Can a company be a shadow director of another company?
A person who is deemed to be a director in this way is often referred to as a ‘shadow director’. A shadow director is required to comply with the duties of directors under the Corporations Act 2001 (Cth) (Act) and may be exposed to claims arising from insolvent trading of the company.
This update considers whether a company can be a shadow director of a corporation.
What is a shadow director?
A related concept is that of a ‘de facto director’. This situation occurs where a person is not validly appointed as a director however they act in the position of a director.[8] It is possible that a person is both a de facto director and a shadow director.
Can a company be a shadow director?
Although a corporation or other body corporate cannot formally be appointed to the position of a director, a company can be a shadow director of another company.
As White J noted in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd[9]:
In Standard Chartered Bank of Australia Ltd v Antico[10], Hodgson J found that Pioneer International Pty Ltd (Pioneer) was a shadow director of a related company, Giant Resources Ltd (Giant).
The following factors were relevant in finding that Pioneer was a shadow director:
- Pioneer had effective control of Giant by virtue of its 42% shareholding, whereas the only other significant shareholders held, respectively, approximately 10%, 6%, 6% and 3% of the shares; and
- Pioneer showed a willingness and ability to exercise control, and an actuality of control, over the management and financial affairs of Giant, such as the assets of Giant and its financial reporting requirements.
The court held that the directors of Giant were accustomed to acting in accordance with the instructions or wishes of Pioneer. Consequently, Pioneer was deemed to be a director of Giant.
Commentary
A company (or individual) who is a shadow director of a company will be required to comply with the duties of a director under the Act. These duties include, but are not limited to, the general duties set out in sections 180-183 of the Act.
Further, a shadow director may be liable for insolvent trading of a company under section 588G of the Act. This was the case in Standard Chartered, where Pioneer was held to be a shadow director of Giant and consequently liable as a director for insolvent trading of Giant.
[1] [2020] HCA 4, 33 [95].[2] Corporations Act 2001 (Cth) s 9.
[3] Ibid.
[4] Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010) 77 ACSR 410, 465 [248].
[5] Ibid.
[6] Corporations Act 2001 (Cth), s 9.
[7] Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010) 77 ACSR 410, 459-460 [227]-[232].
[8] Corporations Act 2001 (Cth), s 9.
[9] (2010) 77 ACSR 410, 460 [231].
[10] (1995) 38 NSWLR 290.
[11] Ibid.