Under Australian law, a person does not need to be formally appointed as a director to be treated as one under the Corporations Act 2001 (Cth) (the Act).
They may never attend board meetings, sign a document, or appear on ASIC records, yet still carry the same duties, obligations and personal liability as an appointed director. These individuals are known as de facto directors and shadow directors, and they represent one of the most misunderstood governance risks for businesses.
Legal Foundations
Section 9AC(1) of the Act expands the definition of director to include:
- De facto directors: Individuals who act as directors without valid appointment.
- Shadow directors: Individuals whose instructions the appointed directors usually follow.
Importantly, this does not include professionals providing independent advice, such as accountants or lawyers, as long as they don’t overstep.
De Facto Directors
A de facto director is someone who, while not officially appointed, performs the role of a director. Key indicators include:
- Undertaking top-level management functions.
- Making decisions typically reserved for directors.
- Being treated by others as part of the leadership team.
- Holding themselves out as a director.
Key differentiation, a de facto director acts like a director.
Shadow Directors
A shadow director influences the board so significantly that directors routinely follow their instructions. Key indicators include:
- Habitual compliance with the person’s directions.
- Real capacity to influence or control decisions.
- Direct or indirect involvement in decisions.
For example, an accountant suggesting ways to improve cash flow is not a shadow director. However, an accountant directing the board on what actions to take may be.
Key differentiation, a shadow director directs the directors.
Why it Matters?
The High Court of Australia found in Australian Securities and Investments Commission v King [2020] that individuals exercising significant influence over a company’s affairs can be deemed an officer and be held liable as a de facto or shadow director. This means civil penalties and personal liability can apply – even if the person never intended to act as a director.
Common Risk Scenarios
De facto or shadow director risks often arise unintentionally, such as:
- Family members directing company decisions without being on the board.
- Major shareholders influencing board choices.
- Investors becoming too involved in operational decisions.
- Advisers or consultants overstepping their advisory role.
- Parent company executives controlling the decisions of subsidiaries.
- Former directors who continue to “guide” the board after resigning.
Managing the Risk
For business owners and directors:
- Define roles clearly and enforce boundaries.
- Ensure only appointed directors make decisions.
- Document advice as advice – not instructions.
- Review governance structures regularly.
For advisers and consultants:
- Give advice, not directions.
- Document engagement terms clearly.
- Avoid operational control or directing staff.
- Keep communication in recommendation form, not instruction form.
Investors should aim to ensure involvement is consistent with shareholder rights, not managerial control.
Conclusion
Even if unintentional, acting as a de facto or shadow director can expose individuals to significant civil penalties and personal liability. Understanding these distinctions is essential for sound cooperate governance.
Need help?
Our firm regularly advises on director appointments, legal structuring, and risk management. If you’re considering a directorship—or already on a board and unsure of your exposure—we’re here to help you put the right protections in place.
About the Authors
This article was prepared by Ersel Akpinar, Special Counsel at Morgan & English Commercial Lawyers, and Renee Abasseri.
Ersel and Renee advise directors, business owners, and professional advisers on corporate governance, risk management, and structuring issues across a range of industries.
You can reach them on +61 2 9196 8950 or via email at:
