A recent NSW Supreme Court decision1 provides further
guidance and some comfort on the law of shadow directorship.
Buzzle Operations resulted from the merger of a number of
resellers of Apple products. Under the terms of their contracts
with Apple, the resellers required Apple's consent to be able
to effect the merger, so Apple took part in discussions leading up
to and after the merger. During these discussions, Apple made clear
to Buzzle its financial expectations and what it required Buzzle to
do in order to maintain its co-operation and give its consent. In
threatened to withhold its consent to the merger unless certain
conditions were met (eg. the provision of a charge to secure
Buzzle's debts to Apple);
insisted on the parties undertaking certain actions (eg. a due
diligence process); and
required Buzzle to agree not to incur debts outside the
ordinary course of business. Buzzle's directors felt that they
had "absolutely no choice but to agree to [Apple's]
terms". Buzzle subsequently went into liquidation. Its
liquidator claimed that Apple's negotiations and communications
with Buzzle had made it a "shadow director" of Buzzle and
that, as a result, Apple was liable for insolvent trading by
What is a shadow director?
In addition to persons formally appointed as directors, the
Corporations Act 2001 (Cth) provides that a person is a director of
a company if:
they act in the position of a director (referred to as a de
facto director); or
the directors of the company or body are accustomed to act in
accordance with the person's instructions or wishes (referred
to as a shadow director).
Allegations against Apple
In this case, it was alleged that by imposing conditions for the
giving of its consent, by participating in discussions relating to
the merger and by imposing other requirements on Buzzle, Apple had
been a shadow director of Buzzle.
If Apple's conduct had been found to make it a shadow
director of Buzzle, then Apple would have been a director of Buzzle
and therefore liable for any insolvent trading by Buzzle.
The case examined whether, in light of the commercial pressure
Apple exerted on Buzzle and its directors and shareholders and the
fact that Buzzle did in fact comply with many if not all of
Apple's demands, Buzzle's directors could be said to be
"accustomed to act in accordance with [Apples]'s
instructions or wishes".
The Court found that Apple was not a shadow director of Buzzle
and gave the following guidance:
1. If a party's consent is required for a
proposal and the party imposes conditions for the giving of its
consent, while this might influence the outcome of the decision, it
does not of itself mean that the party participated in the making
of the decision or that it was involved in the management of the
The court gave as an example "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".
2. Considering and being actively involved in
discussions about a proposal (including attending meetings),
conveying concerns about the proposal and requiring those concerns
to be addressed as a condition of giving consent are simply parts
of an arm's length commercial negotiation: they do not
automatically indicate participation in the making of the
3. Where the directors of a company acquiesce
in a third party's demands, this does not of itself mean that
the third party participated in the company's decision
"Unless something more intrudes, the directors are free and
would be expected to exercise their own judgment as to whether it
is in the interests of the company to comply with the terms upon
which the third party insists, or to reject those terms."
In other words, while Buzzle's directors may have felt that
they had no choice but to comply with Apple's demands, clearly
they did have a choice: either they comply with the demands and
proceed with the proposal, or they do not proceed with the
The case provides comfort and represents a win for common sense.
Something more than imposing conditions and being actively and
intricately involved in dealings with a company is required to make
a third party a shadow director.
An appeal has now been filed, and we await its outcome.
1Buzzle Operations Pty Ltd (In Liq) v
Apple Computer Australia Pty Ltd  NSWSC 233
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