Some examples that cast doubt on the assumption this far that because QZ 8501 is registered to AirAsia Indonesia, in which Air Asia Bhd has only a 49% (as opposed to 51% ) interest ,AirAsia Bhd is immune to any liability that may arise as a consequence of the crash and resulting loss of life.The analyst community has ignored the probability of AA being found to be a shadow director of AirAsia Indonesia:
Holding company directors – potential liability as director of subsidiaries?
- See more at: http://www.fieldfisher.com/publications/2014/10/holding-company-directors-%E2%80%93-potential-liability-as-director-of-subsidiaries#sthash.J5fzaAU1.dpuf
Good Company October 2014 edition
The Court of Appeal has recently considered whether a director of a holding company was liable to one of its subsidiaries for breach of fiduciary duties, despite not having been appointed as a director of the subsidiary company.
The fiduciary and other duties which a director owes to the company which appoints him apply equally to someone who has not been formally appointed but who nonetheless acts as a director (a "de facto director"). Company and insolvency law also impose liability on a “shadow director”, where the actual directors of a company are accustomed to act in accordance with the shadow director's directions or instructions. In the case of Smithton Ltd v Naggar, the Court of Appeal had to determine whether a director of a holding company was a de facto or shadow director of one of its subsidiaries.
The subsidiary was a joint venture, with the holding company owning just over 50 per cent of the shares and members of the subsidiary's management team holding the balance. There was a shareholders' agreement in place, which provided that the board of directors was to be made up of various members of the management team and three other directors nominated by the holding company. As is usual in joint ventures, the agreement also provided for certain information to be provided by the subsidiary to its shareholders, and for certain matters to be reserved for decision by the shareholders rather than by the board.
In the event, nothing much was discussed or decided at formal board meetings of the subsidiary. Important decisions were in fact taken informally by one of the management team and Mr Naggar, who was a director of the holding company but was not one of the holding company's nominees on the subsidiary's board.
The subsidiary entered into a number of contracts with people connected with Mr Naggar. It made a loss on those contracts, and brought a claim against Mr Naggar, alleging that he owed duties to it as a de facto or shadow director which he had breached in relation to the contracts. When the High Court dismissed its claim, it appealed.
The Court of Appeal referred to the leading case of HMRC v Holland, which concerned a number of trading companies which had another company as their sole director (the corporate director). In that case the Supreme Court decided that Mr Holland, who was a director of the corporate director, was nonetheless not a de facto director of the trading companies. He had acted only in his capacity as a director of the corporate director, even though he was involved in all the directorial decisions made on behalf of the trading companies.
The Supreme Court held that there was no one definitive test for a de facto director. The question is whether he was part of the corporate governance system of the company and whether he assumed the status and function of a director so as to make himself responsible as if he were a director.
Although there is no definitive test, in Smithton Ltd v Naggar the Court of Appeal noted a number of points arising out of the Holland case and earlier cases which are of general practical importance in determining who is a de facto director:
- A person may be de facto director even if there was no purported appointment which was for some reason invalid. The question is whether he has assumed responsibility to act as a director.
- To answer that question, the court may have to determine in what capacity the person was acting (as in the Holland case).
- The court will in general also have to determine the corporate governance structure of the company so as to decide in relation to the company's business whether the person's acts were directorial in nature.
- The court is required to look at what the director actually did and not any job title actually given to him.
- A person will not avoid liability if he shows that he in good faith thought he was not acting as a director. The question whether or not he acted as a director is to be determined objectively and irrespective of his motivation or belief.
- The court must look at the cumulative effect of the activities which are relied on as showing that a person is a de facto director.
- It is also important to look at the acts in their context. A single act might lead to liability in an exceptional case.
- Relevant factors include whether the company considered him to be a director and held him out as such, and whether third parties considered that he was a director.
- The fact that a person is consulted about directorial decisions or his approval is sought does not in general make him a de facto director because he is not making the decision.
- Acts outside the period when he is said to have been a de facto director may throw light on whether he was a de facto director in the relevant period.
The court then reviewed the High Court's findings on the allegations relied on by the subsidiary company against Mr Naggar. It agreed with the High Court that the subsidiary had not demonstrated that Mr Naggar was a de facto director.
The subsidiary claimed that the actual directors nominated by the holding company had simply acted as nominees of Mr Naggar since they took decisions to him for approval. It was, however, natural for those directors to consult him since they wanted group support for those decisions.
Mr Naggar was shown certain confidential information which would normally only be available to directors, but his interest in this information was justified by his position as a director of the holding company.
Mr Naggar had given instructions to the subsidiary's employees, but these were found to be readily explicable either on the basis of Mr Naggar's role as a client (on behalf of the people connected with him who were counterparties to the contracts with the subsidiary), or as a director of the holding company or because they were one-off incidents arising from a particular situation.
His role as client or holding company director also explained his involvement in making decisions about important aspects of the subsidiary company's business.
In conclusion, although Mr Naggar did not dispute that he had performed "directorial acts" in relation to the subsidiary, he had at all times acted in a different capacity from that of a director of the subsidiary. He was therefore not a de facto director. Further, on the basis that he was protecting his or others' interests in some other capacity, he was also not a shadow director.
