Directors play an important role in any company whether private or public. They manage the companies’ affairs and business. Importantly they are responsible for setting the strategic direction of a company and the governance to ensure a company complies with its legal and regulatory requirements.
Directors’ duties are based on the common law and the Corporations Act (2001) (Act).
The key core responsibilities of a Director are:
- Act with reasonable care, skill and diligence
- Act in good faith
- Do not act improperly or use information or your position
- Disclose and manage any conflicts of interest
What is the difference between a de facto director and a shadow director?
Put simply, a de facto director is someone who acts as a director but is not formally appointed to the role whereas a shadow director is someone who has not been appointed as a director but the board act on their instructions and/or wishes.
When considering if someone is a de facto director courts look at:
- the duties performed or expected to be performed by that person
- Is the person someone who is considered a director either internally or externally by their actions
- Whether they are held out as a director
On the other hand, courts look at the following when it comes to a shadow director:
- Are they considered to be both a de facto director and a shadow director
- Do the other directors act on that persons directions and/or wishes over a prolonged period of time
- Is there a connection between the person’s directions and/or wishes and the other directors acting on them
What are the legal consequences of acting as a de facto or shadow director?
The legal consequences are identified in the Act and also at common law, their fiduciary duties or as provided for in the company constitution.
Under the Act, there are significant penalties and sanctions.
A de facto or shadow director will face the same penalties as a director for the following:
- Acting without due care and diligence (Section 180)
- Failing to exercise good faith and proper purpose (Section 181)
- Improperly using your position as a director (Section 182)
- Improper use of company information (Section 183)
- Permitting insolvent trading of the company (Section 588G)
- Uncommercial transactions (Section 588FDA)
If found to have breached these statutory obligations under the Act a de facto or shadow director can be subject to:
- Criminal sanctions
- Civil sanctions
- Disqualification from acting as a director
Conclusion
As lawyers and advisors to corporate clients, we advise them that where there is any doubt get independent advice from a professional whether it be your lawyer or accountant.
Some tips we give our clients is to:
- Make sure roles and delegations are clearly defined
- Have strong corporate governance regimes including financial delegations
- Document the board and company decisions
- Understand what insolvency is and be educated on how to spot the signs
- Protect your confidential information and intellectual property
- Educate staff and directors
How can FC Lawyers help?
Our business and corporate team have experience in advising clients on a range of directors’ duties including how to identify avoid exposure to allegations of de facto and shadow director activity.
Contact our team today to discuss your legal needs.
The information provided in this article is for general information and educative purposes in summary form on legal topics which is current at the time it is published. The content does not constitute legal advice or recommendations and should not be relied upon as such. Whilst every care has been taken in the preparation of this article, FC Lawyers cannot accept responsibility for any errors, including those caused by negligence, in the material. We make no representations, statements or warranties about the accuracy or completeness of the information and you should not rely on it. You are advised to make your own independent inquiries regarding the accuracy of any information provided on this website. FC Lawyers does not guarantee, and accepts no legal responsibility whatsoever arising from or in connection to the accuracy, reliability, currency, correctness or completeness of any material contained in this article. Links to third party websites or articles does not constitute any endorsement or approval of those sites or the owners of those sites. Nothing in this article should be construed as granting any licence or right for you to use that content. You should consult the third party’s terms and conditions of use in relation to any third-party content. FC Lawyers disclaims all responsibility and all liability (including liability for negligence) for all expenses, losses, damages and costs you might incur as a result of the information being inaccurate or incomplete in any way. Appropriate legal advice should always be obtained in actual situations.
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