Charity Shadow Directors and De Facto Directors

Directors or Management Committee Members are those who have responsibility for governance of a charity.

At the Christian Management Australia Annual Conference, Andrew Lind presented a paper on just who might be shadow directors and de-facto directors in charities.

That issue has particular relevance in light of recent charity law reforms, with the ACNC’s requirement for registered charities to declare responsible entities (or responsible persons); the duties they owe and the ACNC’s powers to remove them.

 

Who are shadow directors and de-facto directors?

Shadow directors and de-facto directors are people who are acting in the governance of the charity but who have not been formally appointed to a director/member of the board/management committee.

From a commercial perspective we can grasp a better understanding of de-facto and shadow directors by considering the following, pursuant to section 9 of the Corporations Act 2001 (Qld), the definition of a director also includes a person who is not validly elected as a director if the person:

1. 1. a) Acts in the position of a director (de-facto director); or
   2. b) The directors of the company act on instructions of the person’s instructions or wishes (shadow director).

This person will be subject to the same obligations and liabilities as a director would be exposed to.

The Australian Charities and Not for Profits Act 2001 (Cth) (“ACNC Act”) defines a director of a company (under the ACNC Act, a company is defined in the Act as a body corporate or any unincorporated association) as:

1. 1. a)  If a company is incorporated – a director of the company, or an individual who performs the duties of a director of the company; or
   2. b)  If the company is not incorporated – a member of management of the company, or an individual who performs the duties of such a member;

regardless of the name that is given to his or her position, or whether or not he or she is validly appointed.

In charity compliance it is important to consider the duties that a director or management member normally performs in their capacity in the position..

It is important to be mindful of this as the ACNC provides little or no guidance for not-for-profit organisations on the issue.

Please note that for the remainder of this article, any reference to director also refers to management member.

 

What are some examples of tasks that would qualify a person to be a de-facto or shadow director?

The law is clear that there is no single test for determining whether the duties a person carries classifies them as a de-facto or shadow director.

Recent case law from the commercial cases provides some tests for identifying when a person is acting as a director.

We refer to two cases notes below:

 

Case note 1: Grimaldi v Chameleon Mining NL

In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, a case which went before the Federal Court of Australia, a consultant was held to be an officer of a company for reasons such as

• • he played a significant role in directing the company’s corporate strategy;
  • he made decisions which affected the company’s finances;
  • he and led several negotiations;
  • in several instances, he was involved in the day to day running of the company; and
  • he was also reasonably perceived by outsiders to be a director or senior officer of the company.

In Grimaldi, the alleged director was not regarded by the board as a director, nor was he held out to be a director. He was only allowed to attend director board meetings on invitation by the board.

Further, he had no power to formally bind the company. In spite of this, the court held that he was clearly authorised on several occasions to perform functions that would lead a reasonable third party to believe the alleged director was acting as a director.

In their judgement, Justices Finn, Stone and Perram said the following:

“We accept that the Board Members seem only to have allowed Mr Grimaldi’s attendance at Board meetings by invitation and did not appear to regard him as director as such. However, while they did not hold him out as a director eo nomine [by that name], they clearly authorised him on occasion to perform functions such as would lead a reasonable third party dealing with him to believe he was acting as a director…”[1]

This makes it clear that a person can still be held to be a director if they satisfy other criteria. This is even if a person only attends board meetings by invitation of the board, does not have a right to vote at board meetings and is not perceived by members of that board meeting to be a director.

One of the tests (and certainly not the only test) applied in this judgement to determine whether a person is a shadow director or de-facto director, is whether a reasonable third party dealing with the person would believe the person to be a director of the company. Ask people, who they perceive to be directors of your Charity?

“Even though not authorised to be a director, Mr Grimaldi was either given, or had arrogated to himself with the acquiescence of at least the two executive directors… functions in the affairs of [the Company] which would properly be expected to be performed by a director of that corporation given its circumstances. Given the extent and the significance of those functions, he so acted in the position of a director to warrant the imposition on him of the liabilities, statutory and fiduciary, of a director.”[2]

Here, the Court held that Mr Grimaldi was either given the ability to carry out tasks that would normally be expected of a director, or had claimed that ability with the passive inaction of other directors. Mr Grimaldi was therefore acting as a director.

 

Case note 2: Shafron v Australian Securities and Investments Commission

In Shafron v Australian Securities and Investments Commission [2012] HCA 18, a case which went before the High Court of Australia, a consultant was held to be an officer of a company, for reasons such as that he had advised the board on substantive matters, was one of three most senior executives, and had assisted in deriving proposals for separating its subsidiaries exposed to asbestos claims from rest of the group.

In the judgment, Chief Justice French, and Justices Gummow, Hayne, Crennan, Kiefel and Bell said:

“…the Court of Appeal did not decide that making a real contribution to a decision was sufficient to constitute participation in making that decision. Rather, the Court’s focus was upon what was necessary to constitute participation… Participation in any decision of a corporation does not make a person an “officer” – the decisions in which the person participates must have the significance for the business of the corporation…”[3]

Notably, the court held in Shafron that it is not the participation in any decision of a corporation that makes an alleged director an officer, but it is the decisions in which the person participates in. These decisions must have significance for the business of the company.

 

Conclusions and Practical Steps

In considering how broad “responsibility entity” is, registered charities need to be aware that a person need not be recognized as a director by their own formally appointed board.

As long as that person is performing significant functions that a reasonable outside person would perceive a director to perform, that person could be held to be liable as a director.

Charities will also need to consider whether their insurance which covers directors and officers also extends to these people.

Another important consideration would be for charities to see if there is any such person perceived by third parties to be a director and if such a person carries out tasks that are significant to the governance of the charity.

Clear role definition is important in the charity to differentiate such persons from directors. Such actions are imperative in ensuring charity compliance, and mitigating the risk that your charity is removed from the ACNC register due to a breach of the ACNC Governance Standards.

If you feel that you or your members of your company or charity may be at risk of falling under the definition of a director, specific legal advice will need to be taken in determining whether the ACNC Act has been breached. You may also need advice about implementing good governance principles and policies that allow for your members to be protected, or prevented as the case may be, from actively making director or management committee member decisions.

 

For more information regarding Shadow Directors and De-Facto Directors

If you require guidance for your not-for-profit organisation, please contact our client engagement team or call us on (07) 3252 0011 to book an appointment with one of our specialist NFP & Charity Lawyers today.