5315 The Law of Shadow Directorships

Bond Law Review
Volume 10 | Issue 2 Article 4
1998
The Law of Shadow Directorships

Michael D. Hobson
James Cook University
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The Law of Shadow Directorships
Abstract
This paper seeks to examine and critically analyse the law of shadow directorships. The characteristics that
define a shadow director are considered in detail. Further consideration is given to the duties and obligations
associated with shadow directorships and the circumstances in which a shadow director may be liable to
compensate the company. The potential liability of corporate advisers, financiers, creditors and controlling
entities is also discussed. In conclusion, the author submits that whilst the Corporations Law properly extends
liability to corporate ‘string-pullers’, the words of the section fail to provide the necessary degree of certainty.
Keywords
shadow directors, de facto directors, fiduciary obligations, liability of directors, corporate law
Cover Page Footnote

The author acknowledges and thanks Professor John Farrar of the Bond University School of Law for his
assistance and guidance in the preparation of this paper. The author also thanks Dr Darryl McDonough,
Clayton Utz, Brisbane, for his insightful comments on an earlier draft of this paper.
This article is available in Bond Law Review: http://epublications.bond.edu.au/blr/vol10/iss2/4

THE LAW OF SHADOW DIRECTORSHIPS
By MICHAEL D HOBSON, LLB, James Cook University, Articled Clerk, Hunt

& Hunt Lawyers, Brisbane. *
Introduction
The existence of a separate and distinct corporate personality is one of the

fundamental and central principles of modern company law.1 Upon the
incorporation of a company, a new legal entity is created.2 This entity has been
described as ‘an artificial person composed of natural persons’.3 However, an
incorporated company attains an existence which is distinct from both its
directors and shareholders.4 The separate legal personality of a limited liability
company was firmly established by the House of Lords in Salomon v A Salomon
& Co Ltd.5 This ‘veil of incorporation’ has obvious benefits for dynamic
capitalist economies.6 Limited liability promotes entrepreneurship and
shareholder investment in potentially productive but uncertain enterprises.7
However, the privileges of limited liability must be balanced against its costs.8
Persons who extend credit to a company endure the risk of significant losses in
the event of corporate misconduct or insolvency.
* The author acknowledges and thanks Professor John Farrar of the Bond University School of Law for his
assistance and guidance in the preparation of this paper. The author also thanks Dr Darryl McDonough,
Clayton Utz, Brisbane, for his insightful comments on an earlier draft of this paper.
1 See Ford H A J, Austin R P and Ramsay IM, Ford’s Principles of Corporations Law (9th ed) Butterworths
(1999) Chapter 4; Farrar J H and Hannigan B, Farrar’s Company Law (4th ed) Butterworths (1998),
Chapter 6. With reference to the leading case of Salomon v A Salomon & Co Ltd [1897] AC 22, it has been
stated that the ‘rejection by the House of Lords of the doctrine of agency to impugn the non-liability of
members for the acts of the corporation is the foundation of our modern company law’: MacLaine Watson
& Co Ltd v Department of Trade and Industry [1988] 3 WLR 1033 at 1098 per Kerr LJ.
2 Section 119 of the Corporations Law provides that a company comes into existence as a body corporate at
the beginning of the day on which it is registered.
3 Henn H G and Alexander J A, Corporations (3rd ed) West Publishing, St Paul, Minn. (1983) at 145.
Section 124(1) of the Corporations Law provides that a company has, both within and outside the
jurisdiction, the legal capacity of an individual.
4 See Salomon v A Salomon & Co Ltd [1897] AC 22; Macaura v Northern Assurance Co Ltd [1925] AC
619; Lee v Lee’s Air Farming Ltd [1961] AC 12.
5 [1897] AC 22. Per Lord McNaughten at 51: ‘The company is at law a different person altogether from the
subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the
same as it was before, and the same persons are managers, and the same hands receive the profits, the
company is not in law the agent of the subscribers or trustees for them. Nor are the subscribers as members
liable, in any shape or form, except to the extent and in the manner provided by the Act.’
6 Lipton P and Herzberg A, Understanding Company Law (8th ed) LBC (1999) 323.
7 Ibid. It is beyond the scope of this paper to consider the complete legal and economic consequences of
limited liability. However, suffice it to say, the risk of business failure is transferred from the company’s
shareholders to the creditors of the company.
8 In Metal Manufacturers Ltd v Lewis (1988) 13 ACLR 357, Kirby P (dissenting) observed (at 359) that:
‘There is little doubt that the separation of the corporation from the entrepreneurs behind it provided the
‘essential impulse’ to the most remarkable economic development of the last 200 years. Although those
dealing with a corporation would sometimes suffer upon its insolvency and liquidation, a social judgement
was made that their losses were the price occasionally to be borne, where the protective mechanisms of
company law had earlier failed, upon the basis that the general immunity of directors, as of investors, from
the liability for the debts of the corporation promoted the innovation, investment and risk-taking...’; cited in
Tomasic R, Jackson J and Woellner R, Corporations Law: Principles, Policy and Process (2nd ed)
Butterworths (1992) 107-108.
184
Despite criticism of the House of Lords’ decision,9 the Salomon principle has
been consistently applied in subsequent cases.10 However, there has been
increasing recognition that the inflexible application of the separate entity
doctrine and limited liability may result in undesirable consequences.11 It has
further been recognised that the Salomon principle governing risk allocation is
not always appropriate.12 Both the courts and legislature have attempted to draw
a distinction between legitimate and illegitimate risk taking.13 Given the
directors’ position of power - and the perceived vulnerability of shareholders
and creditors - the general trend has been to increase the accountability of
directors and of other persons involved in the management of companies.14
Olney J commented on this trend in Chew v NCSC (No 2)15 :
The making of laws in relation to companies and the persons who are
involved in the formation and management of companies could be
described as one of the contemporary growth industries. I think it is fair to
say, however, that since the introduction of the concept of limited liability
the potential for companies and the dealing in interests in them to be used
as a means of defrauding both the gullible and the greedy has been
recognised and so it is that over a long period of time as the wit of man
has been applied to the pursuit of material gain through the use of
companies it has been necessary for the law to become more and more
complex to the extent that in these times few if any could honestly claim
to have a complete understanding of all the intricacies of the regulatory
provisions that now apply. Be that as it may, one theme which prevails
throughout the whole complex structure of company law is that those in a
position to take advantage of the special position they may exercise in the
promotion or management of companies must always act with the utmost
care, diligence and honesty so that those who are less well informed are
not unfairly taken advantage of. 16
In order to protect the interests of shareholders and creditors - and to generally

regulate corporate conduct in the public interest17 - the law subjects directors to
9 See (1897) 13 LQR 6; and (1944) 7 MLR 54, in which Professor Otto Kahn-Freund described the Salomon
decision as ‘calamitous’.
10 Although Salomon v A Salomon & Co Ltd [1897] AC 22 was not specifically cited, the decision of the
Federal Court in Bond v Australian Broadcasting Tribunal (1989) 89 ALR 185 is a recent illustration of the
effects of the separate legal identity of the corporation. It should be noted that the courts have recognised a
limited range of circumstances in which they will ‘lift the corporate veil’; see generally Ford H A J and
Austin R P, Ford’s Principles of Corporations Law (9th ed) Butterworths (1999) para [4.350] et seq.
11 Lipton and Herzberg, above n 6 at 31.
12 In Quintex Australia Finance Ltd v Schroeders Australia Ltd (1991) 9 ACLC 109, Rogers CJ Comm D, of
the Supreme Court of New South Wales, suggested that the whole issue of the separateness of the corporate
entity should be re-examined in the context of modern commercial contracts. With respect to corporate
groups, Rogers CJ Comm D observed (at 111) that ‘Regularly, liquidators of subsidiaries, or of the holding
company, come to court to argue as to which of their charges bear the liability… As well, creditors of
failed companies encounter difficulty when they have to select from amongst the moving targets the
company with which they consider they concluded a contract. The result has been unproductive
expenditure on legal costs, a reduction in the amount available to creditors, a windfall for some, and an
unfair loss to others. Fairness or equity seems to have little role to play.’ Quoted in Baxt R, ‘Tensions
Between Commercial Reality and Legal Principle - Should the Concept of the Corporate Entity be Re-
examined?’ (1991) 65 ALJ 352.
14 Lipton and Herzberg, above n 6 at 323; Ford, above n 1 at para [7.060].
15 (1985) 3 ACLC 212.
16 (1985) 3 ACLC 212 at 218.
17 In Tomasic R and Bottomley S, Directing the Top 500: Corporate Governance and Accountability in
Australian Companies, Allen & Unwin (1993) the authors put forward a strong argument to suggest (at 86)
185
(1998) 10 BOND LR
strict fiduciary and statutory duties.18 The general law fiduciary obligations of a
director are reinforced by the statutory duties contained in s 232 of the
Corporations Law. 19 However, of particular concern for directors is the personal
liability that attaches to a breach of these duties. In certain circumstances, the
court may hold that a director is liable to compensate the company for any loss
or damage suffered as a result of the director’s breach.20
The law imposes an onerous burden upon company directors.21 There are also
significant consequences for directors who fail to discharge their obligations.22
It is therefore of paramount importance to recognise who the courts will hold to
be a director. 23 The Corporations Law has extended the definition of ‘director’
to include not only ‘de jure directors’,24 but also those persons who purport to
act as directors.25 Under s 60(1)(a) of the Corporations law, any person who
holds himself out as a company director26 cannot escape duty or liability by
declining formal appointment.27 Section 60(1)(b) further extends the definition
that ‘there are limits to the extent to which formal legal rules may be used to control corporate and
individual misconduct covered by the Corporations Law’. It is further suggested that the conduct of
companies is more closely related to the personal ethics of the directors rather than the provisions of the
law: see generally Tomasic and Bottomley, op cit, Chapter 6 - ‘Ethics and Accountability’.
18 Ford, above n 1 at 281. The general duties of directors and those specifically attracted by shadow directors
are considered below.
19 Section 232(11) expressly states that section 232 ‘has effect in addition to, and not in derogation of, any
rule of law relating to the duty or liability of a person by reason of the person’s office or employment in
relation to the corporation and does not prevent the institution of any civil proceedings in respect of a
breach of such a duty in respect of such a liability.’
20 The circumstances in which a director will be held liable to pay compensation to the company (or company
creditors) are considered below.
21 According to Tomasic and Bottomley, much has been written about the burden imposed upon directors by
the law of directors’ duties. In their survey of company directors, all respondents were asked whether they
agree with the view that the legal duties of directors were onerous. Whilst there was general agreement that
the duties were onerous in nature, the authors distinguished three categories of attitudes amongst the
respondents: (i) that the duties were ‘conceptually onerous’ but limited in practice due to the lack of
enforcement; (ii) that the duties were onerous, but not unreasonably so; and, (iii) that the duties were so
onerous that they were considered as ‘obstacles’ in the management of a company rather than obligations.
See Tomasic and Bottomley, above n 17 at 75.
22 It should be noted that the Corporations Law is concerned with imposing duties on all those who take part
in the management of companies — not only directors. As such, many duties are imposed upon ‘officers’
of the company. ‘Officer’ is defined in s 9 of the Corporations Law to include directors, secretaries,
executive officers, employees and managers of insolvent companies such as receiver managers and
liquidators under a voluntary winding up: Lipton and Herzberg, above n 6 at 305.
23 Such a question is not only important to those acting as directors — it may also be relevant to the creditors
of an insolvent company seeking redress for their losses.
24 Markovic defines a ‘ de jure director’ as a director who has been validly appointed in the position pursuant
to the company’s articles of association: Markovic M, ‘The Law of Shadow Directorships’ (1996) 6 Aust
Jnl of Corp Law 323 at 323. See also the judgement of Millett J in Re Hydrodam ( Corby) Ltd [1994] 2
BCLC 180 in which he distinguishes between de jure, shadow, and de facto directors.
25 Section 60(1) of the Corporations Law. Similar extended definitions of ‘director’ are contained in the
companies legislation of many common law jurisdictions including Singapore, Hong Kong, New Zealand
and the United Kingdom: Koh P M C, ‘Shadow Director, Shadow Director, Who Art Thou?’ (1996) 14
C&SLJ 340 at 340.
26 Whilst s 60(1)(a) does not use the expression, such persons are commonly referred to as ‘de facto’
directors.
27 Koh, above n 25 at 340. Section 60(1)(a) provides that a director includes ‘a person occupying or acting in
the position of director of a body, by whatever name called and whether or not validly appointed to occupy,
or duly authorised to act in, the position’. In Corporate Affairs Commissioner (NSW) v Drysdale (1978)
141 CLR 236; 22 ALR 161, the High Court held that persons who knowingly assume, whether dishonestly
or not, to act in a particular role cannot escape the liability for acts done in that role that would have been
incurred by a person properly appointed to that role: Ford and Austin, above n 1 at 255 - 256. Ford and
Austin (at 256) liken the duties and liability of a de facto director to the equitable duties of a trustee de son
tort under the law of trusts.
186
of ‘director’ to include ‘shadow directors’28 - that is, those persons who remain
behind the scenes whilst exerting influence over the administration of company
affairs.29 Clearly, any person who wishes to ‘dabble in the affairs of a company’
must conduct themselves ‘in accordance with the standards expected of all
company directors.’ 30
Despite the ‘self-explanatory’31 nature of the statutory definition, there is

