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Spotlight on Shadow Directors

20 July 2017

In many cases, the registered Director of a company is not the person who is controlling the company or making decisions in relation to the company.  A person who acts (but is not registered) as a Director of a company is known as a Shadow Director and is bound by the same duties and obligations of a registered Director.  A Shadow Director may also face serious consequences for breaching the duties imposed by the Corporations Act.

A shadow director is a person who is not formally appointed as a director of a company but who acts in the position of a director and whose instructions and wishes are followed by others including the formally appointed Directors.

This position has been highlighted in the media recently with the Plutus Payroll taxation fraud scheme which allegedly used ‘dummy directors’ for a number of companies in the group which were actually controlled by members of an alleged Syndicate who acted as Shadow Directors.  The Shadow Directors were allegedly directing the companies to siphon funds due to the Australian Taxation Office.  This case highlights the fact that it is the person who acts as a Director, not necessarily the person who is registered as a Director, who may be held liable for their actions in relation to a company.

A Director of a company is subject to various duties mandated by the Corporations Act.  Identifying a shadow director of a company subjects this person to these same duties.  This is particularly relevant when there have been offences and contraventions of Director’s duties which are exposed in the winding up of a company. A Directors’ duties are to the company’s shareholders however when a company is insolvent, or likely to become insolvent, a Director’s duties expand to include the company’s creditors.

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;
  • 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.

The following duties also apply to a Director or Shadow Director:

  • Duty to maintain proper books and records.  The books and records should adequately explain the history and dealings of the company.  The failure to maintain proper books and records may lead to the presumption of insolvency, if a company is wound up;  and
  • Duty not to trade the company while insolvent.  Insolvency is defined as being unable to pay debts as and when they fall due.  It is vital for anyone acting as a Director to have a thorough understanding of the company’s financial position and to prevent the company from incurring any debts that it is unable to pay.  

What penalites apply?

There are serious consequences for a person who is found to be a Shadow Director who has failed to fulfil his/her duties in relation to a company.  In certain circumstances, a Shadow Director may be found to be personally liable for the debts of the company.  A Shadow Director may also face civil penalties for breaches of his/her duties.  The Corporations Act provides some statutory defences for Directors, however these are unlikely to apply if it is evident a person acting in the position of a Director has not maintained current knowledge of the company’s financial position.

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.

Action

If you are acting as a Shadow Director of a company, it is vital that you are aware of the duties conferred upon you by the Corporations Act, whether or not your name appears registered with ASIC as a Director of the company.

To fulfil your duties as a Shadow Director and avoid any penalties, civil or criminal charges or disqualification, it is important that you remain informed as to the financial position of the company and ensure that the company maintains adequate, timely books and records. 

If you suspect the company is in financial difficulty, it is important to act immediately and obtain professional advice about the best course of action in your circumstances.

Acting promptly will not only ensure you fulfil your duties as a Shadow Director, but allow the greatest possible likelihood of being able to achieve a successful restructure and save the business and company. 

Contact Rodgers Reidy now for a confidential discussion in relation to your business circumstances.

Further resources:-

1.       ASIC Information Sheet 42 – Insolvency: A guide for directors

2.       ASIC Regulatory Guide 217 – Duty to prevent insolvent trading: Guide for Directors

 

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