In New Zealand, the roles of shadow directors and de facto directors hold significant importance, especially when a company faces insolvency. Both these roles can carry substantial legal responsibilities and liabilities, often surprising individuals who may not even realize they are acting as directors. This article discusses the definitions, differences, and potential risks associated with these roles.
Definitions and Differences
Shadow Directors
A shadow director is a person who is not formally appointed as a director but whose instructions or directions are typically followed by the officially appointed directors of the company. Essentially, a shadow director operates behind the scenes, influencing the company's decisions without holding an official title.
De Facto Directors
A de facto director, on the other hand, is someone who acts as a director without having been formally appointed. This individual undertakes the duties and responsibilities of a director and is involved in the company’s governance and decision-making processes. The key distinction here is their active participation in the company's affairs, which aligns with the role of a formally appointed director.
Examples to Illustrate
Shadow Director Example:
Consider a scenario where a major shareholder of a company, who is not officially listed as a director, regularly advises the board on strategic decisions, and the board typically acts on these suggestions. Even though this shareholder does not hold a formal directorial title, their influence on the board's decisions could render them a shadow director.
De Facto Director Example:
Imagine an individual who, without formal appointment, regularly attends board meetings, makes key business decisions, and represents the company in negotiations. This person functions as a director in every practical sense, despite the lack of formal appointment, thereby qualifying as a de facto director.
Risks Associated with Insolvency
When a company becomes insolvent, the risks for shadow and de facto directors are substantial. Both can be held liable for the company's debts and may face legal consequences similar to those faced by formally appointed directors. Some specific risks include:
1. Personal Liability: Shadow and de facto directors can be held personally liable for the company’s debts if it is determined that they failed to act in the best interests of the company, especially in the lead-up to insolvency.
2. Breach of Directors' Duties: Under the Companies Act 1993, directors (including shadow and de facto) have statutory duties, such as acting in good faith and in the best interests of the company. Breaches of these duties can result in significant legal penalties.
3. Voidable Transactions: Transactions entered into by the company during the period leading up to insolvency can be voided if they are deemed to have unfairly benefited certain parties, potentially implicating shadow and de facto directors who influenced these decisions.
An employee or contractor can be found to be a de facto director based on significant involvement in a company's affairs, including making critical financial decisions and dealing with creditors. This can lead to potential liability for breaching duties as a director, demonstrating the serious consequences of assuming directorial responsibilities without formal appointment.
Conclusion
In the context of New Zealand law, the roles of shadow and de facto directors carry substantial legal responsibilities, particularly when a company faces insolvency. Understanding these roles and the associated risks is crucial for individuals who influence or manage company decisions without formal directorial titles. It is important to clearly define and understand your role within a company. If you are in a role that could be deemed to be a director role and have concerns that with the company's solvency gain advice. Our team is here to help.