Shadow Directors and De Facto Directors in Charities

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Directors or Management Committee Members are those who have responsibility for governance of a charity.  At a recent paper presented by Andrew Lind to the Christian Management Australia Annual Conference, just who might be shadow directors and de-facto directors in charities was discussed in Q&A time at some length. That issue has particular relevance in light of recent charity law reforms, with the ACNC’s requirement for charities to declare responsible entities (or responsible persons); the duties they owe and the ACNC’s powers to remove them.

Who are shadow directors and de-facto directors?

Shadow directors and de-facto directors are people who have not been formally appointment to a director/member of the board/management committee but are acting in the governance of the charity.

Firstly, to get a better understanding of what are de-facto and shadow directors, let us consider the concept of de-facto and shadow directors from a commercial perspective. Pursuant to section 9 of the Corporations Act 2001 (Qld), the definition of a director also includes a person who is not validly elected as a director if the person:

a)     Acts in the position of a director (de-facto director); or

b)     The directors of the company act on instructions of the person’s instructions or wishes (shadow director).

This person will be subject to the same obligations and liabilities as a director would be exposed to.

The Australian Charities and Not for Profits Act 2001 (Cth) (“ACNC Act”) defines a director of a company (under the ACNC Act, a company is defined in the Act as a body corporate or any unincorporated association) as:

a)     If a company is incorporated – a director of the company, or an individual who performs the duties of a director of the company; or

b)    If the company is not incorporated – a member of management of the company, or an individual who performs the duties of such a member;

regardless of the name that is given to his or her position, or whether or not he or she is validly appointed.

It is therefore important to consider what are the duties that a director or management member normally performs in their respective capacities as director or management member. Unfortunately, the Act provides little to no guidance on this.

Please note that for the remainder of this article, any reference to director also refers to management member.

What are some examples of tasks that would qualify a person to be a de-facto or shadow director?

The law is clear that there is no single test for determining whether the duties a person carries classifies them as a de-facto or shadow director.

Recent case law from the commercial cases provides some tests for identifying when a person is acting as a director.

In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, a case which went before the Federal Court of Australia, a consultant was held to be an officer of a company for reasons such as that he had played a significant role in directing the company’s corporate strategy, made decisions which affected the company’s finances, handled several negotiations, and in several instances was involved in the day to day running of the company. He was also reasonably perceived by outsiders to be a director or senior officer of the company.

In Grimaldi, the alleged director was only allowed to attend director board meetings on invitation by the board, and was not regarded by the board as a director, nor was he held out to be a director. Further, he had no power to formally bind the company. In spite of this, the court held that he was clearly authorised on several occasions to perform functions that would lead a reasonable third party to believe the alleged director was acting as a director.

In their judgement, Justices Finn, Stone and Perram said the following:

We accept that the Board Members seem only to have allowed Mr Grimaldi’s attendance at Board meetings by invitation and did not appear to regard him as director as such. However, while they did not hold him out as a director eo nomine [by that name], they clearly authorised him on occasion to perform functions such as would lead a reasonable third party dealing with him to believe he was acting as a director…”[1]

This makes it is clear that even if a person only attends board meetings by invitation of the board, does not have a right to vote at board meetings and is not perceived by members of that board meeting to be a director, that person can still be held to be a director if they satisfy other criteria.

One of the tests (and certainly not the only test) applied in this judgement to determine whether a person is a shadow director or de-facto director, is whether a reasonable third party dealing with the person would believe the person to be a director of the company. Ask people, who they perceive to be directors of your Charity?

“Even though not authorised to be a director, Mr Grimaldi was either given, or had arrogated to himself with the acquiescence of at least the two executive directors… functions in the affairs of [the Company] which would properly be expected to be performed by a director of that corporation given its circumstances. Given the extent and the significance of those functions, he so acted in the position of a director to warrant the imposition on him of the liabilities, statutory and fiduciary, of a director.[2]

Here, the Court held that Mr Grimaldi was either given the ability to carry out tasks that would normally be expected of a director, or had claimed that ability with the passive inaction of other directors. Mr Grimaldi was therefore acting as a director.

In Shafron v Australian Securities and Investments Commission [2012] HCA 18, a case which went before the High Court of Australia, a consultant was held to be an officer of a company, for reasons such as that he had advised the board on substantive matters, was one of three most senior executives, and had assisted in deriving proposals for separating its subsidiaries exposed to asbestos claims from rest of the group.

In the judgment, Chief Justice French, and Justices Gummow, Hayne, Crennan, Kiefel and Bell said:

“…the Court of Appeal did not decide that making a real contribution to a decision was sufficient to constitute participation in making that decision. Rather, the Court’s focus was upon what was necessary to constitute participation… Participation in any decision of a corporation does not make a person an “officer” – the decisions in which the person participates must have the significance for the business of the corporation…”[3]

Notably, the court held in Shafron that it is not the participation in any decision of a corporation that makes an alleged director an officer, but it is the decisions in which the person participates in. These decisions must have significance for the business of the company.

Conclusions and Practical Steps

It is the clear that the “responsible entity” is therefore very wide. Charities need to be aware that a person need not be recognised as a director by their own formally appointed board. As long as that person is performing significant functions that a reasonable outside person would perceive a director to perform, that person could be held to be liable as a director.

Charities will also need to consider whether their insurance which covers directors and officers also extend to these people.

Charities need to consider if there is any such person perceived by third parties to be a director, of there is such a person who carries out tasks which have significance on the governance of the charity. It may be that roles in the charity need to be redefined, such that a clear definition is visible where such persons are clearly differentiated from directors.

If you feel that you or your members of your company or charity may be at risk of falling under the definition of a director, specific legal advice will need to be taken in determining whether this is the case. You may also need advice about policies that allow for your members to be protected, or prevented as the case may be, from actively making director or management committee member decisions.

For more information regarding Shadow Directors and De-Facto Directors

Please contact our Business Development Team or call us on (07) 3252 0011 to book an appointment with one of our specialist NFP & Charity Lawyers today.

 


[1] Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, para 133.

[2] Ibid para 141.

[3] Shafron v Australian Securities and Investments Commission [2012] HCA 18, para 27.