considerable uncertainty regarding the ambit of s 60.32 Whilst de facto directors
will generally be betrayed by their very conduct,33 the identification of shadow
directors presents an arduous task. This may, at least in part, be attributed to a
lack of judicial guidance. 34 However, recent decisions by Australian, New
Zealand and English courts have shed substantial light on ‘the law of shadow
directorships’.35
This paper seeks to examine and critically analyse the law of shadow
directorships. The characteristics that define a shadow director are considered in
detail. Further consideration is given to the duties and obligations associated
with shadow directorships and the circumstances in which a shadow director
may be liable to compensate the company. The potential liability of corporate
advisers, financiers, creditors and controlling entities is also discussed. In
conclusion, the author submits that whilst the Corporations Law properly
extends liability to corporate ‘string-pullers’, the words of the section fail to
provide the necessary degree of certainty.
28 The Corporations Law does not specifically make reference to the term ‘shadow directors’. However, s
741(2) of the Companies Act 1985 (UK) clearly distinguishes this class of directors by providing a separate
definition of a ‘shadow director’. According to Koh, above n 25 at 340, the distinction between ‘de facto’
directors and ‘shadow’ directors was clarified by Millett J in Re Hydrodam ( Corby) Ltd [1994] BCC 161 at
163. Previously, the terms were frequently used interchangeably — see Re Tasbian (No 3) Ltd [1991] BCC
435.
29 Koh, above n 25 at 340. Section 60(1)(b) provides that a director includes ‘a person in accordance with
whose directions or instructions the directors of the body are accustomed to act’. Although a body
corporate cannot be appointed as a director, it is possible for a corporation to be caught be this extended
statutory definition. The circumstances in which a corporation may incur liability are considered below.
30 Koh, above n 25 at 340.
31 Fidler P, ‘Banks as Shadow Directors’ [1992] 3 Journal of International Banking Law 97 at 97, observes
that ‘the definitions are self-explanatory’ and that only the reference to ‘in a professional capacity’ calls for
comment. Although Fidler was referring to the UK legislation, the provision is substantially similar to that
of the Corporations Law. It is suggested that upon critical examination of the statutory definition, many
other issues justify consideration.
32 Markovic, above n 24 at 323.
34 Baxt R, ‘Liability of Shadow Directors for Insolvent Trading - Australian Authorities Start to Bite’ (1996)
14 C&SLJ 121 at 121 states that ‘the law relating to shadow directors in Australian company law has been
quite ‘negligible’ insofar as decision of the court are concerned.’ This is further highlighted by Loose P,
Yelland J and Impey D, The Company Director; Powers and Duties (7th ed) Jordans (1993), at 222 where
it is stated that ‘it cannot be pretended that the judges have thrown much light on the outer limits of
‘shadow status’’; cited by Markovic, above n 24 at 323.
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(1998) 10 BOND LR
Director’s Duties and Liability 36
General Law Fiduciary Obligations
The relationship between director and company is that of a fiduciary. As such, a

director owes certain fiduciary duties to the company.37 These duties include:
• the duty to act bona fide in the interests of the company;
• the duty to exercise powers for their proper purpose;
• the duty to retain discretionary powers; and
• the duty to avoid conflicts of interest.38
Directors also owe a common law duty to exercise care, diligence and skill. 39
Whilst the powers of management are generally conferred upon the board of
directors collectively,40 the fiduciary obligations are owed by individual
36 It is beyond the scope of this paper to undertake a detailed examination of the duties and obligations of
company directors. However, in order to fully appreciate the significance of shadow directorships it is
necessary to consider the associated duties and obligations. Therefore, the duties of directors (including
shadow directors) are briefly considered. This is not intended to be a thorough analysis of the law relating
to directors’ duties; but rather, a succinct summary of relevant general law and statutory provisions.
37 The relationship of director and company has often been compared to that of trustee and beneficiary.
Whilst both are fiduciary relationships, the intrinsic risk of commercial enterprise requires that directors be
given a greater degree of freedom in the management of a company. In Re City Equitable Fire Insurance
Co [1925] 1 Ch 407, Romer J observed: ‘It has sometimes been said that directors are trustees. If this
means no more than that directors in the performance of their duties stand in a fiduciary relationship to the
company the statement is true enough. But if the statement is meant to be an indication by way of analogy
of what those duties are, it appears to me to be wholly misleading. I can see but little resemblance between
the duties of a director and the duties of a trustee of a will or marriage settlement.’
38 The general principle regarding the exercise of powers conferred on directors was enunciated by Lord
Green MR in Re Smith and Fawcett Ltd [1942] Ch 304 where it was stated (at 306) that directors ‘must
exercises their discretion bona fide in what they consider - not what the court may consider - to be in the
interests of the company, and not for any collateral purpose.’ The duty is subjective in nature; generally
there will be no breach of duty where the directors honestly believe that they are acting in the best interests
of the company. However, a number of cases has held that directors may breach their duty, even if acting in
what they genuinely consider to be an honest manner, if they fail to give proper consideration to the
interests of the company: Ford, above n 1 para [8.080].
39 The common law previously adopted the position that so long as a director acted honestly, he or she would
not be liable in damages unless guilty of gross negligence: Re City Equitable Fire Insurance Co [1925] 1
Ch 407. However, the decision of the New South Wales Court of Appeal in Daniels & Ors v Anderson &
Ors (1995) 13 ACLC 614 represented a paradigm shift in the law of directors’ duties. The Court discarded
each of the propositions enunciated by Romer J in Re City Equitable Insurance Co. Burnett B, (ed) 1999
Australian Corporations Law, CCH (1999) at 278, citing Daniels v Anderson (1995) 13 ACLC 614 at 652-
666, summarises the current law: ‘(1) A director, whatever his or her background, has a duty greater than
that of simply representing a particular field of experience. That duty involves becoming familiar with the
business of the company and how it is run, and ensuring that the board has sufficient means to audit the
management of the company so that it can satisfy itself that the company is being properly run. (2) The
amount of time that a director should devote to the company is determined by the director’s duties and
responsibilities. It is not a matter of tailoring the duty to match the number of board meetings. (3) The
question of reliance on company officers should be treated as part of the general issue of directors’ duties.
In other words, whether a director could rely on company officers was not something that could be decided
apart from the director’s general duties to the company. Directors have a duty to be generally familiar with
the business and financial conditions of the company, and to devote a sufficient amount of time and energy
to overseeing the company’s affairs; that duty cannot be met solely by relying on other persons.’
40 See Article 66, Schedule 1 Table A. But see now s.226A(1) (replaceable rule).
188
directors.41 The fiduciary nature of directors’ duties requires them to maintain

standards that may be well above those applied to other business relationships.
Thus, if a director gains a benefit from breaching his or her fiduciary duties, the
director will be accountable to the company even if, in business terms, ‘the level
of the benefit received is reasonable and in line with what the director would
have received had he or she been a third party dealing with the company at
arm’s length.’ 42
Section 232 of the Corporations Law
The general law fiduciary obligations are supplemented by similar statutory

duties contained in s 232 of the Corporations Law. These duties are expressly
stated to operate in addition to the general law obligations of directors.43 The
duties imposed under s 232 are contained in the following provisions:
• section 232(2) requires officers of a corporation, in the exercise of their

powers and in the discharge of the duties of their office, to at all times act
honestly;
• section 232(4) requires officers of a corporation, in the exercise of their

powers and in the discharge of their duties, to exercise a degree of care and
diligence that a reasonable person in a like position would exercise in the
corporations circumstances;44
• section 232(5) prohibits officers or employees or former officers or

employees of a corporation from making improper use of information
acquired by virtue of their position to gain, either directly or indirectly, an
advantage to themselves or any other person, or to cause detriment to the
corporation; and
• section 232(6) prohibits officers or employees of a corporation from

making improper use of their position to gain, either directly or indirectly,
an advantage to themselves or any other person, or to cause detriment to the
corporation.45
Section 232(6 B) declares these subsections to be civil penalty provisions. As

such, Part 9.4B of the Corporations Law provides for civil and criminal
consequences of contravention. The civil penalty provisions empower the court
to make orders that a person be prohibited from managing a corporation or that
the person pay a pecuniary penalty of up to $200,000 to the Commonwealth.46
Criminal sanctions may also apply where the contravention is committed with a

