Insolvency
'I don't want to be a director: I just want to control the company'
16 March 2010
Authors


In International Cat Manufacturing Pty Ltd and Anor v Rodrick and Ors [2010] QSC 30 (International), McMurdo J of the Supreme Court of Queensland found Mr Rodrick to be a de facto director of International Cat Manufacturing (the Company) despite the fact that he was never appointed as a director of the Company.

Background

From 2001, the Company carried on the business of boat building, until 18 August 2005 when voluntary administrators were appointed, followed shortly by the appointment of liquidators on 14 September 2005.

The liquidators claimed that while the Company was in operation, Mr Rodrick, as a de facto director, wrongly permitted the Company to trade whilst insolvent and otherwise breached his fiduciary duties as such a director to favour himself or another company of which he was a director (Nu-Log).

Directorship under the Corporations Act

Section 9 of the Corporations Act (Act) defines the term ‘director’ to include:

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

(i) they act in the position of a director; or

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

The liquidators argued that Mr Rodrick fell within the definition at (b) (i) in that he acted in the position of a director - commonly known as a de facto director.

Proving Directorship on the facts

The liquidators relied on Deputy Commission of Taxation v Austin (1988) 28 ACSR 565 (Austin) in which Madgwick J found that whether or not an intermeddler is acting as a director will depend upon the nature of the functions or powers which were exercised and the extent of their exercise:

‘If, in the case of a small company, a person has, with full discretion, acted as the company in relation to matters of great importance to the company, and other than as an arms’ length expert engaged for a limited purpose, the conclusion that that person has acted in the capacity of a director may well be justified.’

In Austin, Madgwick J said that it appeared to be a ‘necessary condition of acting as a director, whether properly appointed or not, that one exercises what might be called the actual … top level management functions’.

Madgwick J has also said that ‘another relevant factor may be how the person who is claimed to have acted as a director was reasonably perceived by outsiders who deal with the company.  This may aid a conclusion that the supposed director has held himself or herself out as such.’

Here, Mr Rodrick introduced himself to outsiders often as an owner or part-owner of the business.  A company employee heard him say to a number of different suppliers that he was ‘the boss’.  In fact, there was an occasion when he visited a supplier and told her that he was a director of the company.

In this case, McMurdo J found that the Company was a small operation with relatively few employees and a very simple structure.  McMurdo J found that Mr Rodrick:

‘… was at the company’s premises effectively on a full time basis, overseeing the production of boats, directing staff as to boat building and other matters and negotiating with suppliers.  He was also much involved in the financial planning, such as it was, for this company.  He appears to have accepted responsibility for the trading performance and future of the company, consistently seeking ways in which to effect cost savings and to make the company profitable.  He was also involved in the promotion of its products by his regular attendance at boat shows and similar events.’

McMurdo J concluded that:

The proposed evidence gives the impression that he was as much in control as the company’s only duly appointed director.  Clearly he was not involved as some specialist consultant or as an employee.

The court held that Mr Rodrick was a de facto director of the Company, and as such his actions must meet the standards of those of a director.  Those include ensuring that the company does not trade whilst insolvent, and to observe other statutory and equitable duties imposed on directors (formally appointed, or not).

Need more information or have any queries?  Please contact Dean Hely on (08) 9288 6772 / dean.hely@lavanlegal.com.au or Alison Robertson on (08) 9288 6872 / alison.robertson@lavanlegal.com.au.