insolvency or financial misconduct.

Essentially, the actions of nominee directors are highly regulated to ensure that they not only perform their duties to high standards but also protect the interests of the company despite their external loyalties. 

How to appoint a nominee director

The steps to appointing a nominee director in an Australian company can be summarised as follows:

• Review the Company’s Constitution or Shareholder Agreement: Ensure that the company’s internal documents or shareholder agreement allow for the appointment of a nominee director.
• Obtain Written Consent: The nominee director must express their agreement to serve as a director in writing by completing and signing a Consent to Act as Director Form.
• Board or Shareholder Resolution: The board of directors or shareholders (depending on the company’s Constitution) must pass a resolution to approve the appointment.
• Lodge a Notification with ASIC: The  Australian Securities and Investments Commission (ASIC) must be notified of the appointment within 28 days by filing Form 484 (Change to Company Details).
• Director Identification Number (DIN): The nominee director must apply for a DIN before or immediately after appointment through the Australian Business Registry Services (ABRS).

Nominee director vs shadow director: What’s the difference?

Many people often confuse a nominee director with the entity known as a shadow director. While both concepts may share certain similarities, they are not the same.

Unlike a nominee director, a shadow director is not formally appointed to a company’s board. However, such directors typically exert significant influence on the company’s decision-making. 

Despite the absence of a formal appointment, a shadow director is legally treated as a director if the company’s board follows their instructions or directions. As such, they are subject to the same legal duties and potential liabilities as formally appointed directors, even though they do not hold an official position. They can be held accountable for breaches, such as insolvent trading or breaching directors’ duties.

As such, the person who appoints a nominee director to represent their interests may be considered a shadow director under certain conditions.

FAQ

Can a nominee director be held liable?

Yes, a nominee director can be held liable. Even though they represent a specific party, they are legally bound by the same duties as any other director under Australian law, including personal liability for breaches like insolvent trading or failing to act in the company’s best interests.

Does a nominee director have voting rights?

Yes, a nominee director has voting rights. Like any other director, they can vote on board decisions, but they must do so in the best interests of the company, not just the party they represent.

Can a nominee director be a foreign national?

Yes, a nominee director in Australia can be a foreign national. However, at least one director of an Australian company must be a resident of Australia, as required by the Corporations Act 2001.

Final thoughts 

A nominee director serves as a formally appointed representative of a specific party, such as a shareholder or parent company, but is legally obligated to act in the best interests of the company as a whole.

Despite the nature of their appointment, they share the same duties, voting rights, and potential liabilities as any other director under the Corporations Act 2001. This includes compliance with legal requirements like obtaining a Director Identification Number (DIN) and meeting ASIC filing obligations. 

Nominee directors must, therefore, carefully balance their obligations to both the appointing party and the company to avoid legal risks and personal liability.

If you have more questions about corporate governance or specifically concerns about a nominee director and their impact on your company’s activities, you might need to consult a skilled business lawyer. 

Our team of experienced business and commercial lawyers at Lawpath can provide on-demand legal advice all year round through our Legal Advice Plan.