Lifting the veil of a shadow director

Do you ever provide advice to company directors, and they act on that advice?

Do you ever give instructions to company directors and they act on those instructions?

People have a general awareness of the implications of personal liability as a director. For example, directors can find themselves personally liable for debts to employees, tax debts and penalties owed to the Australian Tax Office or for breaches of The Corporations Act 2001 (“the Act”).

However, the Act itself provides little guidance or definition as to who is a director. A director may be anyone who acts in the position of a director, or someone who gives instructions or expresses wishes, and the directors of the company act in accordance with those instructions or wishes. The result is that a trusted company advisor can, unwittingly, become liable as if they were a formally-appointed director.

Lessons learnt from the James Hardie Industries Limited case tell us that people such as company secretaries, Chief Financial Officers and in-house legal counsel,  may be considered an officer of a company even if not formally appointed.

Accordingly advisors can be subject to duties owed under the Act, not simply by virtue of appointment as a director or officer, but because they are a person who makes, or participates in a decision making process, that affects the business of the company.

Even an “external” advisor or consultant to a company can find themselves participating in decision making of a company. Perhaps ironically, the better service and advice you provide, which can lead to unquestioning implementation of your recommendations by a company, the more likely it is you might find yourself stepping into the shoes of director of that company – whether you intended to or not. Depending on the circumstances, financial advisors, accountants, lawyers and the like can inadvertently find themselves subject to the statutory and common law duties by which a director is bound.

Whether your conduct can be viewed as the actions of a shadow director will depend on the circumstances. But simply calling yourself a consultant and delivering excellent service will not protect you against the possibility of being found to be shadow director. 

If you are uncertain whether you are at risk of becoming “part” of a company, rather than simply advising one, we can provide practical guidance on how to best ensure that carrying out your business of advising a company does not inadvertently place you at risk of personal liability as a shadow director.

For more information contact:

Dan Simmonds
Principal
Harwood Andrews
T: 03 5226 8513
E: dsimmonds@harwoodandrews.com.au

Chris Bitmead
Associate
Harwood Andrews
T: 03 5225 5265
E: cbitmead@harwoodandrews.com.au