What is a De Facto Director?
Company directors are responsible for the general management of a company and oversee all business activities. A person becomes a director by being appointed to the position, and every company in Australia is required to have at least one director. The legal definition of a director extends beyond directors that are validly appointed to also include de facto directors within its scope.
What are De Facto Directors?
A de facto director refers to a person who is not validly appointed as a director of a company but acts within the capacity that a normal director would. The implications of this are that de facto directors will inherit the same obligations to the company as any formal director would.
What Factors Indicate that a Person is a De Facto Director?
Those who play an advisory role to a company are the most at risk of falling into the definition of a de facto director. This however depends on the types of duties they perform in the context of the company. The relevant considerations include:
- The duties performed by that person;
- The size and structure of the company and how responsibilities are allocated;
- Whether the person represented themselves to be a director;
- Whether the company or third parties considered the person to be a director;
- Whether the duties performed by the person are typically performed by a director in the context of the company
What are the Implications of Being a De Facto Director?
If a person falls within the scope of a de facto director, they will be subject to the same responsibilities as a genuine director. This includes:
- Acting in the best interest of the company;
- Not using their position for personal gain;
- Exercising their powers and duties in good faith;
- Avoiding any conflicts of interest;
- Preventing the company from trading if it becomes insolvent
What Happens if you Breach your Director Duties?
As de facto directors are held to the same standard as any other valid director, they can become liable if they breach their director duties. The potential consequences of a breach includes:
- Being subject to a penalty of up to $200,000 or imprisonment for up to five years (or in some cases both);
- Contravention of a civil penalty provision can result in a penalty of up $200,000;
- Becoming personally liable to compensate the company or others for loss or damage caused;
- Restricting the individual from being able to take on director roles in the future
Exceptions to Being a De Facto Director
There are exceptions that will prevent someone from being defined as a de facto director. If the person is providing advice in a professional capacity, they will not be considered a de facto director. Additionally, if the person is only undertaking minor tasks and has no direct involvement in company affairs, they will be excluded from the definition of a de facto director.
It is important to recognise that if your duties reflect that of a valid director, you may be considered a de facto director. The role of a de facto director comes with risk and you may become personally liable for the company if your director duties are breached.
If you accept the risks and want to continue in these duties then there are no issues. However, if you believe that your current position may leave you liable for obligations you did not intend to have, this may be a good time to review your current duties with your company.