The dangers associated with “de facto” and “shadow” directorships

By 18 March, 2014 January 21st, 2019 No Comments

The term “director” is normally used to describe a natural person that has consented to being appointed to that position.  However, a director may also include a person that has not been validly appointed as a director but:

1. acts in the position of a director (de facto director); or

2. the directors of the company are accustomed to act in accordance with that person’s instructions or wishes (shadow director).

In a (reasonably) recent decision of the Supreme Court of New South Wales, a person that was the de facto partner of the appointed director of an insolvent company was declared by the Court to be a shadow or de facto director of that company.  The Court found that the appointed director (who did not have any financial training, limited business acumen and no experience as a company officer) was acting at the direction of her de facto partner and was not exercising any independent judgment in relation to the affairs of the insolvent company.

Whilst this example is extreme, it illustrates the potential risk to a person of being construed as a director of a company (and therefore taking on the raft of associated legal obligations including the duties to act in good faith and prevent insolvent trading) where that person has not been appointed to that position.

A person will not be a shadow director of a company merely because the appointed directors act on their advice given by that person in the proper performance of functions attaching to their professional capacity, or that person’s business relationship with the directors or the company.  The case authorities suggest that to prevent the possibility of becoming a “de facto” or “shadow director”, persons advising companies should take steps to ensure that they are not playing a leading role in issues normally determined by the board of a company.