Thinking | 19 May 2020

Can a company be a shadow director of another company?

By Martin Ross, Graeme Scott and Mark Lebbon

In the recent High Court decision of Australian Securities and Investments Commission v King, Justices Nettle and Gordon observed that ‘there is substantial room for people outside the boardroom to have a significant effect on a corporation’.[1]

A person who has not been validly appointed as a director of a company may nonetheless be deemed a director of that company if they have influence to the extent that the directors of the company are accustomed to acting in accordance with the person’s instructions or wishes.[2]

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?

In order for a person to be considered a shadow director of a company, the directors of that company (acting as a board) must be ‘accustomed to act’ in accordance with that person’s instructions or wishes.[3]

Courts have interpreted the words ‘accustomed to act’ to mean ‘habitual compliance over a period of time’[4], however they have also made it clear that the board can disregard the person’s instructions or wishes from time to time and still be a shadow director. The key matters for consideration are whether the person has the power to control the directors of a company, and was this power put into practice.[5]

Not every person who provides advice to a board that is accepted will be considered a shadow director. The Act expressly provides that a person will not be deemed to be a shadow director merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company.[6]

Lawyers and accountants advising a company will not ordinarily be deemed to be shadow directors of that company. Further, a board that accepts the advice of a mortgagee (such as a bank) in order to protect itself from any retaliatory actions of the mortgagee will not make the mortgagee a shadow director.[7]

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]:

‘there is nothing inherently incongruous with a body corporate being a de facto or shadow director.’

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

It is important for companies (and individuals) to be aware of their relationship with, and influence over, the board of a company, and understand the risk of being deemed to be a director of that company. In particular, a shadow director relationship can arise between a parent company and a subsidiary company in a corporate group.[11]

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.

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