Even if you are not listed as a registered company director with ASIC, you may be considered what is known as a shadow (or de facto) director. A shadow director is a person who, despite not being a registered or formally appointed as a director, acts in the role of a company director or on whose instructions a company’s registered directors are accustomed to act in accordance with. If you are unsure as to whether you would be considered a shadow director, check out our article, “Are You A Shadow Director?” Below, we set out a shadow director’s duties as well as consequences for breach.
Obligations of a Shadow Director
A shadow director has the same duties and obligations as a registered director under the Corporations Act 2001 (Act) and includes, but are not limited to:
- Duty to act in good faith (i.e. act in the company’s best interest);
- Duty to prevent insolvent trading (i.e. be accurately informed about the company’s financial position and act accordingly);
- Duty to act with reasonable diligence and care (i.e. as a reasonable person would in the same position);
- Duty to avoid conflicts of interest (i.e. not gaining a personal advantage for yourself); and
- Duty not to misuse information or position (i.e. not causing detriment to the company).
Consequences if You Are Deemed a Shadow Director
As mentioned above, a shadow director has the same duties and obligations as a registered director. This means that the consequences for a breach of directors’ duties also applies to shadow directors. Consequences range depending on severity of the breach and may include:
- Criminal sanctions and penalties (up to 5 years imprisonment for anti-competitive conduct, acting in bad faith or dishonestly and penalties of up to $200,000);
- Civil sanctions and penalties (up to $200,000);
- Personal liability to compensate the company or others for loss and damage; and
- Disqualification from managing corporations (i.e. being a director).
The company may also suffer loss and damages resulting from a loss of confidence and reputational damage due to a breach of the directors’ duties.
Personal Liability for Breaches of Directors’ Duties
It is important to know that in most cases when a company has been managed correctly, the company’s debts will remain with the company. In certain circumstances, however, a company director will be personally liable for the business’ debts following a breach of directors’ duties. This includes:
- Personal liability for debts incurred when the company becomes insolvent (i.e. cannot pay its debts as and when they fall due);
- When a company’s losses are caused by a breach of the directors’ duties; and
- Liability for the company’s outstanding tax obligations (i.e. Pay As You Go Withholding Tax (PAYG) and Superannuation Guarantee Charge (SGC) obligations).
What You Should do if You Suspect You Are a Shadow Director
As a wide range of duties and obligations also apply to shadow directors, you should regularly and carefully consider whether or not you may be regarded as a shadow director and be mindful of the risks involved. If you believe you may be acting as a shadow director, ensure you comply with the Act, common law and the company’s governing rules. If you do not wish to be deemed a shadow director, you can minimise your exposure by restricting your influence over the company.
If you have any questions as to whether you are acting as a shadow director for your company, get in touch with our commercial lawyers on 1300 544 755.