Often when a company is in financial distress,
creditors and other third parties get a chance to exercise their legal rights
by becoming the shadow directors of the company. If a company acts according to
the wishes of a lender or a third party then such a person may be considered as
a shadow director of the company.
A recent decision in Buzzle Operations Pty Ltd (In Liquidation) v
Apple Computer Australia Pty Ltd2010] NSWSC 233 provides useful guidance to lenders
as well as third parties on liabilities arising whilst acting as a shadow
director of a financially distressed company.
This case assures creditors
that by being closely associated with the distressed company, does not
necessarily mean that they are acting in the capacity of a shadow director of the
company.
WHAT IS A SHADOW
DIRECTOR?
When a
company or its director is used to acting according to the terms or wishes of a
third party then such a third party may be called a ‘shadow director’.
This case involved
six Apple resellers who merged their business to form a new entity named Buzzle.
Eventually the merged entity failed and Buzzle was
placed into liquidation.
Buzzle
and its directors brought an action
against Apple alleging that Apple had played a major role in directing the
merger and in decisions taken at Buzzle’s board - thus acting as “shadow
director” of Buzzle and subsequently becoming involved in the insolvent
trading.
The liquidator
also argued that Apple had its own reason for permitting the merger to advance,
including the prospects of recovering the debts that were due to it by the
resellers before the merger proceeded.
The liquidator also
claimed the charge to be void as Apple’s involvement had made them an “officer”
of Buzzle or “a person associated.
FINDINGS
The Court found that though
majority of business decisions were taken in the presence of Apple and although
Apple had supported Buzzle financially this did not clearly deem that Apple was
the “officer” of Buzzle.
There was no evidence
to prove that Apple was working as an “associate” with the director’s of
Buzzle. Also, Apple was not involved in the company’s corporate decision
making. It merely put conditions on its commercial dealings with Buzzle. Apple
acted as an observer and attended meetings conducted by Buzzle.
In dismissing the
claim it was found by the Court that Apple was not the shadow director of the
Buzzle.
SUMMARY
This case throws
light on the involvement of creditors with a debtor company. It demonstrates
the importance of the liability of the creditor when getting involved with the
distressed company. The case also suggests that a written statement that the
creditors were not involved in the company’s corporate decision making would
assist the creditors in proving that they had no intent to act as the shadow
director of the company.
An entity or a person
cannot be a shadow director just because they are present in all the board
meetings or impose conditions on dealing with the company. An external company
cannot be termed as a shadow director unless the directors are accustomed to
act according to the wishes and conditions of such an external company and
cannot exercise their own decision as to the corporate governance of the
company.