Current Director When You Are Not A Director
Current Director When You Are Not A Director
Current Director When You Are Not A Director
INTRODUCTION
Significant duties are imposed upon company directors pursuant the Corporations Act 2001 (Cth)
(Corporations Act). However, frequently parties who are not properly appointed directors effectively
run companies. These parties, at first hand, appear to escape censure and accountability of the law
when they have committed improper acts. The Corporations Act, however, sensibly says that those
who have irresponsibly wasted a company’s money acting as if they were directors are indeed liable
as directors, even if they have not been properly appointed as such. They are de facto directors. This
article provides a detailed examination of the law relating to de facto directors. Notwithstanding that
there have been numerous cases concerning de facto directors, there is a clear paucity of literature on
this topic. Unfortunately, in only a few of the many cases has the issue been canvassed in any detail.
This may explain the confusion surrounding the term “de facto director”.1
The article sets out to clarify the ambit of the statutory definition of de facto director. It examines
a number of contentious issues concerning the elements required to satisfy the statutory definition,
including:
• Is the definition restricted to parties who intended to be directors?
• Is the definition restricted to parties which the company intended to be its directors?
• Does the definition require the company to hold out the person as a director?
• Does the definition require the person to hold herself or himself out as a director?
• Is the performance of top-level management functions in a company sufficient to find a party to be
a de facto director?
*
Senior Lecturer in Commercial Law, School of Commerce, The University of Adelaide. The author thanks Professor Jim
Corkery and Mr Walter Mesiti for their useful comments on an earlier version of this article.
1
In particular, there is confusion between the terms “shadow” and “de facto” directors as neither expression is included in the
companies legislation and the term “shadow director” is a fairly recent development. For example, in Porteous v Donnelly
(Trustee) [2002] FCA 862 at [1] the respondents “allege that at the time of the sale the directors of HFMF were accustomed to
act in accordance with Mr Hancock’s instructions. They submit that, as Mr Hancock was in effective control of the company, he
was a de facto director.” However, it is submitted that the situation where a board is accustomed to act in accordance with
instructions of a third party gives rise to a “shadow director” argument pursuant the definition of “director” in corporations
legislation. Similarly in Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 at 361; 13 ACLC 1,381 at
1,470 Hodgson J stated, “I have found Pioneer was a de facto director of Giant” when referring to the second limb of the
definition of director in s 5 of the Companies (Qld) Code which relates to the issue of shadow directors.
The article also reviews the position of a range of parties who are not de jure directors but who
may be at risk of being caught by the statutory definition of de facto director. This review includes the
position of directors whose appointments were invalid and directors who continued after their
appointment lapsed or after an invalid resignation. The review also encompasses the position of a
number of parties who are not held out as directors and who would appear at first instance to be at no
risk. These parties include consultants and business advisers, senior management, banks (and major
creditors) and parties who appoint puppet nominee directors. These parties may have no or little
knowledge of their potential risk of de facto director status. The article provides guidance as to
whether, and in what circumstances, the above-mentioned parties may be at risk of de facto director
status. The article will therefore be of particular relevance to the parties at risk due to the significant
statutory duties imposed upon directors, including the duty to prevent insolvent trading.2 As Millett J
(as he was then) stated in Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 at 182:
Those who assume to act as directors and who thereby exercise the powers and discharge the functions
of a director, whether validly appointed or not, must accept the responsibilities which are attached to the
office.
The article should also be of interest to company liquidators and the legal advisers of parties at risk of
de facto director status. Finally, the article highlights a number of key judicial findings concerning the
interpretation of the statutory definition of de facto director.
Notwithstanding that Ford and Austin referred to “person” as the appointor, it is arguable that the
above comments may also be applied to a corporate appointor of a nominee director. As such, the
possibility of de facto director status has far-reaching ramifications for appointor companies who
exercise such a high degree of control over their nominee directors whereby it may be argued the
nominee is reduced to a puppet. However, a contrary view was expressed by Von Doussa J of the
Federal Court in Beach Petroleum NL v Johnson (1993) 43 FCR 1; 11 ACSR 103. In reference to the
words “any person occupying or acting in the position of director” of the definition of “director” in the
former Companies (SA) Code, his Honour stated (at 24):
It is open to doubt whether Mr Johnson’s role falls into either of these situations. At no time did he hold
himself out as a director in his dealings either with the management of the companies, or with third
parties. His conduct, on which the applicants rely, was to give instructions which the formally appointed
directors followed. It is no part of any recognised office in a company for one person to dictate how the
formally appointed directors of the company will act.
