If you’re toying with doing work for a new customer, investing in a business or franchise, or perhaps buying the business outright, then you’ll want to talk to the director.

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But be careful. The person you get your appointment with may not actually be the company director. So you should always look into whether they’ve been associated with any companies that have failed. And two of the more common examples you should watch out for are:

  • Bankrupts who install their partner as a sole director of a company

  • Fraudsters who use an offshore company with nominee directors to carry out their instructions.

The Corporations Act recognises three categories of director:

  • properly appointed directors

  • de facto directors

  • shadow directors.

Now you may think the “properly appointed director” is the only one who can be in charge of the company. But to quote Section 9 of the Act:

(b) director of a company means, unless the contrary intention appears, a person who is not validly appointed as a director if:

  1. they act in the position of a director; or

  2. the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.

And to make things even less clear-cut:

Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company.

So what’s the difference?

A shadow director (sometimes known as a de facto director) “controls the mind of the company”. They will often:

  • attend Board Meetings (and vote)

  • dictate to the Board on implementing the business plan

  • make executive decisions for the company

  • control the company’s trading

  • decide which creditors should be paid (and when they should be paid)

  • countersign the company’s cheques

  • usurp any functions of the directors

  • make executive decisions.

An appointed director (i.e. one appointed with ASIC) does what they’re told, without exercising any independent judgement. This will include many of the procedural-type provisions.

Note: For the purposes of the shadow/de facto director, normal duties of a director will be apply to shadow directors, as will potentially Section 588G in respect to insolvent trading.

Now, are you really talking to the person you want to do business with?

A basic test is whether the person is entrusted to exercise the company’s powers and control the company. Unfortunately, because they don’t need to show they’ve done acts only a director can lawfully perform it’s often a question of degree. You need to consider the duties performed in the context of the company’s operations and circumstances.

However, they do need to exercises top-level management functions. That means how they are reasonably perceived by outsiders and whether they’ve acted as the company in relation to matters of great importance to the company will both be relevant.

The best advice we can give is to do your research. Check with ASIC as to whether they are actually the appointed director of the company. And if they aren’t, you should do a background check and be very careful about doing business with them.

Because a little work now could save you a lot of work, pain and frustration later on.