What’s the difference between a de facto director and a shadow director?

What is a de facto director?

A de facto director is a person who has not been officially appointed as a director but who acts as one. The term can also refer to a person who has been officially appointed as a director but uses another title or job description in practice.

What is a shadow director?

A shadow director is a person who has not been officially appointed as a director but on whose instructions, or wishes, board members are accustomed to acting. A shadow director can face the same penalties as an officially appointed director.

Shadow directors and de facto directors — the facts

Over the years, the courts have been interested in drawing a distinction between the different types of directors, such as shadow directors and de facto directors.

De facto directors

In the United Kingdom case of Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180, at 183 Justice Millett defined a “de facto director” as:

“…a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director.”

Justice Millett

Australian case law has also established factors to be considered in determining whether a person is a de facto director. These include, for example:

• the duties expected to be performed by the person;
• the duties actually performed by the person;
• whether the person is considered a director inside and outside of the company;
• the size of the company and the allocation of responsibilities;
• whether the person held themselves out as a director; and
• whether the company held the person out as a director.

Therefore, to establish that a person is a de facto director, it is necessary to prove that the person undertook functions or roles in the company that could only be properly discharged by a director.

A person may be found to be a de facto director even though the person does not consent to act as a director, provided that their actions show they are acting in the position of a director.

Shadow directors

The case of Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233, refined the factors to be considered in determining whether a person is a shadow director. These include, for example:

• a person may be considered to be both a de facto director and a shadow director;
• the directors must be accustomed to acting on the person’s instructions and/or wishes, which requires “habitual compliance over a period of time”; and
• there must be a causal connection between the person’s instructions and/or wishes and the directors acting on them (in other words, the act is not something the directors would do irrespective of the instructions and/or wishes).

Implications of being a shadow or de facto director

Both shadow directors and de facto directors have the same statutory duties and obligations as a director under the Corporations Act 2001 (Cth), and may also owe duties and obligations under common law, fiduciary duties, or a company constitution. Such duties and obligations include to:

• act in the best interests of the company and not for an improper purpose, or to gain an advantage for themselves;
• exercise powers and fulfil duties in good faith;
• avoid conflicts of interest;
• not improperly use company information or their position; and
• ensure that the company does not trade insolvently.

Learn more about a director’s duties and responsibilities in Australia here.

Contact Gibbs Wright Litigation Lawyers

Whether you are a shadow director, de facto director, or a managing director it is important that you know your rights and obligations. Contact Gibbs Wright Litigation Lawyers today for a free and confidential consultation about your legal rights and options.