Clive Palmer is not shy to the spotlight. His most recent antics have resulted in Queensland Nickel’s administrators alleging that Palmer was a shadow director. In their report released on April 8, they went on to say that Palmer was involved in making the company’s financial decisions despite resigning as a director in February 2015. The report also raised concerns relating to unfair preference payments, related party loans, political donations, unreasonable director related transactions, loan forgiveness and insolvent trading. These are all breaches of the directors’ duties under the Corporations Act 2001 (Act).

Shadow Director Allegations

If Palmer is found to have been acting as a shadow director, he is potentially personally liable for the debts the company incurred once it began trading insolvent. The company allegedly accrued debts of approximately $771 million since its insolvency on 29 November 2015. Palmer firmly denies the allegations and claims he is owed $2.6 million in loans. He has however admitted to being part of the approval expenditure committee and using an email alias when communicating with QLD Nickel. Palmer’s companies have now sought a Supreme Court injunction against the administrator of Queensland Nickel concerning the allegations of insolvency.

Liquidation of the Company

Following the administrator’s report, the company is now faced with three options:

  1. Continue to operate under administration;
  2. Return QLD Nickel to it its original management structure; or
  3. Liquidation.  

The report recommends that the company be placed into liquidation with the company to face allegations of a breach of director’s duties. With no deeds of company arrangement in sight at this stage, the winding up of the company looks inevitable.

Consequences of Palmer Being Deemed a Shadow Director

So what are the consequences if the court finds that Palmer was in fact a shadow director of the once prosperous Queensland Nickel? In short, very serious. Palmer could face up to five years jail time, potential bankruptcy and the unravelling of his corporate empire. The administrators have also alleged that Palmer had moved more than $200 million from Queensland Nickel to his other businesses before its collapse. This is a serious allegation.

Lessons for Directors 

Just because you are not a registered director of a company does not mean that you can exert influence over a company with no repercussions for your actions. In fact, your actions within the company may deem you to be a shadow or de facto director and if so, you have the same legal duties and obligations as a registered director. If you fail to comply with these legal obligations and duties, you could be held personally liable for the decisions of the company and the consequences of such actions are severe. It’s then critical you understand what actions may deem you to be a shadow director, your obligations and duties, and consequences for breaches. We set these out in further detail below.

1. What Sorts of Actions Would Deem an Individual as a Shadow Director?

Examples include:

  • Being responsible for the management of the company’s business activities;
  • Maintaining the financial records of the company and authorising expenditure;
  • Borrowing or lending money on behalf of the company;
  • Taking an active role in board meetings;
  • Talking to managers and staff about the operation of the company;
  • Taking charge in implementing the company’s policies and procedures; and
  • Taking on a higher level of responsibility in relation to the operation of the company.

2. What are my Obligations as a Director?

Both directors and shadow directors must comply with a number of legal obligations and duties as set out in the Corporations Act 2001 and other instruments, including: 

  • A duty to the company to not use your powers for an improper purpose or to the detriment of the company. You must, therefore, act in the best interests of the company;
  • You must exercise your powers and duties in good faith and comply with the Act;
  • You must be careful and diligent in your operation of the company including being informed about the financial affairs of the company and whether the company is solvent (i.e. can pay its debts as and when they fall due);
  • Avoiding conflicts of interest with the company. You have a fiduciary duty to the company and must put the interests of the company ahead of your own.  You must also disclose any personal interest in a contract with the company;
  • You must not improperly use information or your position;
  • You must properly be informed about the financial position of the company and ensure that the company does not trade while insolvent;
  • You must consider your reliance on experts such as lawyers and accountants and employees when making decisions;
  • You must ensure that the company keeps adequate records of financial information; and
  • You must lodge certain information with ASIC.

3. What are the Consequences for a Breach of Directors’ Duties?

The consequences are based on the severity of the breach and can include:

  • Criminal sanctions and penalties (up to 5 years jail time and penalties of up to $200,000);
  • Civil sanctions and penalties (up to $200,000);
  • Disqualification from again managing a company; and
  • Personal liability.

4. What Should I do If I Think I am a Shadow Director?

If you believe you may be considered a shadow director of a company, it is imperative that you understand your legal obligations and duties. If you do not wish to be deemed a shadow director, you should obtain the necessary legal and financial advice and subsequently limit your exposure by restricting the level of influence you have over the company.

Key Takeaways

Clive Palmer’s situation is not uncommon. It does, however, highlight the severity of improperly exerting power over a company on a large scale even when you are not a registered director. The consequences of such actions, particularly when they breach the legal obligations and duties of a director, are severe and it is important that you are aware of whether your actions may deem you to be a company director, your duties if you are and the consequences if you fail to comply with these. Obtaining legal and financial advice is imperative in risk minimisation. If you have any questions or believe you may be acting as a shadow director, get in touch with our commercial lawyers on 1300 544 755.

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