42 Burnett above n 39 at 282, citing Cummings & Anor v Claremont Petroleum NL (1993) 11 ACLC 125.
43 Section 232(11). See above n 19.
44 Section 232(4) explicitly imposes an objective test and was rewritten in order to reflect what parliament
saw as the current attitude of Australian courts: Burnett, above n 42 at 291.
45 Section 232(1) contains a definition of ‘officer’ for the purposes of s 232, and includes, inter alia, directors,
secretaries, executive officers, receivers, administrators, liquidators and trustees.
46 Section 1317 EA(3).
189
(1998) 10 BOND LR
dishonest intent.47 The court may also order that a person pay compensation to
the company for any profits made or losses suffered by the company.48
Section 588G of the Corporations Law
Section 588 G of the Corporations Law provides that a director is under a duty to
prevent his or her company from engaging in insolvent trading. The section
applies to circumstances in which a company incurs a debt whilst insolvent, or
becomes insolvent by incurring that debt; and, at that time, there are reasonable
grounds for suspecting that the company is insolvent, or would so become
insolvent.49 A director contravenes this section if he or she fails to prevent the
company from incurring the debt and
• the director is aware at that time that there are such grounds for so
suspecting; or
• a reasonable person in a like position in a company in the company’s

circumstances would be so aware. 50
Section 588H provides four alternative defenses available for directors who
would otherwise be in breach of s 588 G. A director will not be liable for
insolvent trading if, at the time the debt was incurred
• the director had reasonable grounds to expect, and did expect, that the
company was solvent and would remain solvent even if it incurred the
debt;51
• the director had reasonable grounds to believe, and did believe:
(i) that a competent and reliable person was responsible for providing to
the director adequate information about whether the company was
solvent; and
(ii) that that person was fulfilling that responsibility; and
expected, on the basis of the information provided by that other person,

that the company was solvent and would remain solvent even if it incurred
the debt;52
• the director, because of illness or for some other good reason, did not take
part in the management of the company;53 or
47 Section 1317 FA(1).

48 Sections 1317 HA and 1317 HD.
49 Section 588 G(1).
50 Section 588 G(2).
51 Section 588 H(2).
190
• the director took all reasonable steps to prevent the company from incurring
the debt.54
Section 588 G(3) declares the section to be a civil penalty provision. As such,
there are civil and criminal consequences of contravention similar to those that
attach to a breach of the s 232 duties. Section 588M(2) provides that a
company’s liquidator may recover compensation from company directors for
debts incurred by the company in breach of s 588 G. In certain circumstances
company creditors may also institute proceedings against the directors for the
recovery of debts incurred in breach of s 588 G. 55
Other Statutory Provisions
There are many provisions of the Corporations Law that impose duties and
liabilities upon company directors. In addition to the civil penalty provisions of
sections 232 and 588 G, directors may be liable for a range of other pecuniary
penalties.56 Provisions imposing liability on company directors range from
fraudulent trading57 to wrongful payment of dividends.58 Clearly, directors
should be wary of the potential liability flowing from their actions.
Shadow Directorships
Statutory Definition of ‘Director’
Strictly speaking, the Corporations Law does not define the term ‘director’. 59
However, s 60(1) provides that certain persons are to be included in references
to a ‘director’.60 As such, s 60(1) provides an inclusive rather than exhaustive
definition.61 Section 60 states that:
60(1) Subject to subsection (2), a reference to a director, in relation

to a body, includes a reference to:
(a) a person occupying or acting in the position of director of the

body, by whatever name called and whether or not validly
appointed to occupy, or duly authorised to act in, the position;

55 Section 588 M(3). The section provides that a creditor may recover an ‘amount equal to the amount of the
loss or damage’.
56 The prescribed penalties for breaches of various provisions of the Corporations Law are contained in
Schedule 3 of the Corporations Law.
57 Section 596.
58 Sections 254T, 256D(3). See also section 232(4); Ford above note 1 para [18.110].
60 With reference to the UK legislation, Browne-Wilkinson VC noted in Re Lo-Line Electric Motors [1988]
BCLC 698 at 706 that ‘it is not possible to treat a de facto director [presumably the same applies to a
shadow director] as a ‘director’ for all the purposes of the 1985 [Companies] Act. Thus in ss 282
(minimum number of directors), 291 (directors’ share qualifications), 293(2) (age limits), and 288 (register
of directors) the word ‘directors’ must be referring to de jure directors alone. On the other hand, in some
sections the word ‘director’ must include a person who is not a de jure director.’ It follows that the same
would apply to the corresponding provisions of the Corporations Law.
61 Markovic, above n 24 at 325. See also the judgment of Browne-Wilkinson VC in Re Lo-Line Electric
Motors [1988] BCLC 698 at 706
191
(1998) 10 BOND LR
(b) a person in accordance with whose directions or instructions the

directors of a body are accustomed to act;
(c) in the case of a body incorporated or formed outside of Australia;
(i) a member of the body’s board;
(ii) a person occupying or acting in the position of member of

the body’s board, by whatever name called and whether or
not validly appointed to occupy, or duly authorised to act
in, the position; and
(iii) a person in accordance with whose directions or

instructions the members of the body’s board are
accustomed to act.
60(2) A person shall not be regarded as a person in accordance with

whose directions or instructions:
(a) a body’s directors; or
(b) the members of the board of a body incorporated or formed

outside Australian;
are accustomed to act merely because the directors or members act on the
advice given by the person in the proper performance of the functions
attaching to the person’s professional capacity or to the person’s business
relationship with the directors or the members of the board or with the
body.
60(3) For the purposes of subsection (1), if there are no positions of

director (by whatever name called) in relation to a body, the reference in
paragraph (1)(a) to a position of director of the body is a reference to a
position the holder of which has control, or shares control, over the
general conduct of the affairs of the body.
The concept of the shadow director, as encapsulated by s 60(1)(b), has a long

history in English company law. 62 Furthermore, a similar provision was
contained in each of the state Companies Acts. Although entrenched in the
companies legislation, the concept of the shadow director has not been the
subject of detailed judicial consideration. It would appear that, until recently, the
issue of shadow directorships had not arisen in any reported decision.
Before attempting to explain the elements of s 60(1)(b), it is of assistance to

review the limited number of cases relating to shadow directorships. Given the
similar provisions of the United Kingdom and New Zealand63 companies
62 As Justice Millett pointed out in ‘Shadow Directorships, a Real or Imagined Threat to Banks’ (1991) 1
Insolvency Practitioner 14 at 15, ‘a similar definition of shadow director has been in every Companies Act
(UK) since the Companies Act, 1929.’ Cited in Markovic, above n 24 at 324.
63 The decisions of the Privy Council in Kuwait Asia Bank E.C. v National Mutual Life Nominees Ltd (1990)
5 NZCLC 66,590 and the High Court of New Zealand in Dairy Containers Ltd v NZI Bank Ltd (1995) 7
NZCLC 96,669 were based on the Companies Act 1955 (NZ) which contained a definition similar to the
Australian provision. However, following the introduction of the Companies Act 1993 (NZ) the definition
192
legislation, the decisions of those jurisdictions may be given some weight when
considering the Australian law.
Case Law - Shadow Directorships
Re a Company (No 005009 of 1987) ex parte Copp64
This is the first reported decision in which the English courts considered the
definition of ‘shadow director’ under s 251 of the Insolvency Act 1986 (UK).
The facts of the case, as outlined by Knox J, were substantially as follows.65 The
company had been trading profitably until the end of 1986 when it lost a major
customer. There was a steep fall in the company’s profitability and its liquidity
following the loss of this customer. The company’s overdraft limit was reached
and it was at this point in time that the company’s bank first became aware of
the decline in the company’s financial position. Previously the bank had had
confidence in the company’s financial standing and had not taken security in
respect of the overdraft. The overdraft limit in early 1987 stood at £300,000.
The bank, when appraised of the difficulties, commissioned a report form its
own financial services section on the affairs of the company and started, at
much the same time, to exert pressure for security for its overdraft. The
company subsequently granted a debenture in favour of the bank in respect of
the overdraft. The company entered into insolvent liquidation three months after
the creation of the debenture.
Various steps were taken by the company and its directors to implement the
recommendations that were contained in the bank’s report. The company’s
liquidators claimed that, in the prevailing circumstances, these steps sufficed to
make the bank a shadow director of the company. The liquidators further
claimed that the bank was aware, at an early stage, that the company was
insolvent and had no reasonable prospect of avoiding insolvent liquidation.
The question before Knox J was whether the claim was, on the facts, obviously
unsustainable. Knox J refused to strike out the claim that the bank was liable for
wrongful trading;66 his Honour held that the liquidator’s allegation that the bank
was a shadow director was not obviously unsustainable.67 Knox J’s judgment
contributed little to the understanding of shadow directorships. However, the
case generated significant concern in the banking community.68
of director was amended. The New Zealand statutory definition of shadow director will be considered
below.
64 [1989] BCLC 13
65 Ibid at 18.
66 Section 214 of the Insolvency Act 1986 (UK) prohibits wrongful trading. Section 214(7) expressly extends
liability to include shadow directors.
67 [1989] BCLC 13 at 21.
68 Farrar J H and Hannigan B, Farrar’s Company Law (4th ed) Butterworths, London (1998) 342: Following
Knox J’s judgment there were calls ‘for an amendment to the definition to make it clear that it is not
applicable to financial institutions in such cases. The argument in favour of such an exclusion being that
the effect of treating banks as shadow directors will be to impede their rescue efforts when a company is in
difficulty.’
193
(1998) 10 BOND LR
At the subsequent hearing of the case (reported as Re MC Bacon Ltd69 ), the

