Directors
The Corporations Act 2001 defines a director as a person formally appointed to the position, an alternate director, a de facto director, or a shadow director. This broad definition ensures that a person who performs the actual functions of a director is held to the same standards as a formally appointed director.
For the full corporate governance framework, including director duties, ASIC investigations, and shareholder disputes, see our corporate governance lawyers page.
De Facto Directors
A de facto director is a person who acts as a director without being formally appointed to the position.
When determining if a person is a de facto director, a court may take the following key factors into consideration:
- If the person performs or is expected to perform director’s duties. For example, if the person constantly participates in board meetings and makes strategic decisions.
- If the person is considered a director by others inside or outside of the company because of their actions. For example, if the person is presenting themselves as a director to third parties.
- Whether they are held out as a director.
Shadow Directors
A shadow director is a person who influences formally appointed directors without acting like one.
A court may find a person to be a shadow director under the following circumstances:
- If the person makes or participates in making decisions that affect the company’s business.
- If the person significantly can impact the company’s position, especially its financial position.
- If the company’s other directors act on the person’s directions and wishes over a period of time.
However, there are some exemptions. A professional advisor, such as a lawyer or an accountant, or a person that only handles small tasks, such as taking notes during board meetings without further participation, is not generally considered a shadow director.
Directors Duties
De facto director or shadow directors have a high level of influence over the company. Therefore, de facto directors and shadow directors are subject to the same duties as formally appointed directors.
Directors’ duties are based on the common law and the Corporations Act 2001. They include:
- Acting with reasonable care, skill and diligence.
- Acting in good faith in the best interests of the company and for a proper purpose.
- Disclosing all material personal interests to the company.
- Not improperly using information or position.
Breach Of Directors Duties
If a court determines that a person is a de facto director or shadow director, the person will be subject to the same legal consequences as a formally appointed director. These include:
- Criminal Penalties – In severe cases a director can face criminal charges. This typically happens when breaches involve dishonesty or recklessness, such as fraud.
- Civil Penalties – The director may be liable for a fine of up to $200,000.
- Compensation – The court can make compensation orders against a director who have breached their duties. This means that the director can be held personally liable to pay compensation to the company and to any person that has suffered a loss in relation to the breach of the directors duties.
- Disqualification – A director can be disqualified from being a director or from managing companies for a period of time.
- Commercial Consequences – A breach of the directors duties can negatively impact the company’s reputation.
Where directors face civil proceedings for breach of duty, our litigation lawyers act in defence and shareholder dispute matters.
How To Avoid Hidden Director Liabilities
There are a number of steps you can take to avoid hidden director liabilities. These include:
- Clearly Defining The Roles And Titles In The Company – If you want to be a formally appointed director, you should go through the proper appointment process or make sure that you have another form of documentation for your role.
- Avoid Making Decisions Exclusive To Directors – If you are not a formally appointed director, you should avoid making director-level decisions, such as making strategic decisions, negotiating on behalf of the company, or signing significant contracts.
- Seek Legal Advice – If you are unsure whether you are crossing the line or not, you should seek professional advice, as the legal consequences can be severe.
Legal Guidance
Breach of a director’s duty, whether by a formally appointed director or a de facto director, can bring severe legal, financial, and reputational consequences. Understanding your obligations under corporate law and acting prudently is essential to avoid personal liability.
If you suspect a breach has occurred, or if you simply want to ensure your role complies with the law, don’t wait. Call us today for legal advice tailored to your situation. Our team is ready to review your circumstances, guide you through your options, and help protect your interests.
This article was prepared by the Citilawyers Legal Team, NSW-admitted solicitors based in Sydney CBD. It is general information only and does not constitute legal advice.
