De Facto Directors: Explained

De Facto Directors: Explained

The issue of De Facto Directors highlights the importance of transparency in corporate governance and accountability for decision-making.
Share on facebook
Share on twitter
Share on linkedin
Share on email
Wednesday, 27 May 2020
By James Cook

A De Facto Director (commonly referred to as a “Shadow Director”), is a person who is not validly appointed as a director of a company but is a person who the appointed directors of the company are accustomed to following instructions from.

The Corporations Act 2001 (Cth) (“the Act“) defines a De Facto Director as:

  • a person who is not validly appointed as a director if:
    they act in the position of a director; or
  • the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.

When determining whether someone is a De Facto Director a Court will typically apply a substance over form approach and will look beyond the records held by the ASIC or written agreements entered into by the corporation and the related entities, to uncover a party’s true position within the corporate organisation (see Featherstone v D J Hambleton as liquidator of Ashala Pty Ltd).

When forming a view on whether a person may have been acting as a De Facto Director of a company, the elements of de facto directorships that have been outlined in the cases of Deputy Commissioner of Taxation v Austin [1998] FCA 1034 and Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129 have included:

  1. Whether those outside the company considered the person to be a director;
  2. The duties that would be expected to be performed by a director in the relevant company (namely, top-level management functions);
  3. The duties actually performed by the person;
  4. Whether others in the company considered the person a director;
  5. Whether the company held out the person as a director; and
  6. Whether the person held themselves out as a director.

It should therefore be noted that a De Facto Director attracts all of the legal obligations, duties, responsibilities and liabilities that attach to any other validly appointed director of a company.

Specifically, De Facto Directors have duties to:

    • To act in the best interests of the company and not for an improper purpose or to gain an advantage for themselves;
    • To exercise powers and duties in good faith;
    • Avoid conflict of interest; and
    • Not improperly use information of the company or their position and ensure it does not trade insolvently.

Like validly appointed directors, De Facto Directors can also be held personally liable for debts incurred by the company while trading insolvent, however it should be noted that whilst De Facto Directors can apply to have the Company wound up under section 459P of the Act, De Facto Directors do not have the authority to appoint an administrator.

If a Court is satisfied a De Facto Director breaches their duties, then the Court can make a declaration pursuant to Section 1317E of the Act and:

    • impose a fine of up to $200,000.00; and
    • disqualify the person from being a director or from managing companies; and
    • If the company has suffered, or is likely to suffer, loss and damage as a result of the breach, the Court on the application of ASIC or a person nominated by ASIC, or an Administrator or Liquidator, can order the payment to the company of money, or transfer of property to the company, or payment of the amount of its lost or damage to the company.

If you are concerned that you or a client may be acting in a De Facto Director capacity to a company and would like assistance or more information regarding the possible implications, please get in touch with our of our qualified and experienced experts.

Latest News & Insights