liquidator abandoned the claim against the bank. The presiding judge, Millett J,
stated that the claim was ‘rightfully abandoned’70 thereby suggesting that he was
not persuaded of the argument that the bank was a shadow director. 71
Kuwait Asia Bank E.C. v National Mutual Life Nominees Ltd72
This was an appeal to the Privy Council from the New Zealand Court of Appeal.
The main issue before the court ultimately involved procedural matters relating
to the service of a statement of claim outside of the jurisdiction. However, the
court also considered the definition of director under s 2 of the Companies Act
1955 (NZ). The facts of the case, as relevant to the issue of shadow directorship,
were as follows.73 The Kuwait Bank and Kumutoto Holdings Ltd held a
beneficial interest in about 80 per cent of the shares in A.I.C. Securities Ltd
(‘AICS’). By agreement between the bank and Kumutoto there were five
directors of AICS, three nominated by Kumutoto and two by the bank. The bank
nominated House and August, both of whom were employed by the bank.
In August 1986, AICS became insolvent and went into liquidation. The
unsecured depositors of AICS brought an action against the plaintiff for breach
of trust, alleging that the plaintiff failed to perform its duties under the trust deed
with diligence and competence. The depositors’ claim amounted to $14.5
million, and the plaintiff thought it prudent to settle the litigation by paying
$6.75 million.
The plaintiff subsequently brought proceedings seeking contribution from

several defendants. Originally its claim was against the auditors of AICS. Later
it brought proceedings against the directors and company secretary of AICS.
That action was subsequently consolidated with the original proceedings. In July
1988, the plaintiff sought leave to join the bank as a defendant in the
consolidated proceedings. That leave was granted and it was the subsequent
service of proceedings on the bank outside New Zealand that was the subject of
the appeal to the Privy Council.
The plaintiff pleaded four causes of action against the bank.74 The plaintiff
alleged, inter alia , ‘that House and August were persons occupying a position of
directors of AICS who were accustomed to act in accordance with the bank’s
directions, and that therefore the bank was a director of AICS within the
meaning of section 2 of the Companies Act, and was accordingly liable for any
loss occasioned to the plaintiff by the acts or omissions of House and August.’75
69 [1990] BCLC 324.

70 Ibid at 326.
71 See also the extra-judicial statement of Justice Millett in ‘Shadow Directorship - a Real or Imagined Threat
to Banks’ (1991) 1 Insolvency Practitioner 14.
72 [1991] 1 A C 187.
73 Ibid at 202-203.
74 The causes of action pleaded included (i) that the bank was vicariously liable for the actions of its
nominees; (ii) that House and August were agents of the bank; (iii) that the bank owed a duty of care; and
(iv) that the bank was a shadow director of A.I.C.S.
75 [1991] 1 AC 187 at 203.
194
The Privy Council held that the statement of claim did not disclose any cause of
action against the bank.76 Lord Lowry, delivering the opinion of the Judicial
Committee, stated that:
In the present case House and August were two out of five directors, the
other three being appointees of Kumutoto. And there is no allegation (and
it is also inherently unlikely) that the directors in these circumstances
were accustomed to act on the direction or instruction of the bank.
The only rights and remedies of the plaintiff were against AICS for
breach of contract and against the directors of AICS who owed a duty to
the plaintiff... House and August were directors but the bank was not a
director. The bank never accepted or assumed any duty of care towards
the plaintiff. In the absence of fraud or bad faith on the part of the bank,
no liability attached to the bank in favour of the plaintiff for any
instructions or advice given by the bank to House and August. Of course,
it was in the interests of the bank to give good advice and to see that
House and August conscientiously and competently performed their
duties both under the trust deed and as directors of AICS. 77
This statement has consistently been cited as authority that before the bank
could be treated as a director under section 2(1) of the Companies Act 1955
(NZ), 78 all the directors of the company had to be accustomed to act on the
bank’s directions or instructions.79 However, it is suggested that the words of
Lord Lowry do not provide unequivocal guidance in this regard.80
Re Hydrodam (Corby) Ltd81
The proceedings arose following the liquidation of Hydrodam (Corby) Ltd, a

wholly-owned indirect subsidiary of Eagle Trust plc. 82 The company liquidator
made an application in the County Court against 14 defendants alleging that
they had been guilty of wrongful trading and seeking orders against them under
s 214 of the Insolvency Act 1986 (UK). The defendants included Eagle Trust
itself, one of its subsidiaries and all its directors.83 The defendants to the
application before Millett J were two Eagle Trust directors. They sought to have
the liquidator’s claim against them struck out as disclosing no reasonable cause
of action. Hydrodam (Corby) Ltd only had two validly appointed directors (two
Channel Island companies); the two defendants had never been appointed
directors of the company. The liquidator asserted that the defendants were de
76 Ibid at 224.
77 [1991] 1 AC 187 at 223-224.
78 Section 2(1) of the Companies Act 1955 (NZ) provides that a director includes ‘a person in accordance
with whose directions or instructions the persons occupying the position of directors of a company are
accustomed to act.’
80 The requirements of the statutory extended definition are considered below.
81 [1994] 2 BCLC 180.
82 Ibid at 180-181.
83 Whilst s 741(3) of the Companies Act 1985 (UK) provides that a body corporate is not to be treated as a
shadow director of any of its subsidiaries by reason only that the directors of the subsidiary are accustomed
to act in accordance with its directions or instructions, no such proviso exists in the case of proceedings
under s 214 of the Insolvency Act 1986 (UK).
195
(1998) 10 BOND LR
facto or shadow directors of Hydrodam (Corby) Ltd by virtue of s 251 of the

Insolvency Act 1986 (UK).
The question before Millett J was whether the defendants were directors of
Hydrodam (Corby) Ltd as contemplated by s 214 of the Insolvency Act 1986
(UK). Millett J commenced by differentiating between the three kinds of
directors: (i) a de jure director is one who has been validly appointed to the
office; (ii) a de facto director is one who, although not validly appointed as a
director, purports to act, and is held out by the company as a director; and, (iii) a
shadow director, by contrast, does not purport to be a director, and is not held
out by the company as a director. ‘On the contrary, a shadow director claims not
to be a director, and shelters behind those who appear to be directors, whether
de facto or de jure.’ 84
The defendants conceded that the liability imposed by s 214 extended to defacto
directors as well as to de jure and shadow directors. Millett J considered this
concession to be correct; however, he observed that an allegation that a
defendant acted as a de facto or shadow director, without distinguishing
between the two, was ‘embarrassing’. Millett J held that the liquidator’s claim
of a de facto directorship must fail — the liquidator had pleaded nothing to
suggest that there were, in addition to the two Channel Island companies, any
other persons who claimed, or were held out by Hydrodam (Corby) Ltd, to be
directors.
Having dealt with the issue of de facto directorship, Millett J considered

whether the defendants might be shadow directors as defined by s 251 of the
Insolvency Act 1986 (UK). The liquidator’s case was based on the assertion that
Eagle Trust was a shadow director of Hydrodam (Corby) Ltd; and that the
defendants were directors of Eagle Trust. It was alleged that as a director of
Eagle Trust, each defendant was collectively responsible for Eagle Trust’s
conduct and was accordingly a shadow director of the Hydrodam (Corby) Ltd.
Millett J did not accept this argument and stated that:
The liquidator submitted that where a body corporate is a director of a

company, whether it be a de jure, de facto or shadow director, its own
directors must ipso facto be shadow directors of the company. In my
judgement that simply does not follow. Attendance of board meetings and
voting, with others, may in limited circumstances expose a director to
personal liability to the company of which he is a director or its creditors.
But it does not, without more, constitute him a director of any company of
which his company is a director.85
Millett J further stated that:
It is possible (although it is not so alleged) that the directors of Eagle

Trust as a collective body gave directions to the directors of the company
and that the directors of the company were accustomed to act in
84 Campbell N R, ‘Liability as a Shadow Director’ [1994] JBL 609 at 610.

