The activities of Apple and its finance director included: Participating in meetings on the merger Making suggestions about the merger and its structure Requesting financial information about the merger Questioning the Apple resellers' ability to pay the debt owed to Apple Raising concerns about Buzzle's financial position, management capabilities and accounting system Negotiating the new reseller agreement and security to be provided to Apple by the Apple resellers and Buzzle.
Claim by liquidator against Apple and finance director Buzzle became insolvent but continued to trade. Shortly after, Apple appointed receivers to Buzzle under its charge. Buzzle ultimately went into liquidation. The liquidator argued that since Buzzle complied with instructions from Apple and its finance director, then Apple and the finance director were shadow directors and should be liable for insolvent trading. Factors to determine whether a person is a shadow director The Court ultimately found that Apple and the finance director were not shadow directors of Buzzle and set out the following factors for determining whether a person is a shadow director: There needs to be a causal connection between the alleged shadow director giving instructions and the company acting on it.
The person needs to have directed the company to act in accordance with their instructions or wishes over a period of time, and the company needs to be accustomed to following these directions for the person to be a shadow director.
The alleged shadow director does not need to exercise influence over the whole board. Influence over the governing majority is sufficient. A person will not be a shadow director where the person is giving advice in their professional capacity or the personhas a professional business relationship with the company, even if the directors usually act on that advice.
Such advice must be given to directors in their capacity as directors rather than in a managerial capacity. For example, giving instructions to executives rather than directors would not make you a shadow director. After reviewing previous cases, the Court also set out the following five principles in relation to shadow directors: Not every person whose advice and instructions are followed by a board will be a shadow director. Even if a person is in a position of control over the company, it needs to be shown that the person actually exercised their control over the company to be found a shadow director.
Where the board splits into a majority and minority faction, the person may be a shadow director if the influence controls the real decision makers. Who is making the board's decisions? The following distinction needs to made: If the board is acting on advice because the board has considered the advice and made its own decision that acting on the advice is in the best interests of the company, then the person will not be deemed a shadow director.
If the board is acting on the advice without first evaluating it because it has simply deferred decision making to that person or it considers the advice given as a sufficient reason to act, then the person may be deemed a shadow director. However, this was not because Buzzle had deferred its decision making to Apple. Even though Apple and the finance director exercised power as creditors of Buzzle and applied pressure to Buzzle's board, Buzzle could still exercise its own judgment and could decide whether to comply with Apple's instructions.
Could an adviser be a shadow director? The question of whether a person is a shadow director will depend on the particular facts of the case. Intention is irrelevant. You do not need to have the intention to act as a director to be considered a shadow director. Nor does the company need to intend for you to act as a director for you to be considered a shadow director.
As an adviser, you will not be a shadow director so long as the advice you give to the company or directors is in the proper performance of your functions attaching to your professional capacity, or your business relationship with the directors or the company.
You will not be a shadow director simply because the company or directors follow your advice. However, there is a risk that you could be a shadow director if you act outside the scope of your professional or business relationship with the directors or the company. How to avoid being a shadow director for a company To avoid being a shadow director for a company, ensure that you: Give advice rather than directions or instructions to the company.
Confine your role to the professional capacity in which you have been retained. Provide advice that is within the scope of your professional or business relationship with the directors or the company.
If you are still concerned that you could be a shadow director, it would also be prudent to ensure, as far as practicable, that: You clearly communicate and record in writing the basis upon which you are to be involved in the company's decision-making process and the advice and assistance to be provided by you to the company. Communications between you and the company are recorded in writing to prove how the board has made decisions in the event that allegations of being a shadow director arise.
The company has an independent board of directors to ensure that board are left to make their own decisions in relation to the advice you have given.
The directors of the company seek independent advice such as legal and accounting advice in circumstances where you and the company have conflicting interests. Consequences of being a shadow director Once a company goes into liquidation, the liquidator will usually look to commence proceedings against some or all of the former directors of the company based on a breach of their duties.
In identifying the directors, the liquidator will not just look at the validly appointed directors as potential defendants but will also look at those people who were involved in the management of the company as shadow directors. Fifthly, although there are problems with cases where the board of the company splits into a majority and minority faction, so long as the influence controls the real decision makers, the person providing the influence may be a shadow director.
The Corporations Act and Buzzle make it clear that in order to be a shadow director, there must be more than the mere potential to control. To meet this definition of shadow director, a person must actively issue instructions to directors. This interpretation is supported by Buzzle. Young JA also makes it clear in his first principle in Buzzle that giving advice will not by itself suffice to make someone a shadow director.
He further expanded on this and stated a person may not necessarily be a shadow director even if that advice is generally followed by the board. Young JA provides an example where a party may give advice and generally have it followed without that party being deemed a shadow director. He uses the example of a mortgagor and a mortgagee.
A company may act in accordance with the banks instructions, perhaps regularly, without the bank being deemed a shadow director.
The Corporations Act states that in order to be a director you must be an individual. This means that a company cannot be the director of another company. Yet, case law has held that it is possible for a company to be a shadow director of another company.
This suggests that companies can be shadow directors but not directors. A shadow director has the same duties and responsibilities as an officially appointed director. As shadow directors are contained in the definition of director in the Corporations Act , a shadow director is subject to all the liabilities and duties imposed on directors by the act.
The duties imposed by the act include but are not limited to: the duty to exercise powers with due care and diligence; the duty to exercise powers with good faith; the duty to not improperly use your position to gain an advantage for yourself or someone else; and the duty to not trade while insolvent. A shadow director will be liable for the same penalties as an official director if they violate these duties. In addition to duties imposed by statute, the common law also imposes fiduciary duties upon directors.
The common law fiduciary duties have been substantially incorporated into the Corporations Act. Despite this, the U. Note should be made that liabilities as a shadow director will only arise in connection with legal proceedings. It is only in legal proceedings that the Court will deem someone a shadow director.
0コメント