Where the appointor of a puppet nominee director is a corporation, there understandably is
opposition to the proposition that a company can be held to be a de facto director. “This is because of
its corporate form. It cannot act in common with properly appointed directors or hold itself out as a
director.”20 However, although “person” is not defined in the Corporations Act definition of “director”,
s 22(1) of the Acts Interpretation Act 1901 (Cth) states:
17
See Companies & Securities Advisory Committee, Corporate Groups Final Report (May 2000) pp 87-88.
18
Agardy P, “Who Wants to Be a Deemed Director?” (2004) 12 Insolv LJ 104 at 105.
19
Ford HAJ and Austin RP, Ford and Austin’s Principles of Corporations Law (8th ed, Butterworths, Sydney, 1997) p 295.
Note that this comment did not appear in later editions.
20
Murphy D, “Holding Company Liability for Debts of its Subsidiaries: Corporate Governance Implications” (1998) 10
Bond LR 241 at 261.
CONCLUSION
This article provided an examination of the law relating to de facto directors. The article examined a
number of contentious issues in an attempt to clarify the scope of the statutory definition of de facto
director. Key findings include the following:
• The great diversity of commercial life makes it unprofitable to attempt a general statement as to
what is meant by acting as a de facto director.
• Intention by the person and/or the company that the person is a director is a relevant key factor in
support of de facto director status. Nevertheless, intention is not an essential element of the
statutory definition.
• No court has held a party to be a de facto director where there was clear evidence that the
company did not intend the party to be a director.
• Holding out by the company and/or the person as a director is a relevant key factor in support of
de facto director status. Nevertheless, holding out is not an essential element of the statutory
definition.
• It is a necessary condition of the statutory definition that the party must perform top-level
management functions. However, performance of top-level management functions alone is not
necessarily sufficient to find a party to be a de facto director.
• Acting as the company in matters of great importance, other than as an independent expert
engaged for a limited purpose, may justify a conclusion of de facto director status.
• The wider the breadth of activities undertaken by consultants in management matters of a
company, the greater their risk of falling within the statutory definition of de facto director.
• The greater the time a person renders assistance in management matters to a company, the more
difficult it may become for the person to argue that the assistance was merely provided informally
or as a consultant.
• A party does not have to provide assistance to a company in a full-time capacity to be at risk of
falling within the statutory definition of de facto director.
The article also provided an examination of the position of a range of parties to clarify their risk
of falling within the statutory definition of de facto director. As stated, there have been numerous cases
where the issue of de facto director has been raised. It is of interest to note that the vast majority of
these cases were against parties who rendered significant assistance to smaller-sized companies. It is
submitted that the leading judgment which set out several key principles on the law of de facto
directors was that of Madgwick J in Deputy Commissioner of Taxation v Austin (1998) 16 ACLC
1,555. The article highlighted the contrasting approaches taken by differing courts. Some courts were
reluctant to find a party a de facto director unless there was an overwhelming case in support. Other
courts were not so hesitant. Some decisions were surprising. Finally, what is clear is that parties who
are not properly appointed directors but who effectively run companies making key strategic decisions
are at risk of falling within the ambit of the statutory definition of de facto director and the
consequential significant duties imposed upon directors pursuant to the Corporations Act.
than ‘should’. Thus when carrying out a geotechnical design to Annexes, and hence the calculation models in them, ‘may be
Eurocode 7, the requirements, not recommendations, in the used’ when carrying out geotechnical designs to BS EN 1997-1.
Principles must be satisfied. All other paragraphs that are not Alternative calculation models to those given in the Informative
Principles are Application Rules, which are defined in EN 1990 Annexes, for example based on existing practice, may be used
§1.4(4) as ‘examples of generally recognized rules, which comply if the designer can demonstrate that they provide designs that
with the Principles and satisfy their requirements’. The Applica- are at least as reliable as those obtained using the calculation
tion Rules are generally expressed using the verbs ‘may’ or models in the Annexes. An example of a situation where an
‘should’. Regarding the use of alternatives to the Application alternative model may be used is indicated by the following
Rules given in Eurocode 7, EN 1997-1 §1.4(5) states that statement from the UK NA to EN 1997-1 concerning the
bearing resistance equation in Annex D:
It is permissible to use alternatives to the Application Rules given in
this standard, provided it is shown that the alternative rules accord Annex D omits depth and ground inclination factors which are
with the relevant Principles and are at least equivalent with regard to commonly found in bearing resistance formulations. The omission of
the structural safety, serviceability and durability, which would be the depth factor errs on the side of safety, but the omission of the
expected when using the Eurocodes. ground inclination factor does not. An alternative method to BS EN
1997-1:2004, Annex D, including the depth and ground inclination
factors as appropriate, may be used.
