Written by Maggie Lau in July, 2011

In the recent case of Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109, the issue of whether a secured creditor may be exposed to director’s risks as a shadow director by exerting influence over a company was considered amongst other interesting topics.

In the aforementioned case, Buzzle was created by the merger of six Apple retailers. Apple held a charge over Buzzle’s assets. Apple demonstrated a significant level of influence over the affairs of Buzzle, including giving Buzzle advice regarding its structure, management requirements, financial systems, trade terms and so forth. Buzzle heeded to Apple and its financial officer’s advice. Buzzle went into Liquidation within months of its establishment.

One of the issues which arose in the Buzzle and Apple case was whether Apple, a secured lender acting in its own interests exercises influence on the directors of a borrower, being Buzzle, should be considered a shadow director and be answerable to insolvent trading allegations. According to Section 9 of the Corporations Act, a person is a “shadow director” when the directors of the company are ‘accustomed to act in accordance with the person’s instructions or wishes’.

On 9 May 2011 in the New South Wales Court of Appeal, Hodgson JA, Young JA and Whealy JA found that neither Apple nor its representative was a shadow director. The court analysed the individual components of the definition of a “shadow director”. The court’s interpretation provides useful guidance on how to determine shadow directorship:-

• “in accordance with” suggests a causal connection, that is, the wishes or instructions given by the alleged shadow director must cause the relevant decision to be taken by the company.

• “the directors” are the governing majority or real decision makers.

• “accustomed” infers a habitual compliance over a period of time- that is, a history of the directors acting in accordance with the alleged shadow director’s instructions or wishes.

In addition to the above, the instructions or wishes of the alleged shadow director must be with regards to board decisions, not managerial activities, to be made by the directors in their capacity as directors, as opposed to their capacity as shareholders or employees etc.

The court stated that, “the directors of the company with whom it deals might feel they have no choice but to comply with the conditions imposed… this is not sufficient to make the third party who exercises such powers in his dealings with the company a shadow director”.

Conditions imposed by a third party such as a secured lender do not amount to ‘instructions or wishes’ because “…the directors are free and would be expected to exercise their own judgment as to whether it is in the interests of the company to comply with the terms upon which the third party insists, or to reject those terms.”

The decision would provide secured lenders, suppliers and other third parties some comfort in that they are not necessarily considered shadow directors when they exercise influence on the directors of a debtor company to protect their own interests.

PLEASE NOTE:  All information contained in the articles below was correct at time of publishing.