Could a lender become a shadow director of a debtor?

Under section 9 of the Corporations Act a person could be a director (commonly described as a shadow director) of a company “if the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes”.

Who is a director is important if a company is insolvent. The recent case of Buzzle Operations Pty Ltd (In Liquidation) v Apple Computer Australia Pty Ltd [2010] NSWSC 233 gives some useful guidance to lenders and others as to potential liability as a shadow director of a company.

Apple provided stock on credit to Buzzle secured by a company charge. When Buzzle went into liquidation its liquidator alleged insolvent trading by the Buzzle directors and also sued Apple and its finance director as shadow directors.

The NSW Supreme Court analysed the creation of the charge and payments made by Buzzle to Apple at certain key dates (were they uncommercial transactions? Did Apple suspect that Buzzle was insolvent?) and the relationship between Apple’s finance director and the company.

The court rejected the liquidator’s claims that the charge was void, the payments were preferences and Apple and its finance directors were shadow directors of Buzzle. In making that finding the trial judge observed:

  • a company can be a shadow director, even though only individuals can be appointed as directors
  • the liquidator had failed to show the directors acted in accordance with another person’s instructions
  • it was not enough to show Apple imposed commercial terms on dealings or that directors felt obliged to comply with them
  • in this case Apple’s prohibition on the sale of non-Apple products and its due diligence requirement were commercial terms only
  • the making of loans did not make Apple a director.
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