A note to this states that
If an alternative design rule is submitted for an Application Rule, the Since BS EN 1997-1 has been published in the UK as the British
resulting design cannot be claimed to be wholly in accordance with Standard for geotechnical design, it has superseded most of the
EN 1997-1, although the design will remain in accordance with the former geotechnical British standards. As Eurocode 7 provides a
Principles of EN 1997-1. broad overall framework for geotechnical design, and does not
provide many calculation models, some of the guidance for
The same Application Rule and an equivalent note are given in construction and calculation models included in these former
EN 1997-2 §1.4(5) with regard to geotechnical investigations and standards that are not in BS EN 1997-1 may be used when
testing. The significance of this is commented upon below in designing to Eurocode 7, because the UK NA to BS EN 1997-1
Section 6. states that (with links for the references added in brackets):
An important feature of Eurocode 7 is that it provides a broad The following is a list of references that contain non-contradictory
framework for the design of all different types of geotechnical complementary information for use with BS EN 1997-1:2004:
structure, giving many lists of items to be considered, taken into BS 1377 (BSI, 1990), BS 5930 (BSI, 1999), BS 6031 (BSI, 2009b),
account or checked in a geotechnical design. Through these BS 8002 (BSI, 1994), BS 8004 (BSI, 1986), BS 8008 (BSI, 1996),
BS 8081 (BSI, 1989), PD 6694-1 (BSI, 2011b), CIRIA C580 (Gaba et
checklists, which are often mandatory, EN 1997-1 identifies what
al., 2003), UK Design Manual for Roads and Bridges (Highways
has to be achieved, but generally does not specify how. Thus EN
Agency, 2011). It should be noted that if any parts of these references
1997-1 involves a risk analysis approach to geotechnical design is in conflict with BS EN 1997-1:2004, then, until such time as
that requires geotechnical engineers to identify all the different revised residual documents are published, the Eurocode takes
hazards involved, and to think carefully about the measures that precedence.
need to be taken to minimise or mitigate the likelihood of their
occurrence. It is suggested that completion and retention of these
checklists could be considered as an element of design in order However, because most of the superseded BSs are no longer
to record and demonstrate that these factors have been taken into being maintained and updated by BSI, designers should be wary
account in the design. of referring to them. An example of where designers should be
wary of referring to these standards is given in Section 7 in
Unlike the Eurocodes for structural materials, EN 1997-1 does connection with the use of Ciria C580 for the design of retaining
not include any detailed calculation models (design equations) walls. Most other European countries have considered it neces-
as Application Rules in the code text because, when it was sary to prepare supporting documents that provide non-conflicting
being drafted, it was found that different calculation models complementary information (NCCI), including detailed calcula-
were used in the different CEN countries, and some calculation tion models for designs to Eurocode 7.
models were still being developed. Hence, rather than include
particular models in the code text, it was decided instead to 3. Eurocode terminology
select the most commonly used and best agreed models, for Since Eurocode 7 is one of the suite of structural Eurocodes that
example the calculation models for bearing resistance and earth are harmonised not only across the different design materials,
pressure, and to place those in Informative Annexes. The such as concrete, steel and soil, but also across the different
sources of these calculation models have been traced by Orr countries in Europe, one effect of the implementation of Euro-
(2008). The UK NA to EN 1997-1 states that the Informative code 7 has been the introduction of the Eurocode terminology
Geotechnical Engineering How Eurocode 7 has affected
Volume 165 Issue GE6 geotechnical design: a review
Orr
into geotechnical design, which can appear strange initially to – Execution is carried out according to the relevant standards and
those from an English-speaking background. Examples of this specifications by personnel having the appropriate skill and
terminology are as follows. experience;
– Construction materials and products are used as specified in this
standard or in the relevant material or product specifications;
j Action, which is defined in EN 1990 §1.5.3.1 as: ‘(a) Set of – The structure will be adequately maintained to ensure its safety
forces (loads) applied to the structure (direct actions); (b) Set and serviceability for the designed service life;
of imposed deformations or accelerations caused, for – The structure will be used for the purpose defined for the design.
example, by temperature changes, moisture variation, uneven
settlement or earthquakes (indirect actions)’. EN 1997-1
§1.5.2.1 defines a geotechnical action as an ‘action Three of the above assumptions refer to the personnel involved in
transmitted to the structure by the ground, fill, standing water the different aspects of the geotechnical design process as being
or ground-water’; hence the forces due to earth and water ‘appropriately qualified’ or having ‘appropriate skill and experi-
pressures are examples of actions. In defining actions in ence’. These are important assumptions, which, when fulfilled,
geotechnical design, the earlier ENV version of Eurocode 7 should ensure the reliability and safety of geotechnical designs.
