Articles > Small Business

What is a Shadow Director?

December 22, 2020   Daniel FellowesPhilip Evangelou

Directors are key stakeholders within a business, and have the power to influence the operations of a company. But did you know that you could be considered the director of a company without being registered? A shadow director (sometimes referred to as a ‘de facto’ director) is a person who acts as a director of a company despite not being registered with ASIC.

Many responsibilities and legal obligations come with the powers of being a director of a company. The duties of a director of a company include to:

  • Act with reasonable care and diligence
  • Act in good faith
  • Prevent insolvent trading
  • Avoid conflicts of interest
  • Not improperly use the position, and
  • Not improperly use information from the position

So, if you are a shadow director, you have the same duties as an officially registered director.

Am I a shadow director?

If you act in the role of a director, or the directors of a company commonly act according to your instructions, you may be a shadow director. The Corporations Act 2001 (Cth) defines a director as either a person appointed as a director, or alternatively, as someone who acts in that position (despite not being officially appointed) or whose instructions or wishes the other company directors are accustomed to following. As a result, if you act as a director, or influence the board of directors, you could be a shadow director.

This does not mean that you are a shadow director just because the board listens to your advice. Nor does it mean that you are not a shadow director if the board occasionally disregards your advice. Ultimately, you will only be held to the standards of a director if deemed a shadow director in legal proceedings. A court will consider the following:

  • Whether you are performing the functions of a director
  • Whether you actively influence or instruct the board of directors, and
  • Your overall role in the business’ operations

Some functions that could meet the requirements are:

  • Managing the company’s overall operations
  • Authorising company expenditures
  • Decision-making in company meetings, and
  • Borrowing or lending funds on behalf of the company

It is important to note that this is not an exhaustive list. In general any functions you perform as if you were a registered director could lead to you being a shadow director.

What are the consequences of breaching duties?

As a shadow director, you have the same legal responsibilities as a registered director. The consequences for breaching these duties are also the same. These can include:

  • Fines of up to $200,000, imprisonment up to 5 years (or both)
  • Personal legal responsibility for loss or damages suffered by the company, and
  • Temporary or permanent barring from managing the company (and other companies)

To Sum Up

If you have similar responsibilities to a company’s directors, or actively influence the board’s decision-making, you may be a shadow director. If you believe this could be you, it is important to hold up the standard of a company director. Severe penalties may apply if you breach the duties of a director.

If you have questions about shadow directors, get in touch with us via the contact form or by calling 1300 337 997.

About Daniel Fellowes

Avatar photoDaniel is a paralegal at OpenLegal. He is a final year business and law student at the University of Technology Sydney, majoring in finance and legal futures. His interests are newlaw, legal technology and commercial law.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.