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

A director of a company is an individual who manages and supervises the company’s business activities. A company or organisation can have different types of directors, two of which being “de facto directors” and “shadow directors”.

This publication is a discussion of the differences between these two kinds of directors.

Table of Contents

About The Author

Gibbs Wright Litigation Lawyers

Gibbs Wright Litigation Lawyers is a top-tier, exclusive litigation firm. Our mission is to help you win your legal battles and get back to business as soon as possible. We offer unparalleled service, dedication, and clear communication to ensure that you achieve the best possible outcome for your situation.

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 confidential consultation about your legal rights and options.

Related Publications

Explore your legal options with Gibbs Wright Litigation Lawyers - Brisbane’s Leading Litigation Firm.

Our expert litigators will let you know where you stand and give you legal guidance if we can help.