You may be a de facto director of a State-owned company — and not know it

10 October 2012
Government employees can have duties that require them to be involved in the management, operation and direction of a company the State controls or in which the State has an interest, i.e. a State-owned company.

These employees should be aware that some kinds of involvement can result in the unintended consequence of making them a de facto director of the State-owned company for the purposes of the Corporations Act 2001 (Cth).

A de facto director is a person who is not properly appointed as a director in the required way, but nevertheless can be regarded as acting in the position of a director. The effect of the Corporations Act is that de facto directors owe the same duties to the company as a validly appointed director of that company.

In the recent case of Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, the full Federal Court provided a useful summary of the legal principles relevant to decide if a person is a de facto director under the Corporations Act.

The case

The court affirmed an earlier decision that found that Mr Grimaldi was a de facto director of the company, Chameleon. In its judgment, the court recognised that there is no single decisive test of when a person will be found to be a de facto director. However, the court observed that the following principles appear from the wording of s 9(b)(i) of the Corporations Act and from Australian case law:

  • The statutory definition does not only apply to invalid appointments. A person may be a director even without any purported appointment as a director, such as in the case of Mr Grimaldi.
  • A person must be acting in a role in the company and performing functions reasonably expected of a director of that company given its circumstances. The Court said Mr Grimaldi was given functions by the executive directors, or had taken on functions with the acceptance of the executive directors, that would properly be expected to be performed by the directors of Chameleon.
  • The roles and functions that constitute a person as a de facto director will vary with the commercial context, operations and governance structures of a particular company.
  • Even if the roles and functions are limited in their scope or performed for a limited period of time, they can still constitute a person as a de facto director. The relationship between a person and a company can evolve over time into that of a de facto director.
  • Whether a person has acted in the position of a director is a question of fact. The description of the person’s position or role is only one factor. Mr Grimaldi’s description as a ‘consultant’ did not preclude a finding that Mr Grimaldi was a de facto director. The court noted that ‘entering into consultancy arrangements, especially but not only with the companies of its own executive directors was part of Chameleon’s ‘modus operandi’.
  • A person will not be precluded from being a de facto director merely because the company has active directors or a properly constituted and apparently functioning board.
  • Whether the company itself has held the person out as a director will itself be a relevant, but not decisive, consideration. Although the board members of Chameleon only permitted Mr Grimaldi to attend board meetings by invitation and did not hold him out or regard him as a director, the court said that they clearly authorised him on occasion to perform functions which would lead a reasonable third party dealing with him to believe he was acting as a director of Chameleon.

An interesting observation also was made by the court about the concepts of ‘de facto director’ and ‘shadow director’.  A shadow director is used to describe a person not validly appointed as director but whose instructions or wishes the directors of the company are accustomed to act in accordance with. Similar to de facto directors, shadows directors owe the same duties to the company as a validly appointed director.  While the court acknowledged that the point has yet to be authoritatively settled in Australia, it observed that a rigid distinction between the two concepts cannot be maintained because the power or influence held or exercised by a person alleged to be a shadow director may also be a relevant consideration to establish a de facto directorship.

Tips

A government employee may be a de facto director of a State-owned company without knowing it. If so, the employee will owe significant duties to the State-owned company and the risk of breaching the duties is greater if you are not mindful of complying with them.

The kinds of activities that the court found made Mr Grimaldi a de facto director were:

  • conducting capital raising activities on behalf of Chameleon including, deciding the contents of a prospectus and dealing with external service providers
  • deciding on share placements in the company
  • giving instructions for legal advice for the company and using the collective pronoun ‘we’, as if he were part of the company
  • making high-level management decisions on matters that affected Chameleon’s financial standing. For example, he was closely involved in meetings involving a significant debt owed to Chameleon and wrote an ‘internal memo’ to another director giving advice and strategic recommendations about Chameleon’s position and liquidity
  • negotiating a significant contract for Chameleon. While he may not have had the capacity to bind Chameleon, the court said that by having unconstrained authority to negotiate such a contract, he was being entrusted with the work of a director.

Government employees also should be aware that if, over a period of time, the board of a State-owned company acts in accordance with the instructions or wishes of a government employee in relation to matters that the board itself should be deciding, there is a risk that the employee could be a held to be a de facto director, as well as a shadow director.


The information in this publication is provided for general purposes only. It is not to be relied on as a substitute for legal advice. Crown Law and the Department of Justice and Attorney-General accept no liability for losses caused by reliance on the material in this publication. Formal legal advice should be obtained for particular matters.

Published: 10 October 2012

Author: Melinda Pugh