85 [1994] 2 BCLC 180 at 184.
196
accordance with such directions. But if they did give such directions as
directors of Eagle Trust, acting as the board of Eagle Trust, they did so as
agents for Eagle Trust (or more accurately as the appropriate organ of
Eagle Trust) and the result is to constitute Eagle Trust, but not
themselves, shadow directors of the company.
In practice, in a case of the present kind, it is much more likely that it will
be found that the executive directors of the ultimate parent company (or
some of them) have form time to time individually and personally given
directions to the directors of the subsidiary and thereby rendered
themselves personally liable as shadow directors of the subsidiary. But if
all they have done is to act in their capacity as directors of the ultimate
holding company, in passing resolutions at board meetings, then in my
judgment the holding company is the shadow director of the subsidiary,
and they are not.86
Dairy Containers Limited v NZI Bank Ltd87
Dairy Containers Ltd (‘DCL’) was a wholly-owned subsidiary of the New

Zealand Dairy Board. DCL’s task was to manufacture cans for dairy products
for the Dairy Board. The company later became a substantial investment
company. The auditor of the Dairy Board and DCL was the Auditor-General.
All the members of DCL’s board of directors were senior Dairy Board
executives. The Dairy Board provided all market data to the company, excluded
it from any discussions relating to the market, funded the purchase of the
company’s raw material (tinplate), and prescribed that it would not make a
profit. The group’s perception of the company was that it was a totally internal
operation, that is, the Dairy Board’s ‘tinplate division’.
Over a period of five years to 1989, the three managers of DCL committed a
number of frauds on the company. They were prosecuted and convicted of
several offences. DCL brought civil proceedings against the A-G in an attempt
to recover funds lost through the misappropriation. The A-G claimed that DCL,
DCL’s managers and DCL’s directors were contributorily negligent. The A-G
successfully applied to join the Dairy Board to the proceedings on the basis that
it was liable as a joint tortfeasor. The A-G alleged that the Dairy Board was a
shadow director of DCL by virtue of s 2 of the Companies Act 1955 (NZ).
In delivering his judgment, Thomas J considered the decision of the Privy

Council in the Kuwait case. His Honour stated that:
Their Lordships’ apparent reasoning that the words ‘persons occupying

the position of directors’ applies to the directors as a whole and not to
individual directors, would not apply in this case. This is not a case where
only a few of the directors were employee-directors; all directors of DCL
were employed by NZDB. But their Lordships’ go on to say that the
Companies Act cannot impose a duty on the employer which it has not
86 Ibid.
87 (1995) 7 NZCLC 96,669; (1995) 13 ACLC 3211.
197
(1998) 10 BOND LR
assumed. With great respect, for the employer to fall within the definition
of ‘director’ I do not think that the question whether he or she has
assumed any duty of care is relevant. The question is one of fact: are the
directors accustomed to act on the directions or instructions of another
person? If they are, that person is subject to the duties imposed on
directors under the Act.88
In concluding that the Dairy Board was not a director of DCL his Honour stated:
As employees of NZDB I do not doubt that they were accustomed to act

in accordance with their employer’s directions or instructions, but as
directors of DCL they did not as a matter of fact receive directions or
instructions from the parent company. They were, as directors of DCL,
standing (or sitting) in the shoes of NZDB at the board table, but they had
not and did not receive directions or instructions from their employer.
Even when a firm instruction from NZDB was made, it was directed at
the company and not at the directors...’89
‘No fiction or artificiality is involved, however, in regarding the directors

of DCL as employees of NZDB acting in the course of their employment,
for that is precisely what they were doing. But that does not mean that in
carrying out their duties as directors of DCL they were acting on the
directions or instructions of NZDB as contemplated in the statutory
definition. As its employees, NZDB delegated the responsibility of
running the company in its interests to them. But it did not give them
identifiable directions or instructions as such.’90
Standard Chartered Bank of Australia Ltd v Antico91
This was the first Australian decision in which the courts considered the
extended definition of ‘director’. The case concerned the liability of company
directors for insolvent trading. The insolvent trading provisions considered by
the Court were substantially modified by amendments to the Corporations Law
in 1993 — the detailed analysis as to the operation of s 556 of the Companies
Code is now of little relevance. However, the extended definition of ‘director’
under s 5 of the Companies Code is substantially similar to that of the
Corporations Law.
Giant Resources Ltd was involved in mineral exploration and mining in

Australia, Canada and South Africa. During the period of November 1987 to
February 1988 Pioneer International Ltd acquired a 42 per cent interest in Giant
through a chain of subsidiary companies. As a result Pioneer became the most
significant shareholder in Giant, the next most significant holding being 10 per
cent. Subsequently the Chairman of Pioneer (Antico), the Managing Director of
Pioneer (Quirk) and the Deputy Managing Director and Finance Director of
Pioneer (Gardiner) were each appointed as non-executive directors of Giant.
88 (1995) 13 ACLC 3211 at 3238.

89 Ibid.
90 Ibid at 3238-3239.
91 (1995) 18 ACSR 1.
198
In October 1988 Standard Chartered Bank made available to Giant a bill of

acceptance and discount facility of $30 million. At the end of March 1989, $30
million was owing under the facility. In July 1989 Standard Chartered made
available to Giant an overdraft facility of $30 million which was used to pay out
the bill acceptance and discount facility. When Giant obtained the overdraft
facility it failed to disclose to Standard Chartered that it was already in default
under another finance agreement, and that Pioneer had taken security over some
of Giant’s assets to secure advances by Pioneer to Giant.
Pioneer advanced funds to Giant during the period October 1988 to November
1989 to cover Giant’s operating expenses. By March 1989 Pioneer had
advanced $24 million to Giant. On 30 June 1989 Pioneer obtained security over
shares held by Giant. On 28 November 1989 the Pioneer board resolved that no
further financial support would be given to Giant. At that time Pioneer had
advanced a total of $91.4 million to Giant.
On 1 December 1989 Giant advised its creditors that it could no longer meet its
debts as they fell due. A summons to wind up Giant was presented in April 1990
and Giant was subsequently wound up. Standard Chartered received nothing
from the winding up.
Standard Chartered commenced proceedings against Antico, Quirk, Gardiner

and Pioneer to recover the principal, interest and/or damages owing under the
overdraft agreement. Standard Chartered sought to recover on the basis of the
insolvent trading provisions (s 556 of the Companies Code), or for misleading
conduct in relation to representations made to Standard Chartered concerning
Giant’s financial position (s 52 of the Trade Practices Act).
In considering whether Pioneer was a director of Giant, Hodgson J stated that:
It is clear that the mere fact that Pioneer owned indirectly 42% of the
shares of Giant, and had three nominees on its board is insufficient to
make Pioneer either a director or a person who took part in the
management of Giant. Furthermore, in general, in the absence of evidence
to the contrary, the Court would take it that actions performed by Antico,
Quirk and Gardiner, as directors of Giant, were actions undertaken by
them on behalf of Giant, and not as officers or agents of Pioneer.92
Hodgson J further stated that:
I accept that a holding company is not a director of its subsidiaries,

merely because it has control of how the boards of its subsidiaries are
constituted; that it is not uncommon for lenders to impose conditions on
loans, including conditions as to the application of funds and disclosure of
the borrower’s affairs; and that it is even less uncommon for lenders to
require security for a loan, and then to require the sale of property over
which the security is given. Certainly these factors on their own would
not amount to assuming the position of a director, or taking part in the
92 Ibid at 66.
199
(1998) 10 BOND LR
management of a borrower company. However, the circumstances of this

case go far beyond these maters.93
Hodgson J ultimately concluded that, for the purposes of s 556, Pioneer was a
director of Giant. His Honour found that the decision as to how Giant was to be
funded by Pioneer, and as to the taking of security, was never the subject of
careful consideration by the Giant board, but was accepted by the Giant board as
something necessary or as a ‘fait accompli’. These matters were given careful
consideration by Antico, Quirk and Gardiner, who were directors of Giant; but
the consideration which they gave was in the context of reports to and decisions
by the Pioneer board, and so, was given by them as directors of Pioneer. 94
Hodgson J referred to the following circumstances as supporting his conclusion

that the directors of Giant, including Antico, Quirk and Gardiner, simply
accepted the decisions of Pioneer:
i) Pioneer had effective control of Giant. Although it held only 42% of the
shares in Giant, it was by far the most significant shareholder. The next
most significant share holdings were 10%, 6%, 6% and 3%. The fact of
control by Pioneer was acknowledged in Giant’s 1988 annual report.
ii) Pioneer imposed financial reporting requirements upon Giant. Pioneer

supplied the cash flow form to be used by Giant, and the Pioneer board
directed management to ensure that there would be proper financial
reporting by Giant, and also that Pioneer be given full access to all
financial records.
iii) The views of Pioneer delayed a takeover and an asset sale by Giant.
iv) At the time when Giant was considering purchasing Pioneer’s mineral
assets, negotiations with third parties for finance to be provided to Giant
for the purchase were conducted by Pioneer and not by Giant. The
transaction was abandoned when the Pioneer board resolved that it was
not in the best interests of either company to proceed.
v) Pioneer exercised management and financial control over Giant. In

exchange for agreeing to finance Giant’s operating expenses, Pioneer
required Giant to appoint a specific firm of accountants; that Giant only
enter new financial commitments after obtaining Pioneer’s approval; and,
that all payments by Giant must be approved by Pioneer’s general
manager of finance.
vi) The decision to fund Giant and to take security over Giant’s assets was
effectively made by Pioneer and simply accepted by Giant.95
93 Ibid at 70.
94 Ibid.
95 Ibid at 68-70.
200
Accordingly, Pioneer was liable along with the appointed directors for the
insolvent trading of Giant.
96
Australian Securities Commission v AS Nominees
The AS Group consisted of 10 companies which were bound together through a

complex web of interlocking shareholdings. AS Nominees Ltd (‘ASN’), Ample
Funds Ltd (‘Ample’) and AS Securities (‘Securities’) were all members of the
group founded by Mr Windsor. ASN was the trustee of superannuation trusts,
and Ample was the trustee of unit trusts. The two companies had common
boards of directors, comprised of Cahill, Napper and Sutherland.
Securities acted as manager of ASN and Ample. Securities was a private

company whose directors were Mr and Mrs Windsor. Its two issued shares were
held by Mr Windsor and another company in the AS Group whose directors
were also Mr and Mrs Windsor. Securities was the ultimate beneficiary of all
management and trustee fees paid by the trusts of ASN and Ample.
Following an Australian Securities Commission investigation into the affairs of

ASN, Ample and Securities, the Commission applied for a winding up order
under s 461(k) of the Corporations Law. The application was founded on an
alleged lack of propriety and competence in the management and conduct of the
affairs of the three companies.
To support its application the Commission argued that Mr Windsor was a

director of ASN and Ample by virtue of s 60 of the Corporations Law. This
argument was made to facilitate findings of conflict of interest in the dealings
between the companies. The Commission submitted that Mr Windsor was a
person in accordance with whose directions or instructions the directors of ASN
and Ample were accustomed to act within the meaning of s 60.
Mr Windsor argued that, by virtue of s 60(2), he was not a director of ASN or

