In the modern day, companies are complex entities with intricate corporate governance mechanisms. However, as companies become larger and more complex, authority and control of the company tends to be delegated throughout the company. Company’s should be cautious in these circumstances not to unintentionally confer so much authority onto an individual so as to make them a shadow director. A company could be susceptible to ASIC investigation if a shadow director contravenes certain duties as outlined in the Corporations Act 2001 (Cth).
- A shadow director is an unofficially appointed director and owes duties under the Corporations Act 2001 (Cth)
- To assess whether a person is a shadow director, the courts take a ‘substance over form’ approach
- Shadow directors (and potentially the company they direct for) may be subject to civil and criminal penalties under the Corporations Act 2001 (Cth)
What is a shadow director?
A shadow director is someone who the law deems to be a director due to the influence or control they exert over a company. This person may not be officially appointed as a director by the company. In turn, the shadow director is likely not registered with ASIC.
What does a shadow director do?
Under section 9 of Corporations Act 2001 (Cth) (The Act), a director is defined as a person appointed as a director or someone who acts in that position. Given the wide scope of this definition, it purports to include a shadow director as a director within the meaning of the Act.
Directors, and thus shadow directors, owe certain duties under the the Act. These duties include, but are not limited to: :
- Exercise their powers with the due care and diligence of a reasonable person in similar circumstances
- Exercise their powers in good faith and in the company’s best interest
- Not improperly use their position as a shadow director to benefit themself or someone else
- Not improperly use their position to harm the company
- Not improperly use information obtained as a result of their position to benefit themself, anybody else or harm the company
Additionally, directors and shadow directors alike, generally perform the roles of:
- Authorising company expenditures
- Managing the company’s overall operations
- Decision-making or active participation in company meetings
- Borrowing or securing funds on behalf of the corporation
What factors indicate that a person is shadow directing?
The duties performed by the person at the particular company must be considered when deciding whether a person is a shadow director. Additionally, other factors to consider include:
- Is the person someone who issues instructions to other members of the company
- Whether other directors are accustomed to act in accordance with those instructions
- How often that person negotiates on behalf of the company
- How much responsibility the person takes on for the company
- Whether they have control of the company’s financial accounts
What is the difference between a shadow director and a de facto director?
Although used interchangeably, a de facto director (as per section 9 of the Act) is a person who acts in the position of a director, whereas a shadow director is where the directors of the company are accustomed to act in accordance with the person’s instructions or wishes. Both types of directors have the same statutory duties and liabilities under the Act, and can thus be held liable for any breach of director’s duties.
What are the consequences of being a shadow director?
Both de facto and shadow directors can face consequences if they breach certain duties under the Act. The penalties may be imposed on the directors in their personal capacity, or on the company itself. ASIC is the Government body who enforces director’s statutory duties under the Act. In the event of a breach of a civil penalty provision under the Act, civil penalties may be imposed which may be greater than $1.1 million for individuals or upwards of $11.1 million for companies. Additionally, directors can be disqualified (either temporarily or permanently) from managing companies if they are repeat offenders.
There is also a possibility that criminal penalties may be imposed if directors (including shadow or de facto directors) breach any of the duties intentionally, recklessly or dishonestly. These penalties include fines of up to $945,000, or, depending on the severity of the breach, directors can face upwards of 15 years imprisonment.
What will the court consider if you are deemed a shadow director in legal proceedings?
If you are deemed a shadow director in legal proceedings, the court will look at:
- Whether you are performing the functions of a director
- Whether you actively influence or instruct the board of directors
- Your role in the business’ operations
The Act created this wide scoped definition of director to catch shadow and de facto directors to ensure people acting in the unofficial capacity as a director still owe duties and are regulated under the Act. Shadow directors are mandated by law to act responsibly and ethically as a representative of a business, as opposed to being able to breach the company’s liabilities (e.g. tax or superannuation) with no consequences.
Can a company be a shadow director of another company?
A company can become a shadow director of another company, however, the company cannot be formally appointed to the position of director. Shadow director relationships generally arise between a parent company or subsidiary company within a group.
Can shadow directors become normal directors?
Yes, a company can make a shadow director an ‘actual’ director through the process of appointing them as a new director. This entails:
- Proposing the concept by resolution at a general meeting
- The person giving formal signed consent to the corporation
- The corporation confirming the appointment with a letter of appointment
- The corporation disclosing the appointment to ASIC or ACNC
If you require further assistance with anything related to shadow directors, de facto directors or directors in general, you should seek legal advice. Legal Kitz’ team of experienced corporate lawyers can direct you with your next steps and advise you on your legal queries. Click here to book a free 30-minute consultation via our website now.