What is a De Facto Director and What are the Risks?

A company director is an individual responsible for managing and overseeing the company’s business activities. All Australian companies must have at least one director. However, some directors are classified as ‘de facto directors‘. This article explains what a de facto director is, how you could overstep your role as one and how to manage directors’ risks.

What is a De Facto Director?

A de facto director is a person who the company has not officially appointed as a director. However, they still act as if they were in the position of a director. Therefore, a court may still recognise you as a de facto director if your actions indicate this to be the case. For example, if you are frequently making management decisions, you could be a de facto director.

Are You a De Facto Director?

There are a number of factors that indicate whether you are a de facto director. Ultimately, it will come down to the circumstances of your involvement within the company and the activities that you are performing.

De facto director situations often arise with consultants. There is a distinction between a consultant and a director that a court will examine, along with all other relevant circumstances. One key distinction is that a company engages a consultant to perform a specific function within the company. In contrast, a company engages a director to act more generally.

How to Determine Whether You Are a De Facto Director

There are certain key factors that a court will consider in determining whether you are a de facto director. These may include:

• the size of the company (this is of particular importance) and the allocation of responsibilities;
• internal practices and structure of the company;
• whether people inside and outside of the company consider you to be a director;
• management duties that a company would expect a director to perform in that company;
• the duties you actually perform;
• whether you consider yourself, or the company considers you, a director.

Additionally, the court may consider you a de facto director if you:

• are playing a significant role in the top-level management functions and direct the company, make decisions, and assist in the daily operation of the company;
• have the right to approve or reject company requests with respect to remuneration and expenses;
• have control over the bank accounts of the company and have the ability to access those accounts and control the company’s finances;
• were a valid director and have since resigned, but continue performing your previous duties.

However, there are some exceptions to the rule. You will not be a de facto director if you are a person:

• providing advice in a professional advisory capacity (for example, a lawyer or accountant); or
• undertaking relatively minor tasks, like calling meetings or recording minutes of those meetings, with no other involvement.

What are the Risks of Being a De Facto Director?

All company directors have directors duties to uphold under the Corporations Act and common law. They include:

• acting in good faith, in the bests interests of the company and for a proper purpose;
• exercising care and diligence;
• avoiding conflicts between the interests of the company and your personal interests;
• preventing the company from trading whilst insolvent;
• if the company is wound up, to report the affairs of the company to the liquidator and to help the liquidator.

Therefore, as a company director, you have the responsibility to ensure that the company complies with its statutory obligations.

Breaching Your Directors Duties

If a court determines that you are a de facto director who has breached your directors duties, the court may hold you personally liable. You could also be subject to criminal and other penalties. The potential penalties include a court:

• finding you guilty of a criminal offence. In this case, you may be subject to a penalty of up to $200,000 or imprisonment for up to five years (or both);
• ruling that you have contravened a civil penalty provision. The penalties may reach up to $200,000;
• deciding you are personally liable to compensate the company or others for any loss or damage that they suffer; and
• disqualifying you from managing any corporations.

Key Takeaways

It is important not to take on the role of a company director unless you are well-prepared to do so. Directors duties will apply, whether you are appointed as a director or a de facto director. Therefore, if you are not prepared to take on the responsibility of a company director, you must be careful to ensure that you are not actively participating in top-level management of the company.

You must also ensure you are not undertaking tasks that a director would typically undertake. Otherwise, the court will likely consider you a de facto director. In this case, you may have to fulfil duties as a director of the company.

If you have any queries about you or someone else who may be acting as a de facto director, get in touch with LegalVision’s business lawyers today on 1300 544 755 or fill out the form on this page.