The iron ore mining boom provided the background for a recent decision in the Full Court of the Federal Court on de facto directors. Chameleon Mining NL (Chameleon), the appellant, made several claims against its former directors and Mr Phillip Grimaldi, who was alleged to have been a de facto director or an ‘officer’ of Chameleon. A range of directors’ duty issues were canvassed in the case. For present purposes we will focus on the shadow director issue.
The Full Court provided an exhaustive analysis of the statutory provisions dealing with directors and officers and their interpretation by Australian courts. It noted that the local provisions were different from their English counterparts in several material respects and it stated at  that English authorities should, therefore, be treated with 'some reserve'.
Only an individual can be a director
One of the threshold questions examined by the Full Court was whether a corporation can be a director of a company. Section 201B(1) of the Corporations Act 2001 (Cth) provides that ‘[o]nly an individual…may be appointed as a director’. The Full Court considered that this subsection should be construed to apply to a director, no matter how that person becomes a director. It stated at  that the words ‘be appointed as’ were not intended to be words of limitation but rather, having regard to the purpose of the provision in its context, signify no more than would have been the case had only the word ‘be’ been used. In other words, only an individual may be a director.
With respect, this interpretation does not give effect to the plain meaning of the words of section 201B(1) which suggest that there is a restriction upon appointing a corporation as a director; only an individual may be appointed as a director. Section 201B(1) does not state that a corporation cannot become a director in some way other than by appointment, nor does it clearly preclude a corporation from being a de facto or shadow director. Moreover, the Full Court’s decision that a corporation cannot be a director appears to be inconsistent with the decision of Hodgson J in Standard Chartered Bank Ltd v Antico (1995) 38 NSWLR 290; 131 ALR 1; 18 ACSR 1; 13 ACLC 1381. This decision was not cited by the Full Court in Grimaldi.
In holding that only an individual can be a director, the Full Court did not, however, rule out the possibility that a director of another company could be a de facto director of the company in question. Indeed, the Full Court declared at :
'…we consider that if a consultant is a corporation and what it does through its own directors or officers results in ‘acting in the position of a director’, then, and consistently with the policy of s201B (which requires a director to be a natural person), it will be a question of fact as to which director (or officer) in the consultancy company is (or are) the de facto director(s) of the corporation'.
The blurred distinction between de facto and shadow directors
Grimaldi v Chameleon Mining NL (No.2)  FCAFC 6 was primarily concerned with the question of de facto directorships but in passing the Full Court expressed the view at  that a rigid distinction between a de facto and a shadow director cannot be maintained because the de facto director concept has been extended to persons who have never purportedly been appointed as directors.
The distinction between a de facto and a shadow director is also blurred because a person can be a shadow director even though their wishes or instructions do not relate to all facets of the management of the company’s business, and likewise the functions assumed by a de facto director may be limited in his scope.
Moreover, the fact that subsections 180-183 of the Corporations Act 2001 (Cth) apply to a ‘director or officer’ can eliminate the need to differentiate between a de facto director and an officer (de facto or not) who is not a director [at 71]. However, it is implicit in the functional definition of ‘officer’ in section 9 and explicit in other provisions of the Corporations Act 2001 (Cth), such as section 180(1), that a person who otherwise satisfies either of the requirements of subparagraphs (b)(i) or (b)(ii) of the definition of ‘officer’ is generally likely to be acting in an office or position of the corporation, regardless of whether he has been formally appointed to a position in the company or merely engaged as a ‘consultant’ to perform the functions in question. Hence, directors and ‘officers’, as defined in section 9, will be treated in the same way for the purposes of the duties and liabilities imposed by the Corporations Act 2001 (Cth).
The position of consultants
The fact that a person has been designated as a ‘consultant’ will not prevent that person from being found to be a director. Whether or not the consultant will be a director turns on the nature and extent of their functions and the constraints imposed on their role. Hence, a limited and specific consultancy is unlikely on its own to be caught by the definition of ‘officer’ in section 9. However, a general and unrestrained consultancy which allows the consultant to take an active part in directing the affairs of the company can fall within the definition of ‘officer’ in section 9, even if the consultant is not engaged on a full-time basis.
A de facto director must do the work of a director
Section 9(1)(b)(i) states that a de facto director is a person who, though not validly appointed as a director, ‘act[s] in the position of a director’. A de facto director can, therefore, be a true usurper of the functions of the directors or a person who takes an active part in directing the affairs of the company, but a person will not be a de facto director unless they are ‘doing the work of a director’ at least in some degree [at 65]. In other words, a person will not be a de facto director unless the person acts in a role (or roles) within the company and performs functions one would reasonably expect to have performed by a director of that company given its circumstances. The roles and functions so performed will vary with the commercial context, operations and governance structure of the company, and it will often be a question of degree whether a person has acted in the role or performed the functions of a director.
The weight of judicial authority favours the view that a person is not a de facto director unless it is shown that they assumed or performed functions that only a de jure (lawful) director or board can properly perform. However, this view can be misleading because it suggests that it is possible to enumerate all the duties or functions that can only be properly performed by de jure directors. The true position is that the court is making essentially a value judgment about the proper characterisation of what in its context the person in question had been doing.
The significance of a properly constituted and functioning board
A person can be held to be a de facto director even if the company has other active directors or a properly constituted and apparently ‘functioning’ board. The activities of the de facto director may simply have been accepted by the de jure directors, even though they had power to disavow them. Alternatively, the de facto director and the de jure directors may be acting in concert on an equal footing in directing the affairs of the company.
The significance of a holding out by the company
Whether the company itself holds the person out as a director is a relevant but not decisive consideration. The perceptions of those dealing with the company can be of some contextual or evidential significance but they cannot change the true character of the position in which the person acts.
Lavan Legal comment
Grimaldi v Chameleon Mining NL (No.2)  FCAFC 6 is a significant case on de facto directors. It suggests that only a natural person can be a de facto director but a director of a consultancy company can be a de facto director of the company to which the consultancy services are provided.
Consultants can also incur liabilities as ‘officers’ of the company, particularly if they take an active role in directing its affairs.
A person is unlikely to be classified as a de facto director unless they do the work of a director, although it is often difficult to determine what the functions of directors are in particular commercial contexts.A person cannot deflect liability as a de facto director by simply pointing out that the company had an active and properly constituted board. However, a person is not necessarily a de facto director just because the company holds that person out as a director.
For further information about de facto directors, please contact:
|Leigh Warnick||Dr James O’Donovan|
|(08) 9288 6771||(08) 9288 6804|