The dangers of lurking in the shadows: shadow director's liability for insolvent trading debts

The New South Wales Supreme Court decision of Justice White last week in Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd [2010] NSWSC 233 concerned whether or not Apple (as an independent corporate entity) was to be deemed a shadow director of Buzzle Operations Pty Ltd (Buzzle) pursuant of the Corporations Act 2001, and thus liable as a director for insolvent trading debts.

If a person or corporation is found to be a shadow director, he, she or it owes statutory duties to act in good faith in the best interests of the company, and with the reasonable care and diligence of a director of that company. A shadow director is also legally responsible for all statutory liabilities that a director would be held responsible for.

In mid-2000, six Apple resellers merged to become Buzzle. As Apple was the supplier and provided a number of sureties for the merger it also participated in the negotiations and subsequent formation of the company. Through these negotiations Apple made Buzzle’s financial obligations clear to them and the trading terms to which they would have to comply to ensure Apple’s continued support. Buzzle unfortunately soon become insolvent and failed to fulfil these obligations. The liquidators of Buzzle subsequently attempted to claim that Apple was liable for a number of insolvent debts incurred as a ‘shadow director’ of the company. 

In dismissing this claim, Justice White provided a number of useful guidelines as to what advice can be given and influence exercised before such actions would be deemed to be those of a shadow director:

  • a person or a corporation may be deemed as a shadow director if the directors of a company 'are accustomed to act in accordance with the person's instructions or wishes';

  • a shadow director need not control all the directors of a company, only a governing majority of the directors, as this will in any event give him or her effective control over the company as a whole;

  • it is not necessary that the instructions or wishes of a shadow director be given over the whole field of corporate activity for which the directors are responsible. A person or corporation may still be a shadow director even if the directors exercise discretion or judgment in areas which the shadow director does not give instruction or express a wish;

  • the directors of the company must be accustomed to act in accordance with the person or corporation’s instructions or wishes as to 'how they should so act' in 'their capacity as directors' of the company. That is to say, a third party who has commercial dealings with a company will not merely be deemed a shadow director because they insist on certain terms for their continued support of a company and those terms are accepted; even if those terms are habitually complied with over an extended period of time by the company;
  • 'in accordance with' in these circumstances is understood to mean that the cause of action was the shadow director’s instructions or expression of wishes; and

  • a bright line of distinction is to be drawn between de facto directors and shadow directors as they are dealt with differently under the statute. The former is one who acts as a director whereas the later is one who commands directors how to act. Both, however, have the same statutory liabilities as directors.

Apple was ultimately found not to be a shadow director because, at the time of its involvement with the directors of Buzzle, they (the directors) were not then deemed to be acting as directors.  Apple was found to be merely imposing conditions on its commercial dealings with Buzzle, rather than controlling the directors.

This decision does not exclusively or conclusively outline all scenarios in which a creditor, financial institution with insolvent corporate clients, investigative accountant or any other person or corporation’s actions may make him, her or it liable as a director for insolvent debts. It does however provide a guideline as to the specific and special types of involvement with a company that would lead to a finding that an independent corporation was a shadow director. 

For further information please contact Partner Alison Robertson on (08) 9288 6872 /

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.