insolvency network newsletter december 2018
Dec 14 2018
Directors Hiding In The Shadows
“Shadow Directors”, otherwise known as “De Facto Directors”, have become a common occurrence in companies that end up in the hands of liquidators. However, are they as liable to satisfy the requirements of the Corporations Act as registered office holders?
According to the Corporations Act, a director is a person who is appointed to the position of a director or is appointed to the position of an alternate director and is acting in that capacity or a person who is not validly appointed as a director however, they act in the position of a director and the directors or the company are accustomed to act in accordance with the person’s instructions or wishes.
What tasks and responsibilities does someone have to be doing to act in the capacity of a director and therefore be regarded as a “shadow director” in the eyes of the law?
A general list of tasks and responsibilities for a person that may be acting in the position of a director include, but are not limited to, the following:-
- Managing and operating the business and affairs of a company;
- Signing off on the strategic direction of a company;
- Being known by staff as the primary decision maker in the company;
- Engaging and supervising employees of a company;
- Acquiring or disposing of a company’s assets;
- Negotiating and dealing with third party creditors;
- Conducting banking on behalf of and have access to the bank accounts or other funds of a company;
- Dealing with the landlord of the premises occupied by a company and/or signing leases;
- Obtaining payments for personal expenses and refunding the company by way of loan accounts;
- Possessing the books and records of a company;
- Instructing accountants on behalf of a company;
- Formerly holding an office position and staying on with a company in an executive role after resigning as a registered office bearer.
The simple answer as to whether liability attaches to Shadow Directors the same way as registered office holders is YES. The same obligations and duties apply to Shadow Directors as registered directors and they have the same exposure to insolvent trading claims.
The government is currently introducing draft legislation to have all new directors apply for Director Identification Numbers within 28 days of becoming a director, with its main focus being that it would reduce ‘phoenix activity’. Existing directors will have 15 months to apply.
The new legislation to be introduced in late 2019, may result in a rise in shadow directors because to qualify as a director, individuals:-
- May not meet the criteria for being a director under the Australian Securities and Investments Commission’s new identity requirements;
- May have been banned from managing corporations, such as being a bankrupt or otherwise disqualified;
- May have controlled several failed entities and therefore wish to avoid any correspondence with any liquidator or party wishing to contact them;
- May wish to be anonymous in the database of the Australian Securities and Investments Commission.
Subordinate Claims – Shareholders’ Right To Vote
The rights of creditors in external administrations has been a primary focus of the Insolvency Law Reform Act, particularly in ensuring that Insolvency Practitioners report those rights to creditors in a timely and effective manner.
One such right is for creditors to vote at creditors’ meetings. In accordance with the Insolvency Practice Rules (Corporations) and likewise for Bankruptcy, a person shall not be entitled to vote as a creditor at a convened meeting of creditors unless that person has lodged with the chairperson of the meeting ‘particulars’ of the debt or claim which they claim to be due to them.
The onus to provide particulars of the debt or claim is on the creditor. This includes the creditor completing a Proof of Debt (“POD”) in the approved format and supplying sufficient evidence in support of their debt or claim, for example a statement, invoice(s), loan agreement etc.
In some circumstances, the debt of the creditor is substantiated by records of the company or evidence already obtained by the external administrator.
In ordinary circumstances, shareholders of a company that are not also creditors, do not have the right to receive Liquidator’s reports and consequently, do not have the right to vote at creditors’ meetings.
However, an interesting recent decision was handed down by the Federal Court which dealt with shareholders’ rights and their entitlement to vote at creditors’ meetings.
Earlier this year, the Federal Court of Australia, in the case of 5Star Sinai Limited (Administrators Appointed), ordered that individuals who had subscribed for shares for which share certificates had not been issued were entitled to vote at a second meeting of creditors of a company under administration which was convened to decide the company’s future.
It has been generally understood that shareholders do not have any right to vote at such meetings unless they are treated as subordinated creditors.
Section 563A of the Corporations Act defines a subordinate claim as a claim for a debt owed by a company to a member (shareholder) or any other claim that arises from dealing with shares of a company.
The Court considered whether the subordinated creditors held a real financial interest in the company as payments were made to the company and their share certificates were not received. The Court alternatively viewed them as ordinary unsecured creditors, which can vote.
The Court’s main purpose was to eliminate any doubt by accepting that if the subordinated creditors were in fact shareholders, then they have a real financial interest in the company and should be permitted to vote as creditors.
To find out more about the information covered in this newsletter or to discuss any issues pertaining to personal or corporate insolvency matters, telephone on 03 8636 3333 or email any of the following contacts:
Stephen Michell - Director smichell@pcipartners.com.au
Philip Newman - Director pnewman@pcipartners.com.au
David Quin - Director dquin@pcipartners.com.au
Warren White - Principal wwhite@pcipartners.com.au
Sean Pulverman - Principal spulverman@pcipartners.com.au
Kylie Wright - Principal kwright@pcipartners.com.au
Peter Fraczek - Manager pfraczek@pcipartners.com.au
Frank Ntim - Manager fntim@pcipartners.com.au
Anna Odrzywolska - Manager aodrzywolska@pcipartners.com.au
All material contained in this newsletter is written by way of general comment. No material should be accepted as authoritative advice and any reader wishing to act upon the material should first contact our office for properly considered professional advice which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein.
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