Australia: Shadow director caught under insolvent trading provisions

BACKGROUND

Mr Featherstone was recorded as director of Ashala Pty Ltd (Ashala) from 10 March 2004 to 7 October 2005 and from 28 November 2005 to 12 December 2005. Ashala occupied premises which Mr Featherstone owned as trustee for his family trust.

On 7 October 2005, Mr Featherstone agreed to transfer his shares in Ashala and two other related companies to Ms Kristy Marks and for Ms Marks to become the sole director of the three companies. This agreement was recorded in an "agreement letter" and ASIC was notified accordingly.

Around 20 months later, Mr Featherstone was "employed" by Ashala as training and events coordinator. The "employment letter" stated that Mr Featherstone had "no responsibility or rights or powers as a director...", and "[he would not] be involved in any decisions that substantially affect the operation of Ashala." The letter did, however, acknowledge that Ms Marks might at times seek Mr Featherstone's advice.

In the period between 30 June 2008 and 9 September 2010, Ashala incurred debts totalling approximately $200,000 (mostly tax debts). Mr Featherstone was not formally recorded as a director of Ashala during this period.

The respondent, Hambleton, was appointed as administrator of Ashala on 9 September 2010 and as liquidator of Ashala on 14 October 2010. Hambleton commenced proceedings against Mr Featherstone in the District Court seeking orders that Mr Featherstone pay the sum of approximately $200,000 under the insolvent trading provisions of the Corporations Act 2001 (Cth) (ss.558G and M) in respect of the debts referred to above.

DECISION

The trial judge found that Mr Featherstone was a shadow / de facto director at the time the debts were incurred and ordered him to pay $208,770.33. The trial judge found that the agreement letter and employment letter "were nothing more than attempts to create self serving evidence in the event (which has turned into fact) [Mr Featherstone] was sued". Mr Featherstone appealed the trial judge's decision.

In dismissing Mr Featherstone's appeal, the Court upheld the trial judge's decision that Mr Featherstone was a shadow / de facto director of Ashala and that there were reasonable grounds for suspecting that Ashala was insolvent at the time the debts were incurred. In reaching its decision, the Court was influenced by the following matters:

• a witness had given evidence (which was corroborated by other evidence) that Mr Featherstone was the one who "pulled the strings in respect of the operation of Ashala..." and that nothing was done at the premises where Ashala carried on business... "unless [Mr Featherstone] 'okay'd' it";
• during an examination of Mr Featherstone under the Corporations Act, he agreed he was involved in decisions relating to Ashala, that he was at Ashala's premises each day when he was in Brisbane (which was most of the year) and that he continued to run the day-to-day affairs of "everything that was happening" after he had resigned as a director;
• during the examination, Mr Featherstone asserted that, although he had transferred the shares in the three companies to Ms Marks, she held the shares on trust for him. Further, with respect to one of the companies (not Ashala), Mr Featherstone considered Ms Marks to be subject to his direction – in the Court's opinion, there was nothing to suggest that Mr Featherstone held a different view in respect of Ashala;
• the evidence indicated that it was Mr Featherstone's decision for a person by the name of Mr Marshall to become involved in Ashala and another of the companies. Mr Marshall become a director of those companies; and
• the evidence demonstrated Mr Featherstone's level of control in relation to one of the other companies (not Ashala). Specifically, he had vetoed Mr Marshall, who had become the sole director of the company, from becoming the sole signatory on the company's bank account.

COMMENT

The decision in this case confirms that the Court will take a substance over form approach in determining whether someone is a shadow / de facto director. The Court will look behind written agreements and ASIC records to uncover the true position as to whether or not a person is acting as a director. The Court will look at the conduct of the person in question, whether the person is performing the functions expected to be performed by a director and whether the person has sufficient influence to control the acts of the other directors of the company.

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