What are the Consequences of Being a Shadow Director?

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Table of Contents

• What is a Shadow Director?
• Duties of a Shadow Director
• Consequences of Breaching a Shadow Director’s Duties
• Key Takeaways

A shadow director is someone who the law considers to be a director due to the influence or control they exert over a company. This is despite not being officially appointed as a director. Normally, a company’s shareholders appoints a director to office. The director is responsible for managing a company’s affairs. Shadow directors are people that are not appointed to this position, but effectively act as though they are. Being a shadow director may mean that you are civilly or even criminally liable for breaching director’s duties, despite not being an official company director. This article will explain in what circumstances the law may consider you to be a shadow director and the consequences of this. 

What is a Shadow Director?

The Corporations Act regards a shadow director as a person that company directors are used to acting in accordance with. Examples of actions that could lead you to be considered a shadow director include:  

• authorising expenditures;
• borrowing or lending on behalf of the company;
• being actively involved in board meetings; and 
• managing the company’s business activities. 

Not everyone who advises a company or its directors will be considered a shadow director. Professional advisers such as lawyers, consultants and accountants often give advice as part of their role. Just because a company’s directors rely on such advice when making decisions does not mean these advisors are shadow directors. Nonetheless, it is still possible for professional advisors or members of an advisory board to be shadow directors if they have the potential to control the directors’ decisions.

Importantly, although a company cannot be the director of another company, a company can be considered a shadow director of another company.

Duties of a Shadow Director

As a shadow director is simply someone the law considers to be a director, the duties of a shadow director are those of an ordinary director. A director must comply with the company’s constitution and any specific laws. They must also act in the company shareholders’ best interests. If a company is insolvent, then a director also has a duty to the company’s creditors. 

Directors also have four general duties, including the duty to:

1. exercise their powers with the care and diligence of a reasonable person in the same circumstances. This requires you to remain properly informed about the financial health of the company and to avoid trading while insolvent;
2. exercise their powers in good faith, in the company’s best interests and for a proper purpose;
3. not improperly use their position as director to benefit themselves or someone else, or to harm the company; and
4. not improperly use information obtained by virtue of their position as director to benefit anyone, or to harm the company.

Directors must also not allow the company to engage in insolvent trading. This means that you should be very clear about your company’s financial situation before allowing it to incur any debts.

Finally, directors must ensure they maintain proper financial records of the company’s transactions and general performance. If a company does not have proper financial records, the directors cannot properly assess the company’s insolvency.

Consequences of Breaching a Shadow Director’s Duties

If you are a shadow director of a company and breach these director’s duties, the consequences are the same as those of breaching a director’s duties. Possible penalties include:

• fines of up to $200,000, imprisonment for up to five years, or both;
• personal liability (legal responsibility) for any loss or damage incurred by the company or related individuals. This could include a company’s tax or superannuation liabilities); and
• prohibition from managing a company for a period of time or permanently.

Directors' Duties Complete Guide

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.

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Key Takeaways

If you think you may be the shadow director of a company, ensure that you adhere to the terms of the company constitution and the various rules in the Corporations Act, including the four general director’s duties. If you have any questions about shadow directors, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.