Who is the Director of a Company

May 4, 2016

 It is not as simple as searching the ASIC company register to establish the directors of the company. Obviously, the directors named on the register are directors. There may also be others acting as directors, namely ‘de facto’ directors and ‘shadow’ directors, who would be deemed by a court to be directors.

Section 9 of the Corporations Act 2001 (Cth) (the Act) provides that a director of a company includes a person:

 

  • who acts in the position of a director (a "de facto director")

  • whose instructions and wishes are followed by the directors of the company (a "shadow director")

 

despite that person not having been validly appointed as a director (unless there is contrary intention).

 

The deeming of ‘de facto’ and ‘shadow’ directors creates the potential for major consequences for:

 

  • Chief Executive Officers;

  • Chief Financial Officers;

  • In-house general counsel;

  • Consultants heavily involved in management and strategic key decisions;

  • lenders who are heavily involved in the business; and

  • major shareholders – especially where a right to appoint a director is not exercised for some reason.

 

In the case of Grimaldi v Chameleon Mining NL (No 2); Chameleon Mining NL v Murchison Metals Ltd (2012) 200 FCR 296; 287 ALR 22 [2012] FCAFC6 a consultant who was heavily involved in the management and key transactions of a company was held to be a de facto director by the Full Federal Court. The Federal Court commented that if a person has an unconstrained role that involves them actively being involved in directing the affairs of a company, it is more likely that the person is a director. The Court considered this to be the case even where the person is still subject to the direction and control of the board.

 

There are serious consequences for any director breaching their duties, including heavy fines. In order to mitigate the risk of individuals being deemed directors, companies and individuals should consider company corporate governance and look to take steps to ensure that individuals are engaged to provide advice to the company board rather than direction. The roles and responsibilities of the board and key staff need to be clearly defined. It is particularly important for boards not to relinquish their role to executive officers and to hold director’s meetings which are minuted.

 

If there is a risk that a company has someone who could be a de factor or shadow director, the company should obtain advice on steps it can take to mitigate that risk.

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