When is a manager not just a manager?

It sounds like a joke. But it's certainly no joke when a manager is yanked out of the land of managers into the world of directors.

There are times when a manager isn't just a manager – when they take on so much responsibility that they are actually considered a de facto director. A case in the Federal Court dealt with this issue recently, finding a manager was in fact acting as a de facto director in the functions they were performing, and was therefore liable for his conduct as a director.

For companies in turbulent times, the case of Chameleon Mining NL v Murchison Metals Limited ('Chameleon'), heard in the Federal Court, may now be particularly pertinent. Companies, particular SMEs, are running lean, and managers are doing more of the work to keep the company going.

In Chameleon, the Federal Court found that, despite never being appointed as a director, a person can be held liable for their conduct if they undertake management functions typically expected of a director.

Chameleon Mining is a listed junior mining company and brought a claim against its directors, alleging they breached their director's duties in carrying out certain financial transactions to the benefit of another company, Murchison.

In making this argument, it was suggested that Phillip Grimaldi, a Chameleon employee, was in fact acting as a director of the company.

Directors' duties are onerous and can have severe consequences when not observed. So the distinction between manager and director is an important one to get right.

Defining the boundaries

A person may be found to be a 'de facto director' or 'shadow director' if they fall within the extended definition of 'director' in s9(b)(i) of the Corporations Act. That definition characterises persons not validly appointed as directors to be directors nonetheless if:

1. they act in the position of a director; or

2. the directors of a company are accustomed to act in accordance with their instructions or wishes.

In Chameleon, the court considered the actions of Grimaldi that were relevant to the question of whether he could be found to be a de facto director. Those actions were centred on Grimaldi's close involvement in high-level management decisions on matters that affected the company's financial standing.

They included negotiating significant acquisitions, preparing the prospectus for the company's capital raising, corresponding with lawyers on behalf of the company, seeking funding and finding investors, and organising the appointment of a director to the board.

Perhaps most telling for the court was the evidence that suggested Grimaldi was reasonably perceived by outsiders to have acted as a director or officer of the company. That evidence included a letter from the company's auditors that Grimaldi was their main source of information and that he appeared to them to be the 'manager' of the company.

The consequences

Once Grimaldi was held to be a de facto director, various transactions were considered through the lens of his new employment. He was found to have a material personal interest in transactions that were obtained without shareholder consent (as is required of directors under the Corporations Act).

It was also held that Grimaldi had breached his duty as a director by failing to act in good faith and in the best interests of Chameleon Mining; breaching the duty to act for a proper purpose as identified in the Corporations Act; and acting improperly by using his position to gain an advantage for himself.

As a de factor director, Grimaldi was ordered to account for all profits made under the transactions.

Conducting business as a manager

This case is a warning for managers who overstep into director territory. While it's not 'easy' to overstep, it's happened before and it'll happen again. And the consequences of the unexpected promotion are steep.

Directors and officers of companies will usually have insurance to protect them against claims arising from their official actions and decisions. Without it, personal liability can amount to hundreds of thousands of dollars.

Problems arise when a manager creates the appearance of having more authority than they actually do. Given the weight the court in Chameleon gave to how outsiders viewed the role of the manager in the company, creating a correct perception of the amount of control and power a manager possesses is certainly a big step in the right direction.

Clarity is essential. There are many managers who have been with a company for a long time, who have clout both within the organisation and externally, and who are key members of the leadership team.

But, with managers doing more, and expected to contribute more to the bottom-line of an organisation, it's important to have a clear delineation between management responsibilities and the responsibilities of a director or officer.

Daren Armstrong is a Partner at Kemp Strang.