(CEN, 1994) stated that ‘For any calculation the values of The competences required by those involved in geotechnical
actions are known quantities. Actions are not unknowns in investigations and testing are identified in the CEN and ISO
the calculation model.’ (International Standards Organisation) Technical Specification
j Resistance, which is defined in EN 1990 §1.5.2.15 as the CEN ISO/TS 22475-2:2006 Qualification criteria for enterprises
‘capacity of a member or component . . . to withstand actions and personnel, which has been published as BS 22475-2 (BSI,
without mechanical failure’. EN 1997-1 §1.5.2.7 includes 2011c). A Technical Specification (TS) is a normative document
‘resistance of the ground’ as an example of a resistance in that has not yet received sufficient agreement for publication as a
geotechnical design. Hence, in designs to Eurocode 7, the European standard, but is published in anticipation of future
resistance of the ground is the maximum resisting force harmonisation. It may be adopted as a national standard, but
provided by the ground when its strength is fully mobilised. conflicting national standards may continue to exist.
In the design of a footing or a pile, for example, this
resistance was previously referred to as the bearing capacity.
j Weight density, which is the term used in the Eurocodes for
the weight per unit volume of a material – that is, kN/m3 –
which traditionally was referred to as the unit weight.
Geohydraulic testing
22282-1 General rules Under development
22282-2 Water permeability tests in a borehole without packer Under development
22282-3 Water pressure tests in rock Under development
22282-4 Pumping tests Under development
22282-5 Infiltrometer tests Under development
22282-6 Water permeability tests in a borehole using closed systems Under development
Sampling methods and groundwater measurements
22475-1 Technical principles for execution Current BS
22475-2 Qualification criteria for enterprises and personnel Current BS
22475-3 Conformity assessment of enterprises and personnel by third party Current BS
Field testing
22476-1 Electrical cone and piezocone penetration tests Under development
22476-2 Dynamic probing Current BS
22476-3 Standard penetration test Current BS
22476-4 Ménard pressuremeter test Under development
22476-5 Flexible dilatometer test Under development
22476-6 Self-boring pressuremeter test Under development
22476-7 Borehole jack test Under development
22476-8 Full displacement pressuremeter test Under development
22476-9 Field vane test Under development
22476-10 Weight sounding test Published by CEN as TS but not listed by BSI
22476-11 Flat dilatometer test Current DD
22476-12 Mechanical cone penetration test (CPTM) Current BS
22476-13 Plate loading test Under development
Testing of geotechnical structures
22477-1 Pile load test by static axially loaded compression Under development
22477-2 Pile load test by static axially loaded tension test Under development
22477-3 Pile load test by static transversely loaded tension test Under development
22477-4 Pile load test by dynamic axially loaded compression test Under development
24777-5 Testing of anchorages Under development
22477-6 Testing of nailing Under development
22477-7 Testing of reinforced fill Under development
standards for the checking of test equipment and performing the These standards are referred to in the revised version of BS 5930
tests, they should result in improved geotechnical investigations (1999) with Amendment 1 (primarily to Section 6: Description of
and the obtaining of more reliable parameter values. An example soil and rock), which removes text of BS 5930 superseded by BS
of this is the standard for the standard penetration test, BS EN EN ISO 14688-1:2002, BS EN ISO 14688-2:2004 and BS EN
ISO 22476-3 (BSI, 2005), which partially replaces BS ISO 14689-1:2003 (BSI, 2004a), and makes reference to the
5930:1999+A2:2010 (BSI, 1999) and Part 9: In-situ tests of BS relevant standard for each affected subclause. The new standards
1377 (BSI, 1990). As noted by Hepton and Gosling (2008), this do not provide much detailed guidance on the description and
standard has new requirements for hammer energy calibration classification of soils, and therefore BS 5930 has been revised to
and documented equipment checks that will have to be actioned, provide non-conflicting complementary information (NCCI) for
but otherwise does not provide any major issue for UK practice. describing and classifying UK soils. The revised version of BS
5930 states that Informative Annex B of BS EN ISO 14688-2,
The new standards for describing and classifying soil are BS EN which provides an example of a soil classification based on
ISO 14688-1:2002 Identification and description (BSI, 2002) and grading alone, is not preferred in UK practice, as it takes no
BS EN ISO 14688-2:2004 Classification principles (BSI, 2006). account of plasticity or water content. This is particularly relevant
Geotechnical Engineering How Eurocode 7 has affected
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