Directors’ and Officers’ Insurance Policies and Management Liability Insurance Policies often defined “Insured Person” to include any natural person who is deemed by any relevant legislation to be a director of a company. But who can be “deemed” to be a director? Recent cases from the Victorian Supreme Court and the New South Wales Court of Appeal discuss who can be “de facto” and “shadow” directors of a company.

Relevant Legislation

According to section 9 of the Corporations Act 2001 (Cth) (Act):

“director" of a company or other body means: … (

b) unless the contrary intention appears, a person who is not validly appointed as a director if:

(i) they act in the position of a director; or

(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.

Subparagraph (b)(ii) does not apply merely 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 or the company or body.

Note: Paragraph (b)--Contrary intention-- Examples of provisions for which a person referred to in paragraph (b) would not be included in the term "director" are:

  • section 249C (power to call meetings of a company's members)
  • subsection 251A(3) (signing minutes of meetings)
  • section 205B (notice to ASIC of change of address).

De Facto Directors

Those that come within sub-paragraph (b)(i) of the definition are also known as “de facto directors”.

In Deputy Commissioner of Taxation of Austin, i it was held that one of the necessary conditions for a person to be “acting as a director” is that they exercise “toplevel management functions”.

In the recent Victorian Supreme Court Case of Xie v Crisp,ii one of the questions for the Court was whether Mr Anderson and Mr Xin were de facto directors and were thereby entitled to convene a meeting of the company and appoint an administrator in the absence of the sole director and secretary, Ms Xie.

Ferguson J stated:iii

The nature of the acts performed by directors will vary dependent upon the type of company it is.iv The smaller the company, the more likely it is that the directors will be involved in day to day operational issues as well as high level management decisions.

Ferguson J held that as Mr Anderson and Mr Xin participated in management decisions and were involved in the day to day operations of the company, and whilst they were not formally appointed, they both acted in the role of directors and were de facto directors under paragraph (b)(i) of the definition in section 9 of the Act.

Shadow Directors

Those that come within sub-paragraph (b)(ii) of the definition are also known as “shadow directors”.

In the recent decision of Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd,v the New South Wales Court of Appeal affirmed the decision of the Supreme Courtvi that found that Apple Computer Australia and its finance director were not shadow directors of Buzzle Operations Pty Ltd.

The primary judge had held:vii

[242] … For the definition to be satisfied the directors of the company must be accustomed to act as directors of the company in accordance with the person’s instructions or wishes as to how they should so act. …

[247] … there must be a causal connection between the acts of the directors and the instructions of the putative shadow director for the definition to be satisfied. …

[248] ... [the directors] must have been “accustomed to act” in accordance with [the shadow director’s] instructions or wishes. This requires habitual compliance over a period of time. A shadow director is not subject to the statutory duties and liabilities of a shadow director for things done by the company in accordance with the shadow director’s instructions or wishes before the directors of the company became accustomed to act in accordance with those instructions or wishes.

On appeal Young JA (with whom Hodgson and Wheally JJA agreed) added:viii

[198] … It should be noted that the pattern of behaviour should be established from acting in accordance with instructions relating to director matters and should not be established from acting with wishes re: management matters. …

[237] The primary judge at [307] correctly said that what needs to be shown is that the governing majority of the directors must act in accordance with the third party’s wishes or instructions if there is to be a finding that the third person is a shadow director. “Directors” does not necessarily mean all directors, a governing majority suffices and it is not necessary that the influence extend over the whole field of corporate activities. However, the influence must be in what would be within the field of a director not just a manager.