Difference between a shadow director and a director

Clive Palmer claims to be Shadow Director as Opposed to Director, is there really a Difference? – why does it matter?

Clive Palmer, the flamboyant Australian multi-million-dollar businessman and politician, has recently been in the news for a variety of matters – the major one being Queensland Nickel and Clive Palmer rejecting ever acting as a shadow director or using the company’s money for personal purposes. Recently the Federal Court has approved a Commonwealth request to liquidate Palmer’s assets.

The liquidators, FTI Consulting have been granted a request by the Court to question Palmer about the evidence portraying him as a shadow director. Palmer is being ordered to appear before the court in Brisbane on Tuesday 14 June 2016 where the evidence and questioning will be revealed and possible charges laid. Clive Palmer has outright denied that he has been summoned to appear for this in the Federal Court.

What is the difference between a shadow director and a director?

Section 9 of the Corporations Act, defines a director as a person who is appointed to the position of a director; or unless the contrary intention appears, a person who is not validly appointed as a director if:

  1. they act in the position of a director (de facto director); or
  2. the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes (shadow director) i.e. they do not need to be appointed as director.

In concise terms, a director of a company must be formally appointed to the position while a shadow director, though unappointed, is capable of being recognised as a director by their instruction to the actual appointed directors and other members of the company.

Investigations into Queensland Nickel have been undertaken to determine that Clive Palmer may have acted as a director along with his nephew, Clive Mensink. It was recommended that Queensland Nickel be liquidated, as they currently owe $200 million including $73 million worth of employee entitlements to an estimated 800 workers who were laid off.

There are now allegations that Clive Palmer has been operating under the alias of “Terry Smith”, since 2009, to approve expenses for Queensland Nickel without the formal capacity of a director. One of Clive Palmer’s personal expenses that was paid for with Queensland Nickel’s finances was $20 million for his political party, the Palmer United Party.

Why does it matter?

Director’s duties can be undertaken by people, like Clive Palmer, who are not formally appointed as a director of a company. The duties include the duty to act with reasonable care and diligence in the best interest of the company and to ensure the company is not trading while insolvent. Courts can rule that individuals are acting in the position of a de facto director or shadow director and have breached their duties. If this person is found guilty then they may be personally liable and made to pay compensation. Given the expenses Clive Palmer has approved for Queensland Nickel, the Courts may rule that he is responsible for the repayment of all damages.

The consequences of damages depends on the severity of the breach and may include:

  • criminal sentencing and penalties (up to 5 years’ imprisonment for anti-competitive behaviour, acting in bad faith or dishonest and a fine of up to $200,000.00);
  • Civil sanctions and penalties (up to $200,000.00);
  • Personal liability to compensate the company or others for loss and damage; and
  • Disqualification from managing corporations (i.e. being a director).

The company may also suffer loss and damages resulting from a loss of confidence and reputational damage due to a breach of the directors’ duties. Shadow directors, even though they are not formally directors may still be accountable for the same duties and liabilities that a director would be. They are still responsible if they breach the law.

If there is evidence to prove that an unrelated person makes decisions about the management of a company and that company implements those instructions, then a Court is likely to rule that the person was acting in the capacity of a shadow director. In the Supreme Court case of Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233, Buzzle resulted from the merger of resellers of Apple products. Buzzle directors felt they had no option but to agree to the terms in Apple’s contract which subsequently lead to them going into liquidation. The liquidator claimed that Apple was acting as a shadow director but the Court found they were not as Buzzle did not have to sign and agree to the terms of the contract. The Courts held that there must still be a causal connection between the direction or intentions of the shadow director and the company acting on it. For the Federal Court to determine if Clive Palmer acted as a shadow director, then this judicial precedent must be considered to outline the causal connection between the instructions or intentions of Clive and Queensland Nickel acting on it. Cases like this will be considered in Palmer’s matter.

Lessons to Learn

It is imperative that when creating and operating a company, that you are completely aware and ensure that the director’s capacity and duties are considered and adhered to so that companies and individuals are legally protected. Board members and business consultants are considered key people in a company and must be mindful to avoid a situation like Queensland Nickel from arising. It is unclear what action (if any) will be taken against Clive Palmer but some reports suggest that his role as a shadow director may be a significant problem. On the other hand, Palmer is filing a $1.2 Billion law suit against FTI consulting, administrators of Queensland Nickel, for “serious breaches of the Queensland Nickel Joint Venture Agreement, and of blocking a restructure that could have kept the refinery open and saved workers’ jobs”. It is a story which continues to unfold and we will keep you updated on developments.

If you have any questions or would like to discuss your obligations and responsibilities in relation to your company further, please contact our office on 07 3876 5111. We offer a no obligation consultation for company directors, board members and business consultants.

Written by:
Jonathan Mamaril, Principal & Director, NB Lawyers – the Lawyers for Employers
(with the assistance of Kayleigh Whittaker, Lawyer)
07 3876 5111
[email protected]