Ample. It was contended that his advice to the directors of ASN and Ample was
given in the proper performance of the functions attaching to his business
relationship with the directors of each company.
In ordering that the companies be wound up, Finn J held that there were
substantial conflicts of interest in the dealings of the companies. In considering
whether Windsor was a director of ASN and Ample, his Honour examined the
relationship of Windsor and the boards:
The relationship of Windsor to the directors — and there is no reason for

distinguishing the two companies in this — is relatively distinctive. First,
it is not one in which the directors can be said at all time for all purposes
to have acted entirely as his puppets without exercising any discretion at
all in company matters: cf Selangor United Rubber Estates v Cradock (No
3) [1968] 1 WLR 1555 at 1577-1578. If such had been the case there
would have been no dispute as to the applicability of s 60.
96 (1995) 13 ACLC 1822
201
(1998) 10 BOND LR
Secondly, the case likewise is not one of the boards acting simply in the
fashion of errant nominee directors who unduly favour the interest they
represent: see Scottish Co-operative Wholesale Society Ltd v Meyer
[1959] AC 324; see also Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2
NZLR 150. Such without more, would not bring the ‘nominor’ within s
60: Standard Charter Bank of Aust Ltd v Antico (1995) 13 ACLC 1381 at
1436; (1995) 131 ALR 1 at 66; see Ford and Austin’s Principles of
Corporations Law, para 9.420 (7th Ed).
Thirdly, it cannot be said that, if there was ‘direction or instruction’, this

extended to all board decisions. As has been seen, some at least of the
transactions I have considered — for example the Bilambee and Woden
loans — have not on the evidence before me involved Windsor either at
all or else significantly. I do not regard this of itself as denying s 60 any
application in this matter.
The reference in the section to a person in accordance with whose

directions or instructions the directors are ‘accustomed to act’ does not in
my opinion require that there be directions or instructions embracing all
matters involving the board. Rather it only requires that, as and when the
directors are directed or instructed, they are accustomed to act as the
section requires. 97
Finn J refused to accept that Mr Windsor, as a manager of the companies,

merely offered advice to the boards. After considering the requirements of the
‘business relationship exemption’, his Honour concluded that Mr Windsor was a
shadow director of the companies:
In these circumstances it can and should be found that Windsor is a

director of both ASN and Ample as a result of s 60. This finding does not,
in my opinion, require it to be shown that formal directions or instructions
were given in those matters in which he involved himself. The formal
command is by no means always necessary to secure as a course
compliance with what is sought. There is no reason to construe the section
so as to deny this: cf Corporations Law, s.109H. The idea of the section,
as Wells J noted of its predecessor in Harris v S (1975-1976) CLC ¶40-
236 at 28,623-28,624; (1976) 2 ACLR 51 at 64, is that the third party
calls the tune and the directors dance in their capacity as directors. This
aptly describes Windsor’s role.98
Elements of Section 60(1)(b)
The limited case law conceals the significance of shadow directorships. As

considered above — and evidenced by the cases — there may be serious
consequences for those persons held to be shadow directors. However, the
courts have thus far failed to provide a definitive statement as to the ambit of the
extended definition. This may, at least in part, be attributed to the nature of
shadow directorships; frequently, the determining factors will be unique to the
circumstances of the case. Therefore, in order to fully appreciate the possible
applications of the extended definition, it is necessary to critically analyse the
97 Ibid at 1837-1838.
98 Ibid at 1838.
202
elements of s 60(1)(b). Markovic identifies four basic elements which are

required to establish the existence of a shadow directorship: person; directions
or instructions; directors of the body; accustomed to act.99
Person
The first element of s 60(1)(b) is that there must be a ‘person’.100 ‘Person’ is

defined pursuant to sections 9 and 85A of the Corporations Law to include ‘a
body politic or corporate as well as an individual’.101 It is evident from these
provisions that a reference to a person should also include a corporation.102
However, whether a corporation should be held to be a director by virtue of s 60
is a contentious issue.103 Be that as it may, the promotion of the Law’s
underlying purpose requires that corporate entities be held accountable for their
actions.
It has been suggested that s 221(3) of the Corporations Law limits the
application of s 60 to natural persons. Section 221(3) expressly provides that a
body corporate cannot be appointed as a director. It follows that only natural
persons may be de jure directors. However, shadow directors, by their very
nature, are not ‘appointed’ to the position of director. As such, s 221(3) does not
necessarily preclude a body corporate from being held to be a shadow director
by virtue of s 60(1)(b). This approach is supported by the relevant case law. In
Standard Chartered Bank of Australian v Antico, Hodgson J held that Pioneer
International Ltd was, by virtue of s 5 of the Companies Code, 104 a director of
Giant Resources Ltd.105 Further support may be gleaned from the decisions of
Re a Company ex parte Copp; Kuwait Asia Bank v National Mutual Life
Nominees; Re Hydrodam (Corby) Ltd; and Dairy Containers Ltd v NZI Bank
Ltd.106
Directions or Instructions
The second element of s 60(1)(b) is that the person must give ‘directions or
instructions’.107 Markovic notes that ‘there appears to be little difference in the
words ‘directions’ or ‘instructions’’;108 however, a distinction can be drawn with

100 Ibid.
101 Ibid. Section 9 provides that ‘person’ has a meaning as affected by s 85A. Section 85 A states: ‘In this Law,
expressions used to denote persons generally (such as ‘person’, ‘party’, ‘someone’, ‘no-one’, ‘one’,
‘another’ and ‘whoever’), include a body politic or corporate as well as an individual.’
102 See also s109 H of the Corporations Law.
103 Markovic, above n 24 at 327. Following the judgment of Knox J in Re a Company, there were calls for the
amendment of the definition of shadow director such that it would not apply to corporate entities such as
banks etc.
104 The predecessor of s 60 of the Corporations Law.
105 Markovic, above n 24 at 327. Markovic notes that his Honour did not make it clear whether he considered
Pioneer to be a shadow or de facto director or both. Whilst it is beyond the scope of this paper to consider
the issue of de facto directorship, suffice it to say, it is difficult to contemplate a situation in which a
company could be held to be a de facto director. Given s 221(3), it may be asserted that it is impossible for
a company to be held out as a validly appointed director of a corporation.
106 Whilst none of these cases held a corporation to be liable as a shadow director, the decisions of the courts
were each premised on the assumption that such a finding was possible.
108 Ibid at 328.
203
(1998) 10 BOND LR
the use of ‘advice’ in s 60(2).109 It is suggested that ‘directions or instructions’

involve an element of compulsion; that the recipient of the ‘directions or
instructions’ does not exercise any discretion in the decision making process.110
The case law fails to resolve whether actual directions or instructions must be
given — the law appears to differ between the jurisdictions. Whilst the issue has
not been directly addressed by the English courts, the judgment of Millett J in
Re Hydrodam (Corby) Ltd suggests that the alleged shadow director must
necessarily have given directions or instructions before shadow directorship can
be founded.111 This proposition is further supported by the judgment of Thomas
J in Dairy Containers Ltd v NZI Bank Ltd. Although all the directors of the
company were employees of the alleged shadow director, his Honour held that
no shadow directorship existed. His Honour stated:
As its employees, NZDB delegated the responsibility of running the

company in its interests to them [the directors]. But it did not give them
identifiable directions or instructions as such.112
The interpretation of the English and New Zealand courts may be contrasted
with that of the Australian courts. In Australian Securities Commission v AS
Nominees, Finn J clearly recognised that actual directions or instructions are not
always necessary to constitute a shadow directorship. His Honour stated:
This finding [that Windsor is a director of both AS Nominees and Ample

as a result of s 60 of the Corporations Law] does not, in my opinion
require it to be shown that formal directions or instructions were given in
those matters in which he [Windsor] involved himself. The formal
command is by no means always necessary to secure as a course
compliance with what is sought. There is no reason to construe the section
so as to deny this.113
It is suggested that where no actual directions or instructions are issued by a

shadow director, there must be some discernible attempt to control or influence
the board. In his extra-judicial statement, Millett J stated that a shadow director
‘must have a conscious intention to control the decisions of the board’.114 A
person should not be held liable as a shadow director merely because ‘a board,
for reasons known only to itself, acts on its own accord only to advance the
interests of an influential and substantial shareholder without formal instructions
from the shareholder or the shareholder’s representatives.’115
109 The meaning of ‘advice’ in the context of the ‘professional capacity or business relationship exemption’ is
considered below.
110 See the judgement of Finn J in Australian Securities Commission v AS Nominees (1995) 13 ACLC 1822 at
1838.
111 Koh, above n 25 at 344. Koh cites the following quote from Millett J’s judgment in support of this
proposition: ‘In practice, in a case of the present kind, it is much more likely that it will be found that the
executive directors of the ultimate parent company (or some of them) have from time to time individually
and personally given directions to the directors of the subsidiary and thereby rendered themselves
personally liable as shadow directors of the subsidiary.’: [1994] BCC 161 at 164.
112 (1995) 13 ACLC 3211 at 3239.
113 (1995) 13 ACLC 1822 at 1838.
114 Above n 71.
204
The issue of control was addressed by Hodgson J in Standard Chartered Bank

of Australia v Antico. Whilst there was limited evidence of formal directions or
instructions to the board of Giant, his Honour stated:
In my view, the conditions imposed following the decision to fund Giant

in March 1989 show a willingness and ability to exercise control and an
actuality of control, over the management and financial affairs of Giant.116
Section 60(1)(b) does not state to whom the directions or instructions must be
given. Although not expressly stated, it may be argued that the wording of the
section requires that the directions or instructions be issued to the board of
directors. This argument appears to have been accepted by Thomas J in Dairy
Containers Ltd v NZI Bank Ltd. In holding that no shadow directorship existed,
his Honour stated that ‘even when a firm instruction from NZDB was made, it
was directed at the company and not at the directors.’117 It is respectfully
submitted that this interpretation is contrary to the intention of the legislation.
To require that a shadow director issue directions or instructions to the board, in

circumstances where all other elements of s 60(1)(b) are satisfied, would be to
promote an artificiality. It is suggested that upon the proper interpretation of s
60(1)(b), it is sufficient that the directors are ‘accustomed to act’ in accordance
with the directions or instructions given, regardless of how and to whom they
are communicated. As stated by Markovic:
From a policy viewpoint if a person gives directions or instructions to a

nominee director (or managing director) and the board is accustomed to
act in accordance with the nominee director’s (or managing director’s)
directions or instructions, then the person is effectively having a vital say
in the conduct of the company’ affairs. As such, there is some merit in the
argument that the person should be subjected to the duties and
responsibilities which are imposed upon directors.118
Directors of the Body
The third element of s 60(1)(b) is that the ‘directors of the body’ are accustomed
to act in accordance with the person’s directions or instructions. Whilst
‘directors of the body’ obviously refers to the board, there is considerable
uncertainty as to its proper interpretation. As noted above, the judgment of Lord
Lowry in the Kuwait case is frequently cited as authority that all the directors of
the body must be accustomed to act in accordance with the person’s directions
or instructions.119 However, it is suggested that Lord Lowry’s judgment does
little more than confirm that exercising control over a minority of directors will
not constitute a shadow directorship.
The proposition that ‘directors of the body’ refers to all the directors of the
board appears to be supported by Millett J. Whilst failing to address the issue in
116 (1995) 18 ACSR 1 at 70.

