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Look like a duck, quack like a duck - expect to be roasted like a duck

Company Law News | August 2012

In Grimaldi v Chameleon Mining NL (No. 2) [2012] FCAFC 6, the Full Federal Court recently considered the duties and liabilities of a non-executive individual who informally exercises corporate powers and functions of the kind that are normally reserved for properly appointed directors of the company.

Mr Grimaldi was found at trial to be a “de facto” director of Chameleon Mining – that is, he was found to be exercising the powers of a company director without having been formally appointed or installed as such. This finding exposed Grimaldi to liability for breaches of directors’ duties in connection with the activities of the company in a “joint venture”-type exploration and mining undertaking in Western Australia.

Problematically, several individual parties were involved in the project in question, through the involvement of a number of companies and other business vehicles and without proper regard being had to the roles and responsibilities of directors or the distribution and sharing or risk, responsibility and, ultimately, profit.

At the trial, the court noted that Chameleon Mining did in fact have a functioning and properly constituted board of directors. The court also noted that Grimaldi was, often, treated by the board as though he was not a director of the company. However, the court ultimately found Grimaldi to be a de facto director as the functioning of the board was irregular and largely informal, and Grimaldi was put in a position that allowed him to readily enter into a range of transactions on behalf of the company without the formal endorsement or involvement of the board. The board was found to have generally allowed Grimaldi to act in such a way that an outsider to the company could reasonably take him for a director, and acquiesced in much of his decision-making and activities within the company.

Importantly, the court held that the fact that Grimaldi sometimes acted with the prior authorisation of the board, and that certain of his actions required subsequent court-ordered ratification, did not affect the conclusion that he was a de facto director – the functions and roles undertaken by Grimaldi were those generally reserved for directors, regardless of their regularity. This was key to the court’s decision.

The practical significance of the court’s finding that Grimaldi was a de facto director of Chameleon was that Grimaldi could be pursued by the company for breaches of directors’ duties, including, most relevantly, the duty to avoid conflicts of interest as between Grimaldi’s personal interests and those of Chameleon.

This decision highlights the responsibilities of not just formally appointed company directors, but of persons whose activities might reasonably lead outsiders to conclude that they are a director of the company. Given the increasing rigidity of directors’ duties, this case should serve as a warning to non-executive decision-makers who exercise de facto control of their companies.

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