Shadow directors are directors of a company that are not registered with the Australian Securities and Investments commission (ASIC). However, their authority is similar to that of an officially appointed director. 

Shadow directors are not often mentioned in discussions about company directors. However, when they are present, they play a crucial role in a company’s management, just as any other director would. 

In this article, we’ll take a closer look at shadow directors and discuss: 

  • Company directors
  • Duties of a director
  • What a shadow director is and who can be one
  • The Corporations Act 2001 and shadow directors
  • Directors signing on behalf of a company 
  • Changing a company director
  • Personal liabilities
  • Breach of director duties 
  • Whether directors can be shareholders

What Is A Company Director?

A company director oversees the affairs of the company. As such, they play an integral role in the company and are held to a strict standard (these can be found in the Corporations Act 2001, which we’ll talk about later). 

A company can have one or multiple directors who are usually voted in by the shareholders. 

There are no qualifications or pre-determined traits a company director needs to have to become one. They simply need to be a person aged over 18 years. If they are the only director of a company, they must reside in Australia. 

A company’s internal policies might place some regulations around who can become a director. For example, some companies may not allow shareholders to be directors and some may only allow directors to be already existing internal employees of the company. 

So, it’s important to check your company’s governing documents such as your Company Constitution to ensure you are compliant with your internal rules. 

What Does A Director Do In A Company?

Directors look after the company by keeping an eye on some of the company’s main functions. 

Generally, a director’s duties will include: 

  • Staying up to date on the company’s finances
  • Making sure the company’s information is properly lodged with ASIC
  • Engaging in decision making 
  • Tax obligations  
  • Disclose any personal interest 
  • Trading under the company 

We’ve included some of the general duties of directors, however, these may differ based on individual companies and their main operations. Essentially, directors play a key role in the upper management of a company. 

Since they have such an important role in the company, they are also required to meet their directors’ duties to ensure the company runs well. 

A Director’s Service Agreement can aid in outlining what is expected of a director.  

What Is A Shadow Director?

Put simply, a shadow director is someone who retains the powers of a director without being officially recognised as one. 

A shadow director is the same as an ‘ordinary director’. However, they are not registered and therefore recognised by ASIC as a director of the company. 

Shadow directors can be identified by their interaction with the company’s other directors. If other directors are used to acting in accordance with their advice (whether they accept or reject it), a person can be considered a shadow director (however it cannot be based on this factor alone). 

Essentially, a shadow director possesses an amount of control and authority around the other directors of the company, allowing them to have the power of a directors without being registered as one. 

Who Can Be A Shadow Director?

Like an ordinary director, a shadow director can be anyone aged over 18. Once again, a company’s internal regulations may influence how this may apply. For example, if the Company Constitution states that a shadow director must be someone who has worked in the company for at least five years prior. 

The case of Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd determined that a shadow director is identified by the authority they have managed to establish within the company. 

Ordinarily though, there is no additional or pre-existing requirement to become a shadow director.  

What Does The Corporations Act Say About Shadow Directors?

Like we mentioned earlier, the Corporations Act sets out important duties of a company director. So, what does the Act say about shadow directors?

The Corporations Act 2001 places the same responsibilities and liabilities of shadow directors as ordinarily appointed directors. Therefore, a shadow director faces the same or similar consequences of a director if they are found to be in breach of their directors’ duties.   

Can One Director Sign On Behalf Of The Company?

A sole director (who is also the only secretary) can sign on behalf of a company alone. 

However, a director that is neither the sole director or company secretary, cannot operate the company seal on their own (a company seal is used to sign company documents). 

Section 127 of the Corporations Act 2001 sets a requirement for two directors or a director and a company secretary to be able to sign on behalf of the company. 

How Do I Change A Company Director?

Company directors are often changed by a vote of the shareholders. 

If you don’t have a Company Constitution, you can adopt the replaceable rules in the Corporations Act 2001. These replaceable rules provide that in a general meeting of the company shareholders, they are able to simultaneously vote to remove a director and appoint a new one (since a company must always have at least one director at all times!). 

The internal processes of a company may be different in terms of changing directors, so they should always be considered first. 

A company director can also change if an already existing director chooses to leave their position. If this is the case and they are the sole director, a replacement should be sought immediately. 

Once a company director has been changed or removed, ASIC should be notified within 28 days. 

Do Shadow Directors Have Duties?

As we mentioned earlier, shadow directors are held to the same duties and standards as directors that are officially recognised in the company. 

A director’s duties include: 

  • Acting in good faith
  • Working for the best interest of the company
  • Never using their position for personal gain 
  • Refraining from the misuses of information they have access to
  • Demonstrating care and diligence  

Breach Of Directors’ Duties

If a shadow director breaches their duties, the penalties are the same as an appointed director. 

Directors who breach their duties can be fined or even face imprisonment, depending on the seriousness of the breach. 

Do Shadow Directors Have Personal Liability?

As a company is a legal entity on its own, directors (regardless of whether they are shadow directors or not) generally do not have any personal liability attached to a company. Therefore, any debts, legal proceedings and assets belong to the company itself. 

The only instance where a director can have personal liability in a company is if they have exposed their personal assets in a directors guarantee. In this case, the director has chosen to put their personal assets on the line in case the company experiences debt. 

As a result, they will be personally liable in case something goes wrong. 

The same applies for shadow directors. They cannot be personally liable for the company unless they actively sign a document that allows this. 

Can Shadow Directors Be Shareholders?

This is entirely up to the company constitution. The Corporations Act 2001 does not determine whether directors (and as a result shadow directors) need to be shareholders. 

The Act’s only requirement is that directors need to be over the age of 18 and reside in Australia if they are the singular director of a company. 

A company may forbid shareholders from being directors whereas other companies may require a director to be a shareholder. 

Ultimately, whether a shareholder can be a director is up to the discretion of the company. 

What’s The Difference Between A De Facto Director And A Shadow Director?

Shadow directors and de facto directors are often confused. However, while both de facto and shadow directors are not officially recognised as directors, there is a key difference that separates the two. 

A de facto director carries out the duties and responsibilities of a director, otherwise acting as if they are a director of a company. 

A shadow director, on the other hand, makes decisions and commands the authority of a director. 

It is entirely possible for a person to be both a shadow director and a de facto director simultaneously. 

Key Takeaways

Clearly, shadow directors have a significant role to play in a company and should not be overlooked. To summarise what we’ve discussed: 

  • A company director is someone that oversees some of the main operations of a company
  • Directors are held to a high standard of professional duty 
  • A shadow director is someone who possess the authority and power of a director by influencing the decisions of other directors
  • Shadow directors do not perform director duties themselves (this would be a de facto director) 
  • A shadow director is held to the same duties and liabilities as an ordinary director
  • Company directors are often changed by vote or resignation 
  • One director cannot sign on behalf of the company (unless they are the sole director or secretary)
  • Shadow directors don’t have personal liability unless they sign a guarantee 
  • Whether a shadow director can be a shareholder depends on the company constitution 

If you would like a consultation on shadow directors, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

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