This case demonstrates that Courts will look beyond ASIC’s records and a person’s formal written agreements in respect of a company to determine whether such person is in fact acting as a de-facto or shadow director of the company, and agreements designed to be “self-serving evidence” that such person is not a director will be disregarded. Instead the Courts will look at a person’s active involvement in the day-to-day operations and management of the company, and also the level of influence they are able to assert over other directors.
Mr Featherstone was recorded by ASIC as being a director of Ashala Pty Ltd (Ashala) (which occupied premises owned by Mr Featherstone as trustee of his family trust) from 10 March 2004 to 7 October 2005 and then again from 28 November 2005 to 12 December 2005. In October 2005, Mr Featherstone transferred his shares in Ashala (and 2 other related companies) to Ms Marks who also became the sole director of all 3 companies after Mr Featherstone ceased to be recorded as a director.
Mr Featherstone was employed as Ashala’s training and events co-ordinator pursuant to an agreement letter which recorded that he had “no responsibility or rights or powers as a director, secretary, officer or manager of the company” and that he would not “be involved in any decisions that substantially affect the operation of Ashala”, but did entitle Ms Marks to seek Mr Featherstone’s advice at times (Employment Letter).
Ashala went into liquidation in 2010 and the liquidators brought proceedings against Mr Featherstone for insolvent trading in respect of debts of approximately $200,000 incurred by Ashala between 30 June 2008 and 9 September 2010.
The trial judge found that:
- despite not being recorded as a director of Ashala, Mr Featherstone was a de-facto director (ie he performed functions which would usually be expected to be performed by a director, or the board of directors) and a shadow director (ie he had sufficient influence to ensure compliance by the directors with his wishes and instructions);
- as a result of his active involvement in the day-to-day affairs and management of Ashala, there were reasonable grounds for him to suspect that Ashala was insolvent; and
- the transfer of the shares to Ms Marks and the Employment Letter were ”nothing more than attempts to create self-serving evidence in the event (which has turned into fact) that [Mr Featherstone] was sued”.
Lyons J in the Supreme Court of Queensland of Court of Appeal (with Gotterson JA and Douglas J in agreement) agreed with the trial judge, and pointed to evidence that:
- Mr Featherstone “pulled the strings” in respect of the operation of Ashala and that nothing happened at Ashala’s premises unless Mr Featherstone “okay’d it”;
- when Mr Featherstone was in Brisbane (which was for all but a couple of months each year), he was in attendance at the Ashala premises each day and was involved in “making decisions and the like” for Ashala and that after he resigned as a director in 2005 he continued to be involved in “the day-to-day affairs of everything that was happening” with Ashala;
- despite Ms Marks paying for the shares in Ashala, the shares were always held on trust for Mr Featherstone; and
- it was Mr Featherstone’s decision to accept the involvement of Mr Marshall (who later became sole director) in Ashala and one of its related companies and the control which he asserted in relation to one of the other related companies was evidenced by his refusal to allow Mr Marshall, as sole director at the time, to be a signatory on the company’s bank accounts.