Early Warner

Professor Bob Baxt discusses a recent case involving the existence of shadow directors.

Courts get tough on de facto directors

In the July issue of the Law Reporter the decision of Gyles J in Akai Pty Ltd (in liq) v Ho [2006] SCA 511 was discussed. In that case the liquidator of the Akai business companies sought orders against Ho and certain companies that he controlled, under various provisions of the Corporations Act (Act) and in particular the insolvent trading provisions.

While the trial judge held that a prima facie case existed for treating the main company in the group, Grande Holdings, as a shadow director and an officer of the relevant Australian corporation, (embracing the analysis adopted by the Supreme Court of New South Wales decision in Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290), there was insufficient evidence to raise an arguable case that Ho was also a shadow director. The judge did, however, hold that there was sufficient evidence to show that Ho was an officer of the Akai company.

The decision of Gyles J was appealed both in the context of the finding against Ho and against the companies that were deemed shadow officers and/or directors.

As sometimes happens when an appeal is brought, the Full Federal Court (FFC) went a lot further (and to the disappointment of the appellants) than they had anticipated (see Ho v Akai Pty Ltd (in liq) [2006] FCAFC 159). After reviewing the evidence (which was being put forward only on a preliminary basis but nevertheless still important), the FFC found that there was nothing in the evidence brought before the court which required it to set aside the finding by Gyles J that there was a prima facie case that Grande Holdings was a shadow director.

However, the court went further. Unlike the trial judge, the members of the FFC did not “consider that the evidence [was] clearly inconsistent with Mr Ho having acted for some purposes or at all in an individual as opposed to an executive capacity. Given the state of the evidence, we do not consider that this claim could properly be rejected on the basis that there was nothing from which to infer that Mr Ho was acting as an individual rather than as a chief executive of Grande Holdings. To assume that Mr Ho was acting throughout on behalf of Grande Holdings is to privilege one possible inference from another” (at para 27).

In the circumstances the court was pointing to the fact that Ho, as well as being held as an officer, might also be held to be a shadow director. This did not affect the orders made by Gyles J but could in an appropriate case lead to a widening of the claims made by the liquidator against the relevant director.

In reaching its view, the FFC provided the following indications as to how the law should be interpreted in relation to shadow directors. In embracing the approach in Standard Chartered Bank that a corporation could be a shadow director, the FFC also noted that though the primary purpose of the definition of director in the relevant section of the Act (section 9) is to identify those persons, other than professional advisers, who have a real influence in, or indeed control of the affairs of the company, “it is not necessary that such influence or control should be exercised over the whole field of its corporate activity. The influence or control exercised by a shadow director may be strategic in character, defining the context in which, or conditions upon which, the company operates, or else contriving transactions of significance to the company” (Ho at para 21).

The willingness of the court to infer that persons who act in a strong advisory (or a persuasive) position in a company may be shadow directors points the way to the insolvent trading provisions being used more aggressively by the Australian Securities and Investments Commission (ASIC) as well as by liquidators. The decision will therefore have quite significant implications for directors.

Of course, the full trial of the issues could well result in a different overall conclusion; but at least the inference points to possibly more aggressive prosecutions of cases of this kind by liquidators and by ASIC especially in light of the current more interventionist policy adopted by ASIC in pursuing company directors for breaches of duty.

Professor Bob Baxt is a partner in Freehills solicitors and chairman of the Law Committee of the AICD which prepares government submissions for the AICD on various issues affecting company directors.