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Did you know that you don’t necessarily need to be a registered director of a company to be considered one? In some cases, your actions within a company may deem you to be what is known as a shadow director. If this is the case, you too have legal obligations that you must comply with just as a registered director does. If you fail to do so, you could be held personally liable for decisions made by the company, resulting in substantial (and likely unexpected) personal exposure.

How do I Know if I am a Shadow Director?

The Corporations Act (Act) is the legislative instrument governing business entities in Australia. The Act defines a director to include a person who acts in the role of a company director despite not formally appointed as such (or listed on ASIC records) or whose instructions a company’s directors act on or for. A shadow director is also often referred to a de-facto director.

Not every person whose advice the company’s board follows is necessarily considered a shadow director. For example, you are not automatically considered a shadow director if you advise the company’s directors in your professional capacity or your role as a business advisor to the company, You must have the potential to control the board’s decisions and must exercise this power. However, this does not mean that the directors must follow your advice each and every time. In fact, even if they occasionally disregard your advice, you may still be considered a shadow director.

If I am Deemed a Shadow Director, What are my Duties?

Under the Act, a director has many duties and obligations. A shadow director owes the company the same duties as a formally appointed director. This includes:

  • Exercising powers and discharging duties in the company’s best interest and for a proper purpose;
  • Exercising powers and discharging duties with the care and diligence that a reasonable person would exercise if they were a director, occupied the office and/or had the same responsibilities within the company as the director. This includes ensuring you are accurately informed about the company’s financial position, and the company doesn’t trade insolvent; and
  • Not improperly using information or the position as a director to gain an advantage for personal interests or to cause detriment to the company. 

If you believe you may be acting in the capacity of a shadow director, it’s critical that you comply with the duties and obligations of a director as required by law.

What is Assessed in Determining if I am a Shadow Director?

In determining whether a person is a shadow director, the following factors will be considered:

  • Your conduct with respect to the business’ operations;
  • Determining whether you are performing the functions which the director is expected to perform;
  • Determining whether the person has sufficient influence to control the acts of the other directors of the company.

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If you believe that you may be a shadow director of a company, and are unsure of your legal obligations – ask. When speaking with a corporate lawyer, tell them about your involvement in the day-to-day operation of the company, whether you are an employee of the company, whether you attend board meetings and your involvement in the company’s decision-making process. If you have any questions, let us know on 1300 544 755.

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