117 (1995) 13 ACLC 3211 at 3238.
119 See above 16.
205
(1998) 10 BOND LR
Re Hydrodam (Corby) Ltd, in his subsequent extra-judicial statement, his

Honour opined that ‘directors’ refers to the whole board, not just some of its
members. ‘The definition, therefore, does not cover the case where one person is
there to do what somebody else (a relative, a business associate, or some other
company whose interests he represents) wants him to do. What the term covers
is a case where the whole board has effectively abandoned its responsibility for
making its own decisions and instead has become accustomed to follow the
directions of a third party.’ 120
Thus far, the Australian courts have not provided an interpretation of ‘directors
of the body’. However, it is submitted that to require all the directors of the
board to act in accordance with the person’s directions or instructions, would be
to ignore the purpose of the section. As observed by Markovic:
Little is to be gained from requiring ‘all’ the directors being accustomed to

act in accordance with the person’s directions or instructions. The company
will implement the person’s directions or instructions if the majority of the
board act upon them. There seems little logic in allowing the person to
escape falling within the ambit of s 60(1)(b) merely because a single or a
minority or the directors are not accustomed to act in accordance with the
person’s directions or instructions when the majority of the board are
accustomed to act. To require the whole board to abandon its
responsibilities and be accustomed to follow the person’s directions or
instructions it is submitted would allow a substantial loophole.121
The New Zealand legislature has firmly addressed this issue with the enactment
of the Companies Act 1993 (NZ). Section 126(1)(b)(i) of the Act provides that a
‘director’, in relation to a company, includes ‘a person in accordance with
whose directions or instructions [a de facto or de jure director] may be required
or is accustomed to act.’ This provision unequivocally extends the definition of
director to include persons that control or direct the actions of a single director.
It is suggested that this demonstrates a legislative intent to implicate all persons
who interfere in the affairs of the board, not only those who control a majority
of the directors. Whilst the Australian provision does not support such an
inference, it is suggested that s 60(1)(b) should be interpreted as including those
persons who direct or instruct the majority of the directors.122 In the alternative,
the Australian provision should be amended to unambiguously reflect the
legislature’s intent.
Accustomed to Act
The fourth element of s 60(1)(b) is that the directors of the body must be
‘accustomed to act’ in accordance with the person’s directions or instructions.
Whilst there is some uncertainty surrounding these words, the courts have
120 Fidler, above n 31 at 98, citing Millett, above n 71.

122 The judgment of Hodgson J in Standard Chartered Bank of Australia v Antico may lend some support to
this argument. Rather than examining Pioneer’s control over individual directors, in holding Pioneer liable
as a director of Giant, his Honour relied on the ‘willingness and ability’ of Pioneer to control the
‘management and financial affairs of Giant’.
206
provided considerable guidance.123 ‘Accustomed to act’ together with the words

‘directions or instructions’ indicates the necessity of an ongoing relationship
between the parties.124 However, there is a divergence of opinion as to the
required nature of this relationship. In Re Hydrodam (Corby) Ltd, Millett J
stated:
What is needed is first, a board of directors claiming and purporting to act

as such; and secondly, a pattern of behaviour in which the board did not
exercise any discretion or judgment of its own, but acted in accordance
with the directions of others.125
This test, taken literally, seems to set a higher standard than that prescribed by
the statutory definition. Millett J indicates that for a shadow directorship to
exist, the directors must be devoid of all discretion or judgment. With respect, it
is submitted that the requirements of s 60(1)(b) may be satisfied even if the
board retains some control. This proposition is supported by the judgement of
Finn J in Australian Securities Commission v AS Nominees Ltd. His Honour
stated that:
The reference in the section to a person in accordance with whose

directions or instructions the directors are ‘accustomed to act’ does not
in my opinion require that there be directions or instructions embracing
all matters involving the board. Rather it only requires that, as and when
the directors are directed or instructed, they are accustomed to act as the
section requires. 126
It is suggested that this is the proper interpretation of s 60(1)(b). Whilst a

shadow director and his board are often described as ‘puppeteer and puppets’,127
to suggest that the board must not exercise any discretion or judgment is an
unnecessary inclusion. It is further suggested that occasional disagreements
between the parties will not, of itself, preclude the existence of a shadow
directorship.128
In conclusion, an analysis of the elements of s 60(1)(b) confirms the unsettled

nature of the law of shadow directorships. Despite the history of the definition,
there has not been a definitive judicial pronouncement as to the ambit of the
extended definition. Unfortunately, the courts have adopted a range of
approaches resulting in confusion and uncertainty. Ultimately, it must be
accepted that shadow directorship is a question to be determined on the facts of
each case. Whilst the words of s 60(1)(b) cannot be ignored, the statement of
Finn J in Australian Securities Commission v AS Nominees may provide some
guidance:
123 Unfortunately such guidance has not always been consistent.

124 Markovic, above n 24 at 331. This proposition appears to be readily accepted among commentators and the
judiciary.
125 [1994] 2 BCLC 180 at 183.
126 (1995) 13 ACLC 1822 at 1838.
128 Australian Securities Commission v AS Nominees (1995) 13 ACLC 1822 at 1837.
207
(1998) 10 BOND LR
The question the section poses is: Where for some or all purposes, is the
locus of effective decision making? If it resides in a third party, and if that
person cannot secure the ‘advisor’ protection of s 60(2), then it is open to
find that person a director for the purposes of the Corporations Law.129
Professional Capacity or Business Relationship Exemption
Shadow directorship is of obvious concern for corporate advisers, financiers,

creditors, and other persons who may ‘influence’ the decisions of company
directors. However, in recognition of the propriety of these relationships, the
Corporations Law provides such persons with an exemption from shadow
directorship. Section 60(2) provides that a person shall not be regarded as a
shadow director merely because the directors ‘act on the advice given by the
person in the proper performance of the functions attaching to the person’s
professional capacity or to the person’s business relationship with the directors
or the members of the board or with the body.’
It is suggested that two elements of the exemption require detailed consideration

– the meaning of ‘advice’, and the scope of ‘in the proper performance’ of the
functions attaching to the person’s professional capacity or business
relationship.
Advice
The meaning given to ‘advice’ will greatly affect the ability of corporate
advisers to remain free from liability.130 In Australian Securities Commission v
AS Nominees Ltd, the respondents ‘acknowledged that Windsor had an influence
upon the actions taken by the boards.’131 However, it was contended that ‘this
was because he acted as manager of the companies; he introduced much of the
trust business; and he was involved in its negotiation. He was a person on whose
advice the directors acted.’132 Furthermore, that the ‘advice [was] given by
[him] in the proper performance of the functions attaching to… [his] business
relationship with the directors of each company.’ 133 In rejecting this submission
Finn J stated:
When one looks to the aggregate of the transactions analysed, it cannot

properly be said that the case is merely one of directors acting on the
advice of a manager in the proper performance of his duties: Corporations
Law, s 60(2). What so often was asked of, and conceded by, the boards
was either to act partially towards Windsor or to act in ways which, in
furthering his designs, required the dereliction of their own, and their trust
company’s, duties.134
129 Ibid at 1838.

130 The New Zealand ‘professional capacity exemption’ has removed the word ‘advice’. Section 126(4) of the
Companies Act 1993 (NZ) provides: ‘Paragraphs (b) to (d) of subsection (1) of this section do not include a
person to the extent that the person acts only in a professional capacity.’ Clearly, acting in a professional
capacity may include the giving of advice.
131 (1995) 13 ACLC 1822 at 1836.
132 Ibid.
133 Ibid.
134 Ibid at 1838.
208
It is submitted that the meaning of ‘advice’ must differ from that of ‘directions
or instructions’.135 As considered above, ‘directions or instructions’ involve an
element of compulsion. This may be contrasted with ‘advice’, which is defined
as ‘words given or offered as an opinion or recommendation about future action
or behaviour’. 136 ‘Advice’ may, unlike ‘directions or instructions’, be rejected.
If such a dichotomy is accepted, s 60(2) does not create an exemption to s

