Have I got your attention!? This headline could equally read “Solicitor Jailed for Helping Client”. This month, we look at the provisions and case law around advisers overstepping their involvement in a client’s company and when all goes wrong, which is usually the time advisers become heavily involved, falling foul of the director deeming provisions of the Act. The place to start this conversation is the definition given to “Director” in Section 9 of the Corporations Act 2001(the Act). Section 9 states a director of a company or other body means:
- A person who:
- is appointed to the position of a director; or
- is appointed to the position of an alternate director and is acting in that capacity;
regardless of the name that is given to their position; and
- Unless the contrary intention appears, 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.
Section 9 further states however that sub-paragraph (2)(ii) does not merely apply to a person because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors of a company. So there appears to be an exemption for advisers? Relieved? Hold that thought for a moment.
Despite this attempted cut out, danger still lurks for advisers in Section 9(b) for the uninformed. There is an adviser’s “line in the sand” so to speak that has been determined by the Courts. The question becomes a matter of fact, set out in precedent to help advisers remain in the sunlight and not venture into the director’s shadow. The results of being deemed a de-facto or shadow director can be catastrophic, for example:
- You could be held liable for breaching the director’s duties contained in the Act
- Be subjected to claims for unreasonable director-related transactions
- Pursued for insolvent trading
- Face the prospect of incarceration for offences under the Act
- Place any professional indemnity insurances you may have in jeopardy; or
- Those directors formally appointed may attempt to bind you as a de-facto director for claims brought against them because of your actions.
Regardless of the outcome, having the knowledge to avoid being put in this predicament is worth its weight in gold, so let’s look at relevant case law findings:-
In the case Grimaldi v Chameleon Mining, Mr Grimaldi was engaged as a consultant by Chameleon, who ultimately brought the proceedings against him (and other formally appointed directors) to reimburse the company for the profits that they had obtained at the company’s expense, as a result of failing to act in accordance with those duties of Directors as set out in the Act. Mr Grimaldi was found to have:
- Negotiated the acquisition of a significant mining tenement for the company
- Facilitated fundraising and share placement activities on behalf of the company; and
- Became heavily involved in high level management activities for an extended period upon which the Board had placed significant reliance.
The Court held that Grimaldi was a de-facto director.
Another noteworthy case is that of Buzzle v Apple involving six resellers of Apple products who intended to merge their combined affairs into a new company called “Buzzle Operations”. Buzzle Operations formed then failed and a liquidator was appointed.
The liquidator of Buzzle Operations sought a determination from the Court that both Apple and Buzzle’s finance directors were directors of the company pursuant to the Act so that he could pursue them for insolvent trading.
Fortunate for Apple and the finance director, the Court considered the facts and found against the liquidator. In doing so the Court set out a number of principles to be considered when determining if an individual is a shadow director: –
- The directors collectively must be accustomed to act on that person’s instructions or wishes. It is not necessary that the person exercises influence over each and every director, just a governing majority is suffice
- It is not necessary that the individual give instructions in regard to the entirety of corporate activity subject to the director governance. It is sufficient to show that the directors are accustomed to act in accordance with the individual’s instructions in relation to just one area of corporate activity
- A causal connection must be established between the instruction of the individual and subsequent activity undertaken by the directors
- A test of “being accustomed to act” was established requiring one to prove the directors acted with habitual compliance over a period of time in relation to director’s affairs not just management activities
- The individual must possess an element of control. Otherwise the directors are free to decide whether to comply with the individual’s instructions or wishes.
Most readers’ dealings will be with micro, small and medium sized corporates and whilst the above principles have been developed litigating at the pointy end of town, they are still applicable and potentially more relevant due to the intimate involvement that comes with clients of this kind. Directors do place heavy reliance upon the relationships they have with their advisers and it’s not unknown for an adviser’s firm to be practically running their client’s business. Acting in accordance with the above principles will keep you on the right side of the adviser’s line in the sand.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.
