Shadow and De Facto Directors: A Guide for Accountants and Other Professionals

As an insolvency practitioner, I occasionally see the impact that shadow and de facto directors can have on companies. These individuals, who are not formally appointed as directors, can often exercise a significant amount of control over a company’s affairs and participate in the day-to-day operations of a corporation. When a Liquidator take control of a corporation, those individuals may be held accountable for the failure, just as formally appointed directors.

What are shadow and de facto directors?

Shadow directors are people who, although not formally appointed as directors of a company, nevertheless exercise control over the company’s affairs. De facto directors, on the other hand, are people who are not formally appointed as directors of a company, but who nevertheless act in the same way as a director, such as by attending board meetings and making decisions on behalf of the company.

The case of Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109 is a leading case on the definition of a shadow director. In this case, the court held that a shadow director is a person who:

• Is not formally appointed as a director of the company;
• Exercises control over the company’s affairs; and
• Is accustomed to act in accordance with the person’s instructions or wishes.

The court also held that a person may be considered to be both a de facto director and a shadow director.

The implications of being a shadow or de facto director

The implications of being a shadow or de facto director are significant. Shadow and de facto directors are subject to the same duties and liabilities as formal directors, including the duty to act in good faith in the best interests of the company and the duty to exercise reasonable care and diligence. This means that shadow and de facto directors can be held personally liable for the company’s debts and other liabilities.

The risks for accountants and other professionals

Accountants and other professionals who provide services to companies should be aware of the risks associated with shadow and de facto directors. If an accountant or other professional is found to be a shadow or de facto director, they could be held personally liable for the company’s debts and other liabilities.

Here are some of the risks that accountants and other professionals face when dealing with shadow and de facto directors:

• Being held personally liable for the company’s debts and other liabilities.
• Being disqualified from practicing their profession.
• Being subject to criminal prosecution.

How to avoid the risks

There are a number of steps that accountants and other professionals can take to avoid the risks associated with shadow and de facto directors. These include

• Carefully documenting the services that they provide to the company. This will help to establish that they were not exercising control over the company’s affairs.
• Avoiding making decisions on behalf of the company without the consent of the formal directors.
• Advising the company of the risks associated with shadow and de facto directors and ensuring that they have appropriate insurance in place.

Conclusion

Shadow and de facto directors can pose significant risks for accountants and other professionals.

This case highlights the importance for accountants and other professionals to be aware of the risks posed by shadow and de facto directors. By taking the necessary precautions, accountants and other professionals can help to protect themselves from these risks.