While you are likely familiar with the role and responsibility of directors, there are situations where a person who is not officially appointed as a director may be considered a director. You may be classified as a shadow director if you are not officially appointed as a company director but exert a certain level of influence or control over the company. This article will explain the circumstances in which you may be considered a shadow director and the consequences of such a status.
Shadow Directors
To be classified as a shadow director, it must be shown that this outside person ‘calls the tune the directors dance to’. That is to say, a shadow director exerts influence and control over how the company’s directors perform their functions.
The powers and responsibilities which generally indicate that an external person is a shadow director include:
- authorising company expenditures;
- borrowing or lending on behalf of the company;
- becoming involved in board meetings and board resolutions; and
- managing the company’s business activities.
However, the powers and responsibilities which generally indicate that an external person is not a shadow director include:
- the power to call general meetings;
- signing minutes of general meetings; and
- responsibility for giving notice to the Australia Securities and Investments Commission (ASIC) of change of address.
Who Can Be a Shadow Director?
In Australia, a director must be a natural person of at least 18 years of age. In addition, you cannot appoint to your company a person who is undischarged from bankruptcy or who has been convicted of specific business or financial offences. These criteria prevent you from officially appointing a company as a director of your company.
However, while the principal corporate legislation in Australia dictates that you can only appoint a natural person as a company director, the law around shadow directors could lead a court to determine that a company was acting as a shadow director of another company.
Continue reading this article below the formShadow Directors Duties
Technically, a person classified as a shadow director must uphold the same statutory duties imposed on any director. Generally, a director must act in the company’s and its shareholders’ best interest.
Some of the primary duties of directors set out in the Corporations Act include the duty to:
- act with care and diligence;
- act in good faith;
- refrain from improperly using their position to gain personal advantage or to cause detriment to the company; and
- not use any information obtained from their office to gain personal advantage or cause detriment to the company.
Breaching a Directors Duty
Breaching a directors duty may result in:
- fines of up to $200,000 or up to five years imprisonment;
- personal liability to the company for any loss or damage connected by the breach; and
- a prohibition from managing a company for some time or permanently.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
Whether a person acts as a shadow director is ultimately a question of fact. If you suspect you are acting as a shadow director, you must ensure that you carry out all the requisite duties placed on company directors. Furthermore, suppose your constituting documents enable you to appoint additional directors. In that case, you should take steps to have that person officially appointed as a director, obtain their consent and update ASIC accordingly (within 28 days).
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Frequently Asked Questions
A de facto director is a director who acts as a director but whose appointment has not been validly adopted. De facto directors also include those persons who have been given different titles but act as directors in practice.
A de facto director is a person who has assumed the role of a director but has not been validly appointed per the requisite procedure. On the other hand, a shadow director does not necessarily act in the role of a director but instead exerts influence and control over how the company’s directors perform their functions. The distinction between a de facto director and a shadow director is often thin. It is always a question resolved by the facts of each situation.
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