Deemed directors (also known as 'shadow directors') have not been formally named directors but act as directors or influence the board's decisions.
In this article, we discuss two scenarios where an employee of a company can be deemed to be a director under the Companies Act 1993 and the possible consequences for such an employee if they breach their director's duties.
Scenario 1: An employee who advises the board and whose advice is followed by the board.
Sections 126(1)(b)(i) & (ii) of the Companies Act 1993 provide that a person is deemed to be a director if the board or one of the other directors is accustomed to (or required to) follow their directions or instructions.
This means that an employee who regularly advises the board on important matters and whose advice is usually followed by the board may be considered a director and responsible for directors' duties, which include:
- The duty to act in good faith and in the best interests of the company (section 131)
- The duty to exercise powers for a proper purpose (section 133)
- The duty not to agree to reckless trading (section 135)
- The duty not to incur obligations without reasonable grounds of performance (section 136)
- The duty to exercise a duty of care (section 137)
- The duty to avoid/disclose conflicts of interest (sections 139 & 140)
- The duty not to disclose confidential information (section 145)
If an employee who is deemed to be a director breaches any of these duties or liabilities, they may be subject to civil or criminal penalties, such as:
- Personal liability to pay compensation or damages
- A fine not exceeding $200,000 or imprisonment for a term not exceeding five years
- Disqualification as a director
Scenario 2: An employee who exercises board powers with the board's knowledge
Section 126(1)(b)(iii) of the Companies Act 1993 provide that a person is deemed to be a director if they exercise or control (or are entitled to exercise or control) powers which the board would normally exercise.
This means that an employee who has been delegated or assumed some of the powers of the board, such as managing the company's finances, operations, or strategy, and who exercises those powers with the knowledge and consent of the board, may be considered a director for the same purposes as in scenario 1.
The consequences for breaching any of the duties or liabilities as a deemed director under section 126(1)(b)(iii) are also the same as in scenario 1.
Conclusion
Employees who act as or influence directors should be aware that they may be deemed to be directors under the Companies Act 1993 and subject to the same duties and liabilities as formal directors. They should ensure they comply with these duties and liabilities and seek legal advice if they need clarification on their status or obligations.