Roles inside small businesses and startups rarely stay neat. A founder steps off the board but keeps calling the shots. An investor who "just advises" starts approving budgets. A general manager signs major contracts without much board oversight. None of these people hold the title of director — but that may not matter.
Under Australian law, the question is not what your business card says. It is what you actually do. The Corporations Act 2001 (Cth) is explicit: a person can be a director based on their conduct alone, and with that status comes the full weight of directors' duties, personal liability for insolvent trading, and exposure to ASIC enforcement. This article explains:
- how the Corporations Act defines a de facto director, and the related concept of a shadow director
- the key duties and liabilities that follow from that status
- the situations where founders, investors, and senior employees most commonly drift into de facto director territory
- practical steps to reduce the risk
What the Corporations Act says about who is a director
The definition of "director" in s 9AC of the Corporations Act 2001 (Cth) deliberately reaches beyond formal appointments. It covers two kinds of informal director:
De facto director — a person who is not validly appointed but who acts in the position of a director. The word "acts" is doing real work here. A court will look at what the person did in practice: the decisions they made, the authority they exercised, how the business held them out to third parties, and whether they functioned as part of the company's governing mind.
Shadow director — a person whose instructions or wishes the formally appointed directors are accustomed to act in accordance with. The shadow director does not step into the director role openly; instead, they exercise control from behind the scenes while the appointed directors carry out their instructions. The Act carves out advice given in the proper performance of a professional or business capacity — so a lawyer or accountant giving standard professional advice is not automatically a shadow director — but genuine decision-making authority over the board is a different matter.
Both categories apply the same legal test in the end: does the substance of what this person does make them part of how the company is governed?
Whether a person meets either test is ultimately determined by a court on the specific facts. There is no bright line. The same person can exhibit features of both — an influential founder who attends all "board" meetings, drives strategy, and whose views the appointed directors consistently follow is a classic example.
Directors' duties that follow from the status
If a court finds that someone is a de facto or shadow director, they are treated as a director for the purposes of the Corporations Act. That means they are exposed to the same statutory duties that apply to formally appointed directors under ss 180–184:
- s 180 — care and diligence: A director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person in their position would exercise. The business judgment rule in s 180(2) provides some protection for genuine business decisions made in good faith and on an informed basis, but it does not shield conduct that falls below a basic standard of competence.
- s 181 — good faith: A director must act in good faith in the best interests of the company and for a proper purpose. Acting in the interests of a controlling shareholder, or pursuing personal gain at the company's expense, will breach this duty.
- s 182 — proper use of position: A director must not use their position to gain an improper advantage for themselves or someone else, or to cause detriment to the company.
- s 183 — proper use of information: Information obtained through the director role cannot be misused to gain an improper advantage.
- s 184 — criminal dishonesty: If any of the ss 181–183 obligations are breached recklessly or with intentional dishonesty, a criminal offence is committed. This is not merely a civil sanction — it is a serious criminal charge that carries the potential for imprisonment.
A breach of the civil duties in ss 180–183 can result in civil penalty orders, compensation orders, and disqualification from managing corporations. An informal director who does not realise they carry these obligations has no exemption from them.
Insolvent trading liability under s 588G
One of the most significant risks for a de facto or shadow director sits in s 588G of the Corporations Act, which imposes a duty on directors to prevent a company from incurring debts when it is insolvent or would become insolvent by doing so.
ASIC's guidance is explicit that s 588G reaches de facto and shadow directors. The definition of "director" in s 9AC applies throughout the Act, and s 588G is no exception. A person who informally controlled the company at the time it incurred debts while insolvent can be personally liable for those debts.
The consequences are significant:
- Civil liability: A director who contravenes s 588G(2) — where they were aware of grounds to suspect insolvency, or a reasonable person in their position would have been — faces civil penalty orders and a compensation claim by a liquidator equal to the debts incurred.
- Criminal liability: Where the director actually suspected insolvency and their failure to prevent the debt being incurred was dishonest, s 588G(3) creates a criminal offence carrying up to five years imprisonment.
- Personal bankruptcy: Compensation liability under the insolvent trading provisions is unlimited and assessed against all debts incurred during the relevant period. For a company with significant creditors, this can easily exceed any personal asset position.
The practical consequence is that a person who has been quietly influencing a company's decisions for years — without formal appointment — may find themselves personally liable for the company's debts when it collapses.
Where informal directors most commonly emerge
De facto director risk does not usually arise from deliberate avoidance of formal appointment. It arises from the ordinary way small businesses and startups operate.
The founder who stepped back but kept running things. Resigning as a director is a legitimate step — founders do it for tax, personal liability, or investor structure reasons. But resignation only works if the conduct changes too. A founder who continues to approve spending, set strategy, hire and fire senior staff, and represent the company externally is likely still acting in the position of a director regardless of what the ASIC register says.
The hands-on investor or advisor. There is a meaningful distinction between an investor who advises and one who directs. The risk materialises when appointed directors are effectively rubber-stamping decisions made by someone who is not on the register — when the advisor's budget approvals, hiring calls, and strategy decisions are implemented without genuine independent director consideration.
The senior employee with wide operational authority. A general manager, operations lead, or chief of staff can legitimately exercise broad authority. The question is whether that authority extends to governing the company — making decisions that properly belong to the board, or holding themselves out to third parties as part of the company's leadership without clear limits on their authority.
Informal "board" meetings where non-directors lead decisions. It is not the name of the meeting that matters. If the documented decision-making — whether in formal minutes, email chains, or Slack messages — consistently shows a particular person driving the resolutions that a board would ordinarily make, that evidence can support a finding of de facto director status.
Where Artificer Legal can help
De facto director questions usually arise in one of two ways: either a business owner realises the governance structure has drifted and wants to fix it, or they are already facing a claim and need to understand their exposure. In either situation, the analysis requires close attention to the specific facts of how decisions were actually made.
Artificer Legal can assist with:
- Governance reviews — mapping who actually made which decisions and identifying where informal arrangements have created de facto director exposure for founders, investors, or senior employees
- Restructuring authority — putting documented delegations, signing limits, and approval workflows in place so that the distinction between management authority and director authority is clear and defensible
- Advisor and investor engagement — structuring advisory and investor relationships so that they remain within the advice-giving carve-out in s 9AC rather than drifting into shadow director territory
- Director appointment and resignation — advising on whether a change in formal appointment status will actually change the legal position, or whether a change in conduct is also required
- Insolvent trading advice — assessing whether a person's historical conduct creates exposure under s 588G, and what steps are available to limit that exposure
Summary
The Corporations Act 2001 (Cth) defines a director broadly. A person who is not formally appointed can be treated as a director — and bear all the associated duties and liabilities — if they act in the position of a director (a de facto director) or if the appointed directors are accustomed to act on their instructions (a shadow director). The key provisions are s 9AC (definition), ss 180–184 (directors' duties), and s 588G (insolvent trading).
Key takeaways:
- Title does not determine status. Conduct does. A founder who resigned from the board but kept running the company may still be a director at law.
- Both de facto directors and shadow directors are captured by the full suite of directors' duties and liabilities, including personal liability for insolvent trading.
- The risk is highest when decision-making authority is informal, undocumented, and concentrated in a person who is not on the ASIC register.
- Clear governance documents, written delegations, and proper approval processes reduce both the risk of informal director status arising and the difficulty of demonstrating that it did not.
If you are a founder, investor, or operator who is uncertain whether your current role creates director exposure — or if you want to restructure governance to remove that uncertainty — contact Artificer Legal for advice tailored to your situation.