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The recent case of Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd has shed further light on whether a person or corporation will be considered a shadow director for the purposes of the Corporations Act 2001 (Cth).
Under the Corporations Act a director of a company is defined to include a person who “is not validly appointed as a director if they act in the position of a director; or the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.”
In this case the company Buzzle was created by six retailers of Apple products. Many of the products sold by the company were held on credit from Apple who had a charge over the assets of the company to secure the debt. When Buzzle became insolvent and continued to trade in 2000 the company incurred a further $18 million to Apple and other creditors. Apple had been heavily involved in the merger of the six retailers, giving advice on the structure of the merger, future cash flow, the financial accounting system to be used by the company and the due diligence reports. Further, when Apple heard of financial problems experienced by Buzzle the senior finance officers of Apple provided advice on systems which was generally followed by the directors of Buzzle.
When Buzzle went into liquidation, the liquidators brought proceedings against Apple and tried to claim that Apple and its financial officer had been a shadow director of Buzzle. At first instance, the Supreme Court of New South Wales found that Apple’s involvement with Buzzle and conditions imposed upon the company had been part of a commercial negotiation at arm’s length, a regular practice for suppliers such as Apple. It was further found that while the directors had tended to follow the advice of the senior financial officers from Apple they still needed to exercise their own judgment and were free to make their own decisions.
The case was appealed to the New South Wales Court of Appeal who upheld the decision at first instance that Apple had simply influenced the business of Buzzle who were under no obligation to follow the directions and so Apple was not considered a shadow director.
While this case is good news for secured lenders acting in their own interests who wish to retain some control over the activities of debtors experiencing financial problems, it is important to remember that the line between advice and a shadow directorship is a fine one.