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What is a De Facto Director?

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A director’s primary duty is prioritising the company’s best interests and the ongoing liability risk as a de facto director, even post-resignation. Under New Zealand law, every registered company must have at least one director. A director leads and oversees a company while fulfilling director duties. Individuals may be considered de facto directors if they perform director duties, even without proper appointment. If you are in an unintended director position, careful decision-making and adherence to legal obligations are the utmost priority. This article will explore what the role of an unintended director entails and the associated risks of overstepping your role.  

Who Can Be a De Facto Director?

This status can apply to individuals absent any formal appointment or registration as a director. What truly makes them “de facto” is if their role and actions align with a director’s. They assume the Director’s role and carry out some or all of its responsibilities. These include making significant decisions, exercising authority or performing directorial duties, which may be regarded as a “de facto” director by law. In essence, their practical role holds more weight in defining the role they assume rather than their title. 

When determining whether you classify as an unintended director, you should consider: 

  • company size and allocation of responsibilities;
  • internal practice and structure;
  • both internal and external perceptions of your directorial role;
  • performed duties aligned with directorial expectations; and 
  • self-perception or acknowledgement by the company as a director. 

Furthermore, you may hold the role of an unintended director if you: 

  • oversee management team, make decisions and manage daily operations;
  • hold authority over company affairs, finances and accounts; and 
  • continue previous directorial duties post-resignation. 

Therefore, you may unintentionally face director liabilities even if you do not intend to be one. 

It is essential to keep in mind that a few exceptions exist. These include providing professional advice, such as acting as a lawyer or accountant or engaging in minor tasks without further involvement. This is due to purely advisory relationships that these companies have with advisors and that directors or company boards are not controlled or directed by the advisors.

What Happens if You Breach Your Duties as a Director?

New Zealand law regulates de facto director duties by imposing criminal penalties which consist of: 

  • a maximum of 5 years imprisonment; or 
  • $200,000 payment for certain severe breaches of duties by directors. 

However, the court will also consider whether the individual should be personally liable for some or all of the company’s debt for failure to keep proper accounting records, given that the failure contributed to the cause of the company’s loss.  This may come in the form of: 

  • repayment or restoration of the money or property or any part of it with interest at a rate the court believes is fair; or 
  • to contribute such sum to the company’s assets by compensation as the court thinks just.
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De Facto Director vs Non De Facto Director Examples 

De Facto Director An individual may be classified as a de facto director even though they were not formally appointed. They demonstrate this through attending board meetings, influencing decision-making and holding power over the company’s strategic direction and operations. This significant involvement and decision-making authority align closely with a director’s role beyond an advisory role, making them a de facto director.

You may still be seen as a de facto director even after you step down from your original director role. For example, you continue to manage and make major company decisions after stepping down from your director role. Despite lacking an official position, your substantial influence mirrors that of a director. Therefore, your significant company management involvement may deem you a de facto director.
Not De Facto Director A firm has hired a consultant to provide specialised advice on financial matters, and they attend occasional meetings to provide recommendations. However, the consultant’s role is limited to providing advice within their expertise without actively engaging in the company’s daily operations and holding any significant decision power. Although the consultant advises the company, they would not be classified as a de facto director as they do not assume directorial responsibilities or control over the company’s affairs. 

Key Takeaways  

Only assume the role of a company director if you are prepared to take on the risk of undertaking director liabilities. Whether formally appointed or acting as a de facto director, director duties apply. You should refrain from active participation in top-level management or tasks typical of a director. If your responsibilities align with a director role, the court may deem you an unintended director, requiring you to fulfil your legal director duties. 

If you have any queries about you or another who may be acting as an unintended director, LegalVision’s experienced business lawyers can assist as part of our LegalVision membership.  For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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