In brief – NSW decision helps define shadow
A recent decision in Buzzle Operations (in Liquidation) v
Apple Computer has clarified the criteria to be met for a
lender, secured creditor or other third party to be considered a
What is a shadow director?
A shadow director is a person (or it can be a company) whose
instructions and wishes others within the company are accustomed to
obeying. To be a shadow director, one must exclude any residual
discretion in a board. In other words, the nominal directors must
effectively be doing one's bidding.
This can have serious implications if the company is engaged in
insolvent trading, because a director can be liable for insolvent
Until recently, it was often considered possible for someone who
is not listed as a director to be regarded as a shadow director. A
recent decision in the Court of Appeal has clarified the
The Court of Appeal accepted that there can be instances in
which a secured creditor may in fact be a shadow director if two
criteria are met.
First, it had to be shown that the company's actual
directors were deferring their decision making to the lender or
some other third party.
Secondly, it had to be shown that the directors were taking
important decisions, such as decisions to continue trading while
insolvent, because of the lender's wishes or instructions.
In this particular instance, the court said that the fact that
the secured creditor was indicating its preference did not of
itself amount to the existence of a shadow directorship.
Directors free to accept or reject third party
The Court of Appeal approved of the trial judge's findings
person or company is not within the definition (of shadow director)
merely because that party imposes conditions on his or her
commercial dealings with a company which the directors feel obliged
to comply. 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. A supplier
or buyer might impose conditions because of its superior bargaining
power, the directors of the company with whom it deals might feel
they have no choice but to comply with those conditions imposed...
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, if, in the exercise
of their own judgment, they habitually comply with third party
terms, it does not follow that the third party has given
instructions or expressed a wish as to how they should exercise
their functions as directors.
Creditor not a shadow director if directors can make own
It follows then that if the directors have an opportunity to
make their own decisions without a metaphorical gun to their head,
then a secured creditor or landlord or someone who has leverage
over the company should not be considered to be a shadow
The only thing I would add to that is that there is always a
caveat. The court talks about there being a need for
"something more". Be careful. You never know when the
pressure being applied might tip you over into that broad
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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