Who are Shadow Directors?

Shadow Director is the term given to a natural person not on the public register as a director of a company but who directs and manages the company’s affairs.

A person is classed as a Shadow Director when the company is “accustomed to act in the accordance with the person’s instructions or wishes”. In other words, a Shadow Director is someone who was not officially appointed as company director by a board, but engages in important company activities, makes decisions for the company and is generally seen as a director due to the influence or control they exert over business operations or director decisions.

Shadow Directors have been known to participate in:

  • Authorising expenditures;
  • Borrowing or lending on behalf of the company;
  • Being actively involved in board meetings; and
  • Managing the company’s business activities.

However, just because someone serves a company or its directors in an advisory capacity does not automatically mean they qualify as a Shadow Director. External professionals like lawyers, consultants and accountants whose job it is to give advice as part of their role are not typically recognised as Shadow Directors.

There are several ways to determine whether or not someone is a Shadow Director:

  • Their instructions must directly correlate to the company’s corporate activity;
  • They do not need to control all of the directors, only the majority of them;
  • There must be a pattern of compliance over time to the instructions and wishes from that person; and
  • Their direct instruction must be direct cause for the relevant decision to be made.
A person can also be considered an ‘officer’ despite not having associated rights or duties. Resultantly, the term ‘officer’ can now capture more parties, including financiers and advisers who have the ability to influence the management of a company.
 

Understanding a Shadow Director’s responsibilities

Some Shadow Directors may believe that their influence over appointed directors and control over a company is the ‘power behind the curtain’, and that somehow their title gives them great power without the liability.

This is not the case.

It is not illegal to be a Shadow Director, but that is because under the Corporations Act 2001 (Cth) those who enact the duties of a director are considered by law to be the equivalent of an ordinary director. A director must comply with the company’s constitution and any specific laws.

This means that a person found to be a Shadow Director may be liable for breach of director’s/officer’s duties including trading whilst insolvent by a court, despite not being recorded on the ASIC register or being formally appointed to the position of Shadow Director.

The general duties of a Director or Shadow Director include:

  • The duty to exercise your powers and duties with the care and diligence that a reasonable person would have;
  • The duty to exercise your powers and discharge your duties in good faith in the best interests of the company and for a proper purpose;
  • The duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company; and
  • The duty not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company.

These duties also apply to a Director or Shadow Director:

  • To maintain proper books and records. Failure to maintain proper books and records may lead to the presumption of insolvency; and
  • To not trade the company while insolvent.

Why it matters in insolvency

Those who act as a Shadow Director can face serious consequences if they do not fulfil a director’s company duties. Shadow Directors could be found personally liable for company debts in certain circumstances. A Shadow Director may also face civil penalties for a breach of duties.

In the event of insolvent trading allegations, a Shadow Director may face not only civil penalties, but compensation proceedings and criminal charges (if the Shadow Director is also found to have been dishonest).

In certain circumstances, a Shadow Director may also be disqualified from holding a position as a Director or managing a company for a period of time.