The case is helpful both in relation to joint venture companies and to groups. Directors of investing or holding companies will not generally be held to be de facto or shadow directors of joint venture or subsidiary companies unless their actions go beyond what can reasonably be regarded as appropriate to their position as director of the investing or holding company. For joint venture companies, the management provisions of the shareholders' or joint venture agreement can also be helpful in ensuring that liability as a de facto director is avoided.
is a Partner in Fieldfisher's Corporate Group
Australia: Are you a shadow director? Determining your liability as an advisor to a company
Corporate Advisory and Governance Alert - 28 Nov 2011
By Brian Moller, Partner and Michael Hansel, Partner
A recent decision of the NSW Court of Appeal has clarified when a person will be considered a shadow director of a company.
A shadow director attracts all of the legal obligations, duties and liabilities that attach to any other director of a company. This court decision provides some clarity for those who are unsure how involved in a company's decision making they have to be in order to be considered a shadow director.
Here, partners Brian Moller and Michael Hansel and solicitor Katherine Hammond outline the case in Buzzle Operations v Apple Computer Australia and what company advisors and creditors can learn from it.
- If the directors of a company act on a creditor or advisor's instructions because they consider those instructions a sufficient reason to act, the advisor may be considered a shadow director. Because of this, those who have not been formally appointed as a director may still be liable for insolvent trading and other directors' liabilities if the company regularly relies on their advice without first assessing whether the advice should be acted on.
- However, if the directors of a company make their own decisions in which the instructions given by an advisor or creditor are just one factor taken into account, the advisor will not be considered a shadow director. This provides a level of comfort to those who become actively involved in a company, or who impose conditions which the directors must or feel compelled to follow if they wish to pursue a particular course of action.
What is a shadow director?
According to the Corporations Act 2001 (Cth), the broad definition of 'director' extends beyond those who have been validly appointed as a director to include those not validly appointed, if the appointed "directors are accustomed to acting in accordance with the person's instructions or wishes", rather than just acting on advice given by the person in their usual business relationship with the directors.
The confusion arises in determining "when the directors of the company are accustomed to acting in accordance with a person's instructions or wishes". For example, a creditor who takes a keen interest in and exerts a marked degree of commercial pressure on a debtor company, which the company complies with, may be concerned that they will be considered a shadow director if the company feels that it has no other option but to act in accordance with the creditor's instructions.
Buzzle Operations v Apple Computer Australia
Buzzle Operations Pty Ltd (in liq) and Another v Apple Computer Australia Pty Ltd and Others (2011) came about after Buzzle Operations acquired six Apple product reseller businesses.
The assets of the business - the resellers' Apple products - were transferred to Buzzle. In exchange, Buzzle issued the resellers with shares and was obliged to make cash payments once it had listed on the ASX, or at a time when the directors formed the view, on reasonable grounds, that Buzzle had adequate funds to make a cash payment.
Apple had a charge over the assets, which was granted when Apple had initially transferred the assets to the resellers. As a result, Apple's consent was required for the acquisition to go ahead.
Buzzle made cash payments in November and December 2000, but went into receivership in March 2001. When an order was made for Buzzle to be wound up in February 2002, the liquidator initiated proceedings against Apple on the basis that the cash payments constituted uncommercial transactions and unfair preferences to a related party, and that Apple was liable for insolvent trading.
The liquidator maintained that Apple was liable because it was a shadow director of Buzzle. It argued that the directors of Buzzle had become accustomed to acting in accordance with Apple's instructions or wishes, rather than merely acting on the advice Apple gave them in properly performing functions attached to its business relationship with them.
The basis for this argument was that:
- Apple participated significantly in the discussions leading up to and after the acquisition, and threatened to withhold its consent to the acquisition unless Buzzle complied with certain conditions, took certain action, and agreed not to incur debts outside the ordinary course of business; and
- Buzzle's directors felt that they had "absolutely no choice but to agree to Apple's terms" and did in fact comply with many, if not all, of Apple's demands.
The deciding factors
The Court found that Apple was not a shadow director of Buzzle, and its decision clarifies the following points:
- In order to establish that a person or entity is a shadow director, it must be shown that there is a causal connection between the alleged shadow director giving an instruction or expressing a wish, and the other directors acting on it. However, it is not necessary to show that the other directors exercised no discretion of their own. The ultimate question to be determined is who is making the board's decisions, and where the locus of control sits.
- The question for consideration is whether the directors are acting in accordance with the alleged shadow director's wishes because the directors have decided that to do so is in the interests of the company or because they wish to pursue a certain course of action, rather than because they have simply deferred to the alleged shadow director's decision making.
- In Buzzle's case, although the directors felt they had no choice but to follow Apple's instructions, this was not because they were unquestioningly deferential and accustomed to acting in accordance with Apple's instructions, but rather because they knew they needed to follow Apple's instructions in that instance if they wanted to proceed with the acquisition.
- Being "accustomed to act" requires a pattern of behaviour and habitual compliance over a period of time.
- Not every person whose advice or instructions are followed by a board is a shadow director. If someone has a genuine interest in giving advice to the board (for example, a bank or mortgagee), the fact that the board will tend to take that advice will not make that person a shadow director. The important factor is the potential for the alleged shadow director to control decisions, viewed in light of the circumstances as a whole. For instance, a lender who is entitled to demand repayment of a loan and appoint a receiver can say, for example, that it will stay its hand only if the borrowing company sells certain assets.
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