Silent Directors: Do they exist?

KEY TAKE-OUTS

• Silent directors are still liable directors.
• Directors must keep themselves informed of the day-to-day activities of the company and must comply with their directorial duties.
• Breaches of director duties can have serious consequences for individual directors.

What is a Director?

When it comes to corporate structures the term “silent director” has been heard many times. It is the notion of a director that does not work in close proximity with the company, does not actively participate or have a holistic knowledge of the day-to-day activities and is often used by directors to void liability. In reality, the law does not distinguish between silent directors and directors who have a more active role in the Company.

Section 9 of the Corporations Act 2001 defines a Director as a person who has been elected or acts in a manner that exercises directors’ powers and control over a company’s business. 

• De facto director: a person who has not formally been appointed but has the authority to act within that role.
• Shadow director is a person that instructs an appointed director.
• Executive director is an employee of a company that manages day-to-day tasks.
• Nonexecutive is a person who is not involved in the day-to-day management of the company but operates in a supervisory capacity.

Directors’ duties in Australia

Directors are subjected to a range of statutory obligations that are found in sections 180 – 183 of the Corporations Act, and common law duties including;

• Exercising power with reasonable care;
• Act in good faith in the best interest of the company and for a proper purpose;
• Avoiding conflicts of interest;
• Acting honestly and transparently;
• Being up to date with the Company’s affairs;
• Avoid insolvent trading.

Remaining ‘silent’ and distancing yourself from the running of a company does not negate your responsibility. Irrespective of the level of involvement that a director has, directors are obligated to action matters pertaining to the Company and may be held liable for falling short of their obligations.

What happens if a director breaches their duty?

It is important for Directors to make themselves aware of their obligations to their shareholders as generally breaching director duties can result in criminal and civil sanctions, disqualifications, or commercial consequences.

Directors can also be personally liable for debts and may have to compensate the company for any losses that were suffered from a breach of their duties. Directors may also be liable as a guarantor and may need to use personal assets as security for the companies’ liabilities.

Directors must be careful to avoid assuming that they are a ‘silent director’ and turning a blind eye on business operations as they are still held legally responsible and liable for any gains and loss that occur.

CASE STUDY: Deputy Commissioner of Taxation v Clark [2003] NSWCA 91

The debunking of silent directors has been shown by the courts in the case of Deputy Commissioner of Taxation v Clark. The Court considered the position of a wife as a ‘sleeping’, or silent, director. She had attempted to rely on non-participation in the management of the company, to avoid liability under the insolvent trading provisions of the Corporations Act.

The case highlighted that the failure to participate in the management of a company, regardless of the reason, is inconsistent with the director’s duty to share in the management of a company and cannot be relied upon in defence of liability for insolvent trading.

The Court stated that ‘there is no justification for a doctrine, which would hold sleeping directors to be `de facto non-directors’, who should be relieved of their liabilities’.

If you have any concerns about your obligations and rights as a company’s director or if you suspect that you may potentially be liable for breaching your duty as a director, get in contact with our commercial team at Coutts. Our commercial team has a breadth of experience in matters of this nature and can provide practical legal advice for the resolution of issues surrounding breach of the director’s duties.