Directors of a company are subject to many duties, one of which is to prevent insolvent trading by their company.[1] A person will not only be considered subject to this duty when they specifically hold the title of ‘director’, it is sufficient if they perform functions which would usually be expected to be performed by a director (this makes them a de facto director) or if they had sufficient influence to ensure compliance with their instructions by the actual directors (this makes them a shadow director). The case of Featherstone v D J Hambleton as liquidator of Ashala Pty Ltd (in liq) [2015] QCA 43, handed down at the beginning of April, confirmed that a person may be considered a de facto or shadow director even in a situation where they signed an agreement stating they had no responsibility, rights or powers as a director.

Background facts

Mr Featherstone was a director of Ashala Pty Ltd (Ashala), according to ASIC records, up until 7 October 2005. Ashala Bar Café and Restaurant Pty Ltd (ACBR) was initially registered Mr Featherstone, as the sole director. He was also the sole director of Ashala Agency Ltd (AMA) and Ashala Hair and Beauty Pty Ltd (AHB) when they were registered.

On 7 October 2005, a letter signed by Ms Marks, addressed to Mr Featherstone, recorded an agreement between them relating to the transfer of Ashala, ABCR and AHB from Mr Featherstone to Ms Marks. It recorded that Mr Featherstone would transfer the shares in the three companies to Ms Marks and she would replace him as the sole director for each of them. The letter also recorded the agreement of Ms Marks to lodge all necessary documents and notifications to give effect to this transfer. ASIC did receive a notice from Ms Marks on the same date that she had replaced Mr Featherstone as director for each of the three companies.

On 22 June 2007, a letter was signed by Mr Featherstone containing a confirmation regarding his employment as training and events coordinator with Ashala from 1 July 2007. The letter recorded that the appellant did not hold a formal role with Ashala and 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“; though it also recorded that Ms Marks might at times ask Mr Featherstone for advice. Similar letters were also signed on 30 June 2008 and 30 June 2009.

Ms Marks continued as director of Ashala until 1 August 2010. Mr Marshall became director on 11 March 2010. On 9 September Hambleton was appointed as Ashala’s administrator, and on 14 October became Ashala’s liquidator.

Hambleton met with Mr Featherstone on 14 September 2010 and an examination of Mr Featherstone was conducted on 12 February 2013. Hambleton then commenced proceedings against Mr Featherstone, seeking compensation for loss resulting from insolvent trading.[2]

Initial decision

At trial the primary judge found Mr Featherstone was a director of Ashala during the nominated period. It was found that the employment letter and agreement letter “were nothing more than attempts to create self -serving evidence in the event [Mr Featherstone] was sued as a consequence of his involvement” with Ashala and the other companies, which of course is what happened. Mr Marshall’s evidence to the effect that “it was really [Mr Featherstone] who pulled the strings in respect of the operation of Ashala and indeed all the other related companies“; and that nothing happened at the premises where these companies carried on business “unless [Mr Featherstone] ‘okay’d it’” was accepted by the primary judge, as this evidence was corroborated by other evidence. The primary judge also referred to the evidence showing Mr Featherstone had control of AMA, despite the fact he was not recorded as a director.

The primary judge concluded Mr Featherstone assumed or performed functions which would usually be expected to be performed by a director, or the board of directors (i.e. he was a “de facto director“); and that he had influence sufficient to ensure compliance by those who were recorded as the directors of the company with his wishes and instructions (i.e. he was a “shadow director“).

Due to Mr Featherstone’s involvement with the daily affairs and management of Ashala, the primary judge found he was aware for some time that the GFC had effectively ended the modelling business and of the financial difficulties of Ashala. This provided reasonable grounds for suspecting Ashala was insolvent and thus making Mr Featherstone guilty of insolvent trading.

Appeal decision

On appeal Mr Featherstone tried to argue that the primary judge should not have relied on certain evidence, such as Mr Marshall’s evidence and evidence from the examination. The Court of Appeal rejected these submissions and found there was no proper ground for interfering with the primary judge’s decision.

The Court of Appeal considered the following evidence supported the finding that Mr Featherstone was a director of Ashala:

  • Mr Featherstone’s admissions in his examination that, when he was in Brisbane, he was in attendance at the premises of the companies each day, and was involved in “making decisions and the like” for both Ashala and AMA; and that he was in Brisbane for all but “a couple of months a year I guess”;
  • An earlier statement that, after he resigned as a director of Ashala in 2005, Mr Featherstone “continued to run the day-to-day — be involved in the day-to-day affairs of everything that was happening”; and
  • Mr Featherstone’s evidence that the shares he sold to Ms Marks were always held on trust for him, combined with the control which he exerted by reason of his ownership of the shares, demonstrated by the fact he would not permit Ms Marks to be a signatory on the company’s bank account, despite her being the sole director at the time.

The Court was also satisfied Mr Featherstone had reasonable grounds for suspecting that Ashala was insolvent as Ashala was a small company and  few people acted in it. Whilst Mr Featherstone tried to argue there were areas of the business which he was unfamiliar with, the evidence which went towards showing he was a director strongly suggested the opposite.

Therefore, the initial decision was upheld.

Take-home tips 

An agreement or acknowledgement in writing that a person is not a director of a company, nor subject to the responsibilities of a director, will not be sufficient to protect that person from being found liable under insolvent trading provisions if that person’s conduct indicates they were in fact a de facto director or a shadow director. It is the actions of the person which will determine whether someone is liable as a director, notwithstanding any agreement to the contrary.