Buzzle Operations Pty Ltd (in liq)-v Apple Computer Ltd NSWCA 109

The New South Wales Court of Appeal recently examined the elements of a shadow directorship. In particular, it looked at whether the creditor of a distressed company can by virtue of certain conduct become a shadow director of that company.

Background
In July 2000, six retailers of Apple products merged to create a company called Buzzle Operations Pty Ltd. Apple was heavily involved in the merger and gave advice, for instance, on its structure and the financial systems. Apple also took a charge over the assets of Buzzle as security for stock provided on credit. By November 2000, Buzzle had become insolvent, but continued to trade. When Apple became aware of its cashflow difficulties, it provided Buzzle with one of its finance officers.

Buzzle subsequently went into liquidation and the liquidator sought to establish that Apple and its finance officer were shadow directors of Buzzle and that they should therefore be liable for Buzzle’s insolvent trading.

Decision
The New South Wales Court of Appeal unanimously found that Apple and its finance director were not shadow directors. While Apple did exert certain influence over Buzzle’s business, the directors of Buzzle were free to exercise their own judgment as to whether it was in the company’s interests to adopt Apple’s advice. The Court held that the evidence must show “something more” than just a creditor being in a position of control.

In so finding, the Court of Appeal provided useful guidance for determining whether a person is in fact a shadow director. In particular, it noted that:

• Not every person whose advice is in fact heeded as a general rule by the board of a company is to be classed as a shadow director and
• A person is not a shadow director merely because he imposes conditions on his commercial dealings with a company (even if the company believes it has little option but to comply with those conditions). This is particularly so if the person imposing the conditions is a secured creditor and the conditions are supported by the terms of the loan agreement between the parties

In order to establish a shadow directorship, it must be shown that:

• The alleged shadow director has the potential to control the company (however, it is not necessary that he control every aspect of the company’s business)
• The majority of the board are habitually compliant with the alleged shadow director’s advice or instructions. This requires an established pattern of compliant behaviour on behalf of the governing majority of the board. It is not necessary that the alleged shadow director control every person on the board
• There is a causal connection between the alleged shadow director’s instructions/wishes and the company’s actions/decisions
• The instructions/wishes of the alleged shadow director are aimed at the decisions of the directors in their capacity as directors

Implications
This decision, although not binding in Ireland, is persuasive authority for the proposition that a person will not be deemed to be a shadow director merely because he imposes conditions on the company in its commercial dealings with the company.

Contributed by Marguerite Dooley and Fergus Doorly.