Deemed director liability and the way to minimise your risk

POSTED BY Andrew Wallace
25 September 2013

posted in Deemed director | Shadow Director | governanace | director liability

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A recent High Court decision is a useful reminder that directors’ duties and potential liabilities don’t only apply to named directors. An awareness of these rules can go a long way to minimise the risk of you or your organisation being exposed to deemed director liability.

Let’s look at the case first: Gilles Bakery Limited v Gillespie. GBL had guaranteed a loan taken out by the holder of its ordinary shares, Yarrows (The Bakers) Limited. Yarrows defaulted under its loan, its bank appointed a receiver and GBL’s bakery business was ultimately sold with the proceeds applied in reduction of the loan. As a consequence, the other shares on issue in GBL (preference shares held in family trusts associated with its directors) became worthless. GBL and the trustees sued, arguing amongst other things that Yarrows and its Group Finance Director and CEO were "deemed directors” of GBL and had breached Companies Act duties and fiduciary duties in procuring GBL to sign up to the bank documents. Ultimately, on the evidence before it the court held that it was arguable that Yarrows was a deemed director, but not the Group Finance Director or the CEO (here they had acted merely as representatives of Yarrows and hadn’t stepped outside their roles).

So, what are the rules? The Companies Act states that for the purposes of various provisions which impose duties on directors and provide for various sanctions against directors, the term "director” is deemed to include, among others:

  • A person in accordance with whose directions a named director or the board may be required or is accustomed to act, and
  • A person to whom a power or duty of the board has been delegated.

Importantly, the term "person” doesn’t only refer to natural persons. A company can be deemed to be a director of another company.

The policy of the provisions is broadly to make those who involve themselves in the management of a company subject to the same duties and potential liabilities as named directors.

The provisions most often come up in the context of corporate collapses, where aggrieved parties can be motivated to cast their net as widely as possible when seeking recovery. At the point of collapse, however, it’s usually too late to do much to help.

If you’re a named director or it’s clear that you’re a deemed director in what you do, it goes without saying that you should be aware of the grounds upon which you could face liability and what you should do to minimise the risk of attack.

If you’re not a named director and you could potentially be regarded as a deemed director (for example in your role as a CEO, CFO, professional adviser or financier), how can you minimise the risk of attack?

The key thing to do is to make sure the board makes the decisions, on the basis of the directors’ own discretion or judgement. For all organisations it’s important to ensure staff are well trained in how far they can legitimately go to advance and protect the organisation’s commercial interests without overstepping the mark and creating exposure to deemed director liability.

This article was first published in the Your Law column in the Sunday Star Times on 1 September 2013.

POSTED BY Andrew Wallace
25 September 2013

posted in Deemed directorShadow Directorgovernanacedirector liability

VIEWED 7897 TIMES

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