Shadow and De Facto Directors: When you’re a director and didn’t know it!
Can you face the risks of being a director of a corporation even when you aren’t formally a director? In short, the answer is yes, if you are found to be a de facto or shadow director.
It is generally understood that when you are formally appointed as a director of a company, a variety of risks, obligations and responsibilities are “part of the deal.”
Due to these associated risks, it is not uncommon for individuals to shy away from taking on such positions. But is that the end of the story? No. There are many cases where Courts have found other individuals to be directors, and to be personally liable for debts of the company, even though they were never actually formally appointed as a director.
Section 9 of the Corporations Act 2001 (Cth) (‘the Act’) creates the notion of shadow and de facto directors by providing that an individual can be a director, even if not validly appointed, if:
- They act in the position of a director (de facto director); or
- The directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes (shadow director).
What makes a de facto director?
De facto directors are individuals who assume the role of a director without obtaining any formal appointment or title. Individuals are often found to be de facto directors if they:
- are the driving force behind the Company; or
- continue to participate in the management of a Company after their appointment has ceased.
What makes a shadow director?
Shadow directors are often referred to as individuals who “control” the Company from behind closed doors – they often assume the role of a “puppeteer” controlling the other members of the Board and/or the other directors”. Shadow directors can include people who:
- are involved in top-level management;
- are responsible for tasks which would normally be reserved for a director;
- regularly attend board meetings and may, or may not, participate in voting; and
Consequently, when a person is found to be either a de facto or shadow director, they become subject to the same statutory duties and liabilities under the Act (including director’s Duties) as directors who have been formally appointed. Accountants, bank managers, business consultants
and other professional advisors need to be cautious in the roles they fulfill as external advisors to the company, or the board, particularly if they are attending director/board meetings and actively participating in those meetings.
Grimaldi v Chameleon – A case in point
Grimaldi* was a decision surrounding an ore mining Company, Chameleon Mining, making several claims against its former directors and Mr Grimaldi who they alleged was a de facto director.
The following observations from the case are relevant:
- only an individual can be a director;
- the distinction between a shadow director and a de facto director is not always rigid;
- a consultant may be found to be a director; and
- in order to be found to be a de facto director, the individual must undertake the work which a director would complete.
In this case, Grimaldi was found to be liable for the improper use of funds as a de facto director for over $150,000 along with other directors.
If you believe that you may be acting as a shadow or de facto director, please do not hesitate to contact our Litigation + Dispute Resolution to determine your potential obligations and liabilities