Shadow Directors

In the wake of the 2009 recession, the task of clarifying the rules that regulate corporate governance is an important one. In New Zealand in particular, it is still commonplace to find distressed and in debt companies that require banks or their creditors to step in with an attempt to turn around the fortunes of that company. Unfortunately, the more creditors intervene with advising and influencing the running of a company, the more risk they develop of exposing themselves as shadow directors. Although the threshold for finding the existence of shadow directors appears to be high, creditors ought to tread carefully when becoming involved in a struggling customer's business (Arthur & Tripp, 2010, p. 324), as they may be found liable for the failure of a company. Because this area of law is still so vague in New Zealand, there is still no clear line as to what will and will not amount to legitimate and acceptable conduct in order to avoid liability as a shadow director (Arthur & Tripp, 2010, p. 325). The factors that determine whether a person is a shadow director can be depicted from Millett J in Re Hydrodam (Corby) Ltd, where he states ' it is necessary to show: (1) who are the directors of the company, whether de facto or de jure; (2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act'(Taylor, L. 2010, p. 209).

The definition of a director can be found in the Companies Act 1993. Section 126 describes the meaning of a director along with the powers they possess and the duties they are accustomed to. In Re Hydrodam (Corby) Ltd, Millett J stated that company directors may be of three kinds: de jure directors, de facto directors and shadow directors (Taylor, L. 2010, p. 203). The most commonly known type of director is known as a De jure director. He or she is formally and legally appointed or elected as a director in accordance with the articles of association of the firm, and gives written consent to hold the office as a director. It also establishes that either individually or collectively (with other directors) whom is held responsible for the firm, along with the liability (business dictionary, 2012). A De facto director is a person who assumes to act as a director. That person is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he/she undertook functions in relation to the company

which could properly be discharged only by a director(Taylor, L. 2010, p.205). Although not specifically mentioned in the Act, case law holds that the concept of a De facto director falls within the ambit of s126(1)(a); a person occupying the position of director of the company by whatever name called. This decision is held true in relation to the case Clark v Libra Developments Ltd (Taylor, L. 2010, p.204).

Shadow directorship, unlike de facto directorship, is a concept that is statutory in origin (Taylor, L. 2010, p.205). Millett J characterised a shadow director as someone who 'does not claim or purport to act as a director'. (Barber, M. 2011. P.85). The current statutory expression of the concept is found in s126(1)(b) under the Companies Act and refers to a shadow director as 'a person in accordance with whose directions or instructions a duly appointed or de facto director, or the board of the company may be required, or is accustomed to act'(Arthur & Tripp, 2010, p. 324). Similar to this provision is the United Kingdom's more classical form in which a shadow director embodies the 'role of a puppet master who pulls the strings and controls the company's appointed directors' (Arthur & Tripp, 2010, p. 324). The most recent New Zealand case which dealt with shadow directorships is Krtolica v Westpac Banking Corporation 2008 where Stevens J noted for the first time that a financier could be liable as a shadow director, but only where the 'right facts were present' (Arthur & Tripp, 2010, p. 324). The case saw Mrs Krtolica bring six separate causes of action against Westpac including the liability of reckless trading which came under s135 of the Companies Act 1993. In the case the court accepted that although liability could certainly be imposed on a bank under s126(1)(b), the overall decision would depend on the facts of the case. An emphasis on the "right facts" issue led the New South Wales Supreme Court in the Buzzle Operations Pty Ltd v Apple Computer Australia Ltd case to consider whether the same liability could apply to creditors of distressed companies where they exert pressure to recover outstanding debts.

The way in which people are involved in a company's activities and influence the directors are diverse and complex, and there are 'a number of issues at the margins of the definition that have yet to be fully explored by the courts'(Barber, M. 2011. P.87). One of these asks whether mere advice is sufficient to bring someone within the definition,