A person who exercises influence on the board of a company but who is not a formally appointed director may be found to be de facto or shadow director and personally liable for breaches of the Corporations Act. Are you jeopardising the effectiveness of your asset protection strategy by unknowingly acting as an officer of a company?
A company is a very popular form of organisation for most businesses and for good reason. A corporate structure allows you to pool your capital with others, gives you potential tax benefits and most importantly provides the means of putting a firewall between the risk in the enterprise and your personal assets. That said, a company structure does not allow you to avoid responsibility altogether if things go wrong. If you are an ‘officer’ of a company the law imposes certain duties on you, breaches of which can make you personally liable.
Most of us understand corporate officers to include directors and company secretaries, however, people who are involved in the management of a company should be aware that director liability provisions sometimes apply to individuals who are not formally appointed to these roles. For SMEs it is not uncommon for spouses, family and friends to become involved in an unofficial capacity in providing advice to a business and sometimes in participating in major decisions. You may have found yourself in this position. If so, you should be aware that you may be civilly or even criminally liable for breaching director’s duties, despite not being an official company director
Who is a corporate ‘officer’?
The Corporations Act extends the definition of ‘officer’ beyond directors and company secretaries to include:
- a person who carries out the role and duties that would ordinarily be performed by a director of the company. These individuals are known as ‘de-facto directors’ and often third parties outside of the company assume that the person is a director of the company due to the role that they play; and
- a person who provides instructions, directions or advice which the validly appointed board of directors habitually ‘adopt’ and act in accordance with. These individuals are known as ‘shadow directors’ and it may not be immediately obvious to others that such a person is piloting the operations and decisions of the company.
A person who agrees to be a director of a company (that is, signs a Consent to Act as a director, has their name listed on the company’s internal documents as a director and is listed with ASIC as a director), usually does so with an awareness that such a role comes with certain duties, including the duty to:
- exercise their powers with the care and diligence of a reasonable person in the same circumstances;
- act in good faith, in the company’s best interests and for a proper purpose;
- not improperly use their position as director to benefit themselves or someone else, or to harm the company;
- not improperly use information obtained by virtue of their position as director to benefit anyone, or to harm the company; and
- not allow the company to engage in insolvent trading.
Since a breach of these director’s duties has serious consequences, directors will ensure they have appropriate asset protection strategies in place to ensure that they protect their wealth from the risk of acting in this corporate role. If you are a de facto or shadow director of a company, the consequences of breaching these duties are the same. The problem is you may not be aware that you are an officer of a company.
How do you know if you are an officer of a company?
In what circumstances will a person be found to have acted as a de facto director of a company? A commonplace example of a spouse being found to be a de facto director is the case of Mrs Thompson. [1] Mrs Thompson’s husband was the sole director of a waterproofing business, Kadoe Pty Ltd, that was sued by their main supplier, Tremco Pty Ltd, for not paying their invoices. Kadoe was declared insolvent, and Mr Thompson became a bankrupt. Tremco successfully sued Mrs Thompson on the basis that she was a de facto director of Kadoe at the time the company became insolvent. In making their decision, the Court found Mrs Thompson to have:
- Taken an active part in directing the affairs of the company;
- Provided instructions to employees and advisers;
- Operated with very little oversight; and
- Had the independent ability to negotiate and bind the company.
The personal consequences to Mr and Mrs Thompson, was that their home, which had been placed in Mrs Thompson’s name for asset protection purposes, was sold to pay her debts to Tremco.
When will a person be considered to have gone beyond giving mere advice and recommendations to becoming a shadow director? Persons who advise a company such as an accountant, solicitor, banker etc. will not automatically be considered a shadow director. However, if you are providing advice or recommendations to a company, you should note the way in which the board of directors of the company carries out their roles and the way in which the company follows (or questions or considers) your recommendations or suggestions. Is there a causal connection between you giving an instruction and the board following it? Is the board considering the best interests of the company or merely deferring to your wishes? The rule is that advisers should ‘advise, not direct’. The minutes of a board meeting should show they are ‘present’ rather than in attendance.
Key takeaways
To protect yourself against the unintended consequences of being found to be a de facto or shadow director, we recommend that:
- you evaluate your role and the role of key personnel who assist, advise or manage a company but who are not formally appointed as directors;
- ensure that your company has internal governance policies and processes and document the authorities of key personnel; and
- consider your respective asset protection strategies.
If you conclude that you may be an officer of a company, then ensure you comply with all director’s duties under the Corporations Law. If you are in doubt, then seek legal advice about how to minimise your liability.
[1] Thomson v Tremco Pty Ltd [2019] QCA 18
