Part of a liquidator’s role is to look at the insolvency of the company, its outstanding debts and determine who was to blame, if for no other reason that to consider making an insolvent trading claim against that person.
Insolvent trading claims in particular, but also some breach of duty claims and claims under section 588FGA, can only be brought against the directors of the company. Sometimes ‘Who is a director?’ can be a difficult but necessary question to answer.
The Corporations Act defines a director in two broad groups: those appointed as directors and those acting as directors. The first group is described as:
“director” of a company or other body means:
(a) a person who:
(i) is appointed to the position of a director; or
(ii) is appointed to the position of an alternate director and is acting in that capacity;
regardless of the name that is given to their position; and
Finding people that have been appointed as directors or alternate directors is pretty straight forward. Their names are on the company register and company documents. Identifying the other group is more difficult. The second group are defined as:
(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.
This group falls into two broad categories and are generally differentiated by knowledge and intent. There are:
(1) people intentionally acting as shadow directors through a nominee or other appointed directors; and
(2) people whose activities unintentionally bring them under this definition.
Examples of the first category are the (usually bankrupt) husband making his wife the director but effectively keeping control of the company himself, or the non-resident person behind the ‘man-of-straw’ director located in this jurisdiction. These people know that they are acting as the guiding hand – they just want to distance themselves from the company.
The second category, sometimes called de facto directors, are the ones most surprised when they are summonsed for public examinations or are issued demands for insolvent trading or other claims. Generally their activity was not designed to make them a director, or hide their involvement in the company, they just crossed the line between acting as a director and not.
The definition requires that a person act in the position of a director – taking on some of the usual tasks of a director or giving directions – or have the appointed directors act in accordance with their instructions. Both limbs contemplate some active involvement in directing the company, albeit sometimes unintentional.
When considering whether the line has been crossed, the Courts will look at the actual relationship between the parties rather than the basis of the engagement. Companies generally pay advisors for good advice, and would often follow that advice. So, is that advisor directing the company? The answer may hinge on whether advice or instructions are given, whether the directors are accustomed to acting on that advisor’s advice regardless of its content, and whether the advisor knows this.
If advice is based on a professional opinion, gives alternate courses of action and makes a recommendation, it is hard to see that the advisor is directing the company, regardless of how often the Board thinks the recommendation is worth following.
Some advisors have previously been caught on the wrong side because they have been too involved in the ‘running’ of the company. They have:
- negotiated with creditors and the ATO,
- become signatories to the bank account, and
- sat in on and controlled board meetings
But these activities do not automatically mean that a person was acting as a director. The Act itself provides exclusions for some activities that may be interpreted as acting as a director. The definition provides this limitation:
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).
What constitutes crossing the line will be different in every case. Advisors just need to ensure that they are only truly advising a client and not directing a company – regardless of how those directions are termed.