60(1)(b). Rather, s 60(2) affirms that a person cannot be liable as a shadow
director for the offering of ‘advice’. The court must therefore determine whether
an adviser has been giving advice or issuing directions or instructions.137 This
issue can only be determined on the facts of each case. However, it is submitted
that a professional adviser will not be a shadow director merely because a
company follows his ‘advice’ due to commercial or economic necessity. In such
circumstances, it must be recognised that the ‘locus of effective decision
making’ remains with the board.
In the Proper Performance…
In addition to refraining from issuing instructions or directions, s 60(2) implies

that an adviser should only give advice in the proper performance of the
functions attaching to that person’s professional capacity or business
relationship with the directors or the company.
Section 60(2) of the Corporations Law would appear to be of broader

application than the corresponding English provision. Section 741(2) of the
Companies Act 1985 (UK) only refers to ‘advice given... in a professional
capacity’. This distinction may be of particular significance to banks and other
financiers not usually considered to act in a professional capacity.138
The important issue to be determined is whether or not an adviser will be liable

for advice that is beyond the scope of his or her professional capacity or
business relationship. What will the court consider to be ‘in the proper
performance of the functions attaching to the person’s professional capacity or
the person’s business relationship’ with the directors or the company? For
example, can a lawyer (engaged to provide legal advice) advise a company on
financial or commercial matters? Obviously, an adviser may be liable in tort for
negligent advice, but will the provision of such advice be sufficient to render
that person liable as a shadow director of the company?
135 Markovic creates a technical construction to argue that ‘advice’ and ‘directions or instructions’ are not
distinct concepts. He argues that ‘directions or instructions’ encompass ‘advice’. It is suggested that if a
similar meaning was intended the same words would have been used. It is further suggested that if the
terms are synonyms, the extremely wide scope of ‘professional capacity’ and ‘business relationship’ would
create an exemption so broad as to apply to virtually all persons engaged in business. It follows that s
60(1)(b) would be of no effect.
136 Oxford English Reference Dictionary, Oxford University Press (1995). See Markovic, above n 24 at 328.
138 Originally the Australian provision only referred to persons who offered advice in a professional capacity.
Following the introduction of the Companies Code, the ‘business relationship’ exemption was included.
The accompanying Explanatory Memorandum is of little assistance in explaining the Legislature’s
motivation for extending the exemption’s application.
209
(1998) 10 BOND LR
It is submitted that, whilst it is prudent for corporate advisers to limit their

advice to the extent of their expertise, the offering of advice on matters beyond
their ‘professional capacity or business relationship’ will not be sufficient to
attract liability under the Corporations Law. As considered above, an essential
element of shadow directorship is the issuing of ‘directions or instructions’ –
provided that the board of directors retains its discretion it seems unlikely that a
shadow directorship is possible.
It is difficult to suggest that an adviser will be liable because ‘advice’ given is

not in the ‘proper performance of the functions attaching to the person’s
professional capacity or to the person’s business relationship’; unless there are
‘directions or instructions’ the fundamental elements of shadow directorship
have not been established. Likewise, it would be dangerous to assume that an
adviser will escape liability simply because he or she has only directed the board
on matters that are within his or her realm of expertise.
It is submitted that the subject matter of the ‘advice’ is not of significance in

determining the existence of a shadow directorship. This is supported by the
cases that have focused upon the shadow director’s influence over the board
rather than analysing the ‘functions attaching to the person’s professional
capacity or to the person’s business relationship’.139 The fundamental issue
remains whether the person has merely offered ‘advice’ or issued ‘directions or
instructions’ to the board.
It has been suggested that ‘directions or instructions’ may encompass

‘advice’. 140 If this were accepted, the scope of ‘in the proper performance of the
functions attaching to the person’s professional capacity or to the person’s
business relationship with the directors or the members of the board or with the
body’ would be of significant importance. However, the wide range of persons
encompassed by professional and business relationships would result in an
exemption so broad that s 60(2) would be of little or no effect. This is clearly
not the intention of the legislature.
As Markovic observes, ‘there remains a large degree of uncertainty surrounding

the scope or ambit of this exemption’. 141 Corporate advisers, financiers,
creditors, and other persons who may ‘influence’ the decisions of company
directors must clearly exercise caution in the offering of their advice. However,
the courts appear to have adopted a sensible approach in relation to such
professional and business relationships.
Whilst the judgement of Knox J in Re a Company ex parte Copp caused

significant concern in the banking community, recent decisions indicate a
reluctance to hold banks and other financiers liable as shadow directors. In Re
PFTZM Ltd142 the court held that, although bank officers participated in weekly
management meetings over a two year period, the bank was not a shadow
139 In particular, see Australian Securities Commission v AS Nominees (1995) 13 ACLC 1822 at 1838.
141 Ibid at 335.
142 [1995] BCC 280; 2 BCLC 354.
210
director of the company. Baker J concluded that the officers of the bank were
acting, not as directors of the company, but in the defence of the financier’s
commercial interests.
In his extra-judicial statement, Millett J opined that, whilst a bank has no

business managing its customers’ affairs, it is entitled to attach conditions to the
continuation of its financial support.143 Although commercial necessity may
require the company to accept the conditions, the ultimate decision is made by
the directors of the company. Accordingly, the bank cannot be said to be a
person in accordance with whose directions or instructions the directors are
accustomed to act. Other permissible actions included:
• sending in an investigation team;
• demanding a reduction in the overdraft;
• demanding security or further security;
• calling for information, valuations, accounts, cash-flow forecasts, etc;
• requesting the customer’s proposals for reducing the overdraft, including

submitting a business plan, schedule of asset sales, etc; and
• advising on the desirability of strengthening management, seeking fresh

capital, etc. 144
Millett J’s propositions appear to be supported by the judgement of Hodgson J

in Standard Chartered Bank of Australia v Antico. Whilst holding that Pioneer
was liable as a shadow director of Giant, his Honour stated:
I accept that... it is not uncommon for lenders to impose conditions on

loans, including conditions as to the application of funds and disclosure of
the borrower’s affairs; and that it is even less uncommon for lenders to
require security for a loan, and then to require the sale of property over
which the security is given. Certainly these factors on their own would
not amount to assuming the position of a director, or taking part in the
management of a borrower company.145
Conclusion
The Corporations Law seeks to protect the interests of shareholders, creditors

and the public. As such, directors and other persons involved in the management
of companies are subject to onerous duties and obligations. The application of
these duties and obligations is extended by s 60 of the Corporations Law to
apply not only to de jure directors, but also to de facto and shadow directors. A
143 Millett, above n 71 cited in Koh, above n 25 at 348.

144 Millett, above n 71 cited in Fidler, above n 31 at 99. Millett’s article was written in the context of possible
bank liability for wrongful trading of an insolvent customer.
145 (1995) 131 ALR 1 at 70.
211
(1998) 10 BOND LR
shadow director may be described as a person with whose directions or

instructions the directors of the body are accustomed to act.
There is a clear intention that the law should extend to all persons who ‘dabble
in the affairs’ of a company. However, in adopting the words of s 60(1)(b), the
legislature has employed unnecessary ambiguity. The question of who is a
shadow director is not an easy one to answer. Unfortunately the case law
provides limited guidance. Many issues remain unresolved and there is often a
conflict of opinion as to the correct interpretation. Be that as it may, it is
submitted that under s 60 of the Corporations Law:
• Shadow directors may be either natural persons or corporations.
• It is unnecessary to establish that actual directions or instructions where

issued to the board of directors. However, there must be some intention by
the alleged shadow director to exert control over the members of the board.
• It is unclear whether all or a majority of the directors must be accustomed

to act in accordance with the directions or instructions issued. It is
suggested that to require all the directors to so act would be to ignore the
purpose of the section. Such an interpretation would also create a
substantial loophole in the legislation.
• The fact that the directors exercise some discretion in the management of
the company does not preclude the existence of a shadow directorship.
‘Advice’ differs from ‘directions or instruction’. The fact that the directors of a
company may follow the advice of an third party does not necessarily establish
the existence of a shadow directorship.
212

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Bond Law Review

Volume 10 | Issue 2 Article 4

The Law of Shadow Directorships

Follow this and additional works at: http://epublications.bond.edu.au/blr

Cover Page Footnote

This article is available in Bond Law Review: http://epublications.bond.edu.au/blr/vol10/iss2/4

By MICHAEL D HOBSON, LLB, James Cook University, Articled Clerk, Hunt

The existence of a separate and distinct corporate personality is one of the

In order to protect the interests of shareholders and creditors - and to generally

Despite the ‘self-explanatory’31 nature of the statutory definition, there is

Director’s Duties and Liability 36

General Law Fiduciary Obligations

The relationship between director and company is that of a fiduciary. As such, a

• the duty to act bona fide in the interests of the company;

• the duty to exercise powers for their proper purpose;

• the duty to retain discretionary powers; and

• the duty to avoid conflicts of interest.38

directors.41 The fiduciary nature of directors’ duties requires them to maintain

Section 232 of the Corporations Law

The general law fiduciary obligations are supplemented by similar statutory

• section 232(2) requires officers of a corporation, in the exercise of their

• section 232(4) requires officers of a corporation, in the exercise of their

• section 232(5) prohibits officers or employees or former officers or

• section 232(6) prohibits officers or employees of a corporation from

Section 232(6 B) declares these subsections to be civil penalty provisions. As

41 Lipton and Herzberg, above n 6 at 266.

Section 588G of the Corporations Law

• a reasonable person in a like position in a company in the company’s

• the director had reasonable grounds to believe, and did believe:

(ii) that that person was fulfilling that responsibility; and

expected, on the basis of the information provided by that other person,

47 Section 1317 FA(1).

Other Statutory Provisions

Statutory Definition of ‘Director’

60(1) Subject to subsection (2), a reference to a director, in relation

(a) a person occupying or acting in the position of director of the

54 Section 588 H(5).

(b) a person in accordance with whose directions or instructions the

(c) in the case of a body incorporated or formed outside of Australia;

(i) a member of the body’s board;

(ii) a person occupying or acting in the position of member of

(iii) a person in accordance with whose directions or

60(2) A person shall not be regarded as a person in accordance with

(a) a body’s directors; or

(b) the members of the board of a body incorporated or formed

60(3) For the purposes of subsection (1), if there are no positions of

The concept of the shadow director, as encapsulated by s 60(1)(b), has a long

Before attempting to explain the elements of s 60(1)(b), it is of assistance to

Case Law - Shadow Directorships

Re a Company (No 005009 of 1987) ex parte Copp64

At the subsequent hearing of the case (reported as Re MC Bacon Ltd69 ), the

Kuwait Asia Bank E.C. v National Mutual Life Nominees Ltd72

The plaintiff subsequently brought proceedings seeking contribution from

69 [1990] BCLC 324.

Re Hydrodam (Corby) Ltd81

The proceedings arose following the liquidation of Hydrodam (Corby) Ltd, a

facto or shadow directors of Hydrodam (Corby) Ltd by virtue of s 251 of the

Having dealt with the issue of de facto directorship, Millett J considered