A recent matter heard in the High Court has left the issue of shadow directorship ‘out of the shadows’ in ASIC v King [2020] HCA 4. The concept of shadow directorship derives from the definition of ‘officer’ in the Corporations Act: “an officer of a corporation means a director or secretary who significantly affects the corporation’s financial standing”. Accordingly, it is possible to be treated as an officer of a company and be subject to the duties and obligations of one, without a formal appointment to the role.
In this particular matter, Mr King was CEO and executive director of MFS LTD: a fund management and financial services company. It was found that MFSIM; an offshoot company of MFS LTD used $150 million of their client’s funds to pay outstanding debt. MFSIM had no liability in respect of this debt but the transaction resulted in multiple contraventions of the Corporations Act. The issue was that Mr King was not formally a director of MFSIM and so he endeavoured to avoid the director’s personal liability. ASIC eventually appealed the decision of Mr King not being considered liable all the way to the High Court of Australia.
The High Court reversed the decision of the Court of Appeal; noting that there was no requirement to be formally appointed as a director or secretary; the only requirement being that the other criteria of the Corporations Act be triggered.
The implications of this decision relate to illegal phoenixing behaviour; a topic we have discussed in our previous articles. A common example of phoenixing involves individuals who are not formally appointed to the role of director.
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