Who are considered directors and officers of a company? It is wider than you may think
When a company enters voluntary administration or liquidation, the administrator or liquidator will investigate whether the directors and officers breached any of their duties, and whether actions can be brought against them to recover funds for creditors. For companies that are considering turnaround or restructuring options, knowing whether you may be held to be a director or officer if the turnaround or restructuring is not successful is very important.
In this two-part series, we will examine what it takes to be considered a director or officer of a company. In this article, we look at what it takes to be a de facto director or an officer.
There are many duties imposed on directors and officers of companies. These arise under statute (eg under sections 180 to 183 of the Corporations Act 2001 (Cth)) and under the general law (eg fiduciary duties). Some apply only to directors[1]; others apply both to directors and officers[2].
When a company fails and enters voluntary administration or liquidation, the administrator or liquidator will investigate whether the directors and officers breached any of their duties, and whether actions can be brought against them to recover funds for creditors. For companies that are financially stressed and considering turnaround or restructuring options, knowing whether you may be held to be a director or officer if the turnaround or restructuring is not successful is very important.
See our second article, what it takes to be a shadow director of a company.
There is a general misconception that the directors and officers of a company are only those persons formally appointed as a director or company secretary in writing, and whose appointment is recorded with ASIC. In fact, the concept of director and officer is much wider.
The Corporations Act definition of director in section 9AC(1)(b) includes:
(b) [U]nless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director; or [known as a ‘de facto director’]
(ii) the directors of the company … are accustomed to act in accordance with the person’s instructions or wishes (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation). [known as a ‘shadow director’]
As well as duly appointed directors and company secretaries, the Corporations Act definition of officer in section 9AD(1)(b) includes:
(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the [company]; or
(ii) who has the capacity to affect significantly the [company]’s financial standing; or
(iii) in accordance with whose instructions or wishes the directors of the [company] are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the [company]);
The definition of officer includes, in sub-paragraph (iii), the shadow director test, to make it clear that a shadow director is also an officer.
The leading case on what circumstances will lead to a person being found to be a de facto director is the Full Federal Court decision of Grimaldi v Chameleon Mining NL (No 2) 287 ALR 22 (Grimaldi). In Grimaldi, the Full Federal Court identified the following relevant principles in relation to de facto directors.
- The words ‘they act in the position of a director’[3] contemplates that the person concerned, though not a formally appointed director, has been acting in a role (or roles) within the company and performing functions one would reasonably expect to have been performed by a director of that company given its circumstances.
- Whether a person is a de facto director is often a question of degree having regard to ‘the nature of the functions or powers which are exercised and the extent of their exercise’.
- There is no reason why the relationship of a person with a company may not evolve over time into that of de facto director. It also may be the case that the person only performs the role and functions that constitute him or her a director for a limited period of time.
- Whether a person has acted in the position of a director is a question of substance and not simply of how that person has been denominated in, or by, the company. Importantly, the fact that a person has been designated a ‘consultant’ for the performance of functions for a company will not as of course mean that person cannot be found to be a director.
- A limited and specific consultancy is unlikely on its own to lead to de facto directorship. That should be contrasted with a general and unconstrained one that allows the person to take an active part in directing the affairs of the company.
- Only an individual can be a de facto director. Where a consultant is a company, it will be a question of fact as to which directors (or officers) of the consultant is (or are) de facto directors of the client company.
- To be a de facto director, the person must be shown to have assumed or performed functions that only a duly appointed director or directors would properly perform.
- There is a wide spectrum of companies and what functions directors perform depends on the company in question. In a very small company, the director(s) will do almost everything because there is no management under them to perform managerial tasks. In a large company, there will be a clear delineation between the directors and management. So, the inquiry becomes whether, in the circumstances of the particular company, is what is being done reasonably regarded as being a responsibility of a director or of management? If it is properly a responsibility of management, performance of those tasks will not make the person a de facto director. However, it might make the person an officer.
- Just because a company has an active director or directors apart from the alleged de facto director, or has a properly constituted and apparently ‘functioning’ board, does not preclude a finding that a person is a de facto director.
- Whether the company itself has held the person out as a director will itself be a relevant, but not decisive, consideration. As will whether third parties dealing with the person formed an independent, reasonably held, perception that the person was acting as a director.
As we set out earlier, an officer of a company includes[4] a person:
- who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the company; or
- who has the capacity to affect significantly the company’s financial standing.
The enquiry as to whether a person is an officer is often ‘a far less complex inquiry than the de facto director one’.[5] In larger companies, a range of senior management personnel could be officers. That likely includes those with ‘officer’ in their title, such as Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Chief Information Officer, but also includes others who participate in significant decisions about the business of the company.
For further information, please contact Scott Butler.
[1] Such as the duty to prevent insolvent trading under section 588G of the Corporations Act.
[2] Such as the duties under sections 180 to 183 of the Corporations Act.
[3] In section 9AC(1)(b)(i) of the Corporations Act.
[4] See section 9AD(1)(b)(i) and 9AD(1)(b)(ii) of the Corporations Act.
[5]Grimaldi v Chameleon Mining NL (No 2) 287 ALR 22 at [143].
