Shadow directors and parent control: steering an Australian subsidiary without stepping over the line

A shadow director is someone who isn't appointed to an Australian company's board but whose instructions or wishes the directors are accustomed to act on. The Corporations Act treats that person as a director, with the same duties and liabilities. Overseas parents can control a subsidiary lawfully through shareholder powers, the constitution, recorded delegations and, for wholly owned subsidiaries, s187. The line is crossed when the local board stops deciding and just carries out instructions.

The legal definition

The definition of "director" is in section 9AC of the Corporations Act 2001 (current compilation). Besides validly appointed directors, unless the contrary intention appears, it includes a person who isn't validly appointed if:

• they act in the position of a director. This is usually called a de facto director, for example someone who signs as "director", attends and votes at board meetings, or holds themselves out to banks as a director, or
• the directors are accustomed to act in accordance with their instructions or wishes. This is the shadow director limb.

The shadow limb has one built-in exclusion: advice given in the proper performance of functions attaching to the person's professional capacity or business relationship with the directors or the company. Your lawyer, auditor or a lender negotiating terms isn't a shadow director just because the board takes their advice.

A parallel test sits in the definition of "officer" (s9AD). It covers a person in accordance with whose instructions the directors are accustomed to act, and also anyone who makes or takes part in decisions affecting the whole or a substantial part of the business. Officers owe the care and good-faith duties in ss180–184 too.

Why it matters to the parent

Being treated as a director brings the full set of obligations covered in our director duties guide. The insolvency consequences are the sharpest. ASIC's RG 217 (at RG 217.13) confirms the duty to prevent insolvent trading applies to people who aren't formally appointed but act as directors, or whose instructions the directors are used to following.

The parent company has a second, separate exposure that doesn't depend on shadow-director status. Under s588V, a holding company can be liable for debts its subsidiary incurs while insolvent if there were reasonable grounds to suspect insolvency and the parent or its directors knew, or, given how much control the parent exercises, should reasonably have known (RG 217.33). The more hands-on the control, the harder it is to argue the parent didn't know. Our insolvent trading guide sets out the parent's s588WA safe harbour.

The individuals matter as well. A regional vice-president who routinely tells the Australian board what to sign can be personally exposed as a shadow director, separately from the parent company.

What "accustomed to act" looks like in practice

No single instruction makes someone a shadow director. The question is a pattern of the board acting on someone's instructions or wishes. Some patterns that should worry a foreign group:

• board resolutions drafted at head office and signed by return email, with no meeting and no papers
• the local director told to "just sign" contracts, guarantees or intercompany loans that were negotiated overseas
• group executives giving instructions directly to Australian staff on matters reserved to the board
• minutes that record decisions but never record discussion, questions or the information considered
• a resident director who has never declined, deferred or queried anything.

Say a Dutch parent's regional CFO emails the Australian board each quarter with a list of payments to approve, and the board approves the list unchanged every time. Each email is harmless on its own. Together, they are evidence that the board is accustomed to act on the CFO's wishes.

Lawful levers of control

Owners have plenty of control without needing to give the board instructions:

Replaceable rules apply only to the extent a company's constitution doesn't displace them, so start with your constitution.

Section 187 in detail

For a wholly owned subsidiary, s187 says a director is taken to act in good faith in the subsidiary's best interests if:

1. the subsidiary's constitution expressly authorises the director to act in the best interests of the holding company
2. the director does act in good faith in the holding company's interests
3. the subsidiary is not insolvent when the director acts and doesn't become insolvent because of the act.

All three conditions must be met. Section 187 doesn't apply to a subsidiary with outside shareholders, such as employee option holders who have exercised, a local co-founder or an investor. It doesn't touch the care-and-diligence duty or insolvent trading, and it stops working at the point solvency becomes doubtful, which is when it matters most. If your subsidiary's constitution was a generic off-the-shelf document, it probably doesn't contain the express authorisation, and that's worth fixing when you set up the subsidiary.

A governance pattern that holds up

1. Constitution: include the s187 authorisation (for wholly owned subsidiaries) and any matters reserved to the shareholder.
2. Delegation instrument: have the board formally delegate day-to-day management to the country manager or a regional executive, with written limits, recorded in the minutes.
3. Board calendar: hold real meetings, even short video calls, with papers circulated in advance, at least for accounts, budgets, solvency and anything outside the delegation.
4. Escalation list: borrowing, guarantees, related-party transactions, asset transfers and new lines of business go to the board with information, not as a pre-signed resolution.
5. Minutes that show thinking: record what was considered and the reasons, not just the outcome.

This is the structure our resident director works inside. The decision protocol agreed at onboarding sets out what the director signs routinely and what gets escalated. The minutes and action log are what let both the director and the parent show the board actually decided. We keep board decisions properly made and recorded, and your own lawyer advises on group governance design. If you're weighing a "name only" arrangement instead, read nominee directors in Australia first.

This is general information current to 27 October 2026, not legal advice. Have your group's lawyers check your structure and constitution against these rules.

General information about Australian law and practice, not legal or tax advice for your circumstances. Check the official sources, or ask your adviser, before you act.