Buzzle v Apple - Creditors take heart
By Daniel Goldberg, Special Counsel
9 July 2010
A recent NSW Supreme Court decision[1] provides further guidance and some comfort on the law of shadow directorship.
Background
Buzzle Operations resulted from the merger of a number of resellers of Apple products.
Under the terms of their contracts with Apple, the resellers required Apple's consent to be able to effect the merger, so Apple took part in discussions leading up to and after the merger.
During these discussions, Apple made clear to Buzzle its financial expectations and what it required Buzzle to do in order to maintain its co-operation and give its consent. In particular, Apple:
- threatened to withhold its consent to the merger unless certain conditions were met (eg. the provision of a charge to secure Buzzle's debts to Apple);
- insisted on the parties undertaking certain actions (eg. a due diligence process); and
- required Buzzle to agree not to incur debts outside the ordinary course of business.
Buzzle's directors felt that they had "absolutely no choice but to agree to [Apple's] terms".
Buzzle subsequently went into liquidation. Its liquidator claimed that Apple's negotiations and communications with Buzzle had made it a "shadow director" of Buzzle and that, as a result, Apple was liable for insolvent trading by Buzzle.
What is a shadow director?
In addition to persons formally appointed as directors, the Corporations Act 2001 (Cth) provides that a person is a director of a company if:
- they act in the position of a director (referred to as a de facto director); or
- the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes (referred to as a shadow director).
Allegations against Apple
In this case, it was alleged that by imposing conditions for the giving of its consent, by participating in discussions relating to the merger and by imposing other requirements on Buzzle, Apple had been a shadow director of Buzzle.
If Apple's conduct had been found to make it a shadow director of Buzzle, then Apple would have been a director of Buzzle and therefore liable for any insolvent trading by Buzzle.
Key findings
The case examined whether, in light of the commercial pressure Apple exerted on Buzzle and its directors and shareholders and the fact that Buzzle did in fact comply with many if not all of Apple's demands, Buzzle's directors could be said to be "accustomed to act in accordance with [Apples]'s instructions or wishes".
The Court found that Apple was not a shadow director of Buzzle and gave the following guidance:
- If a party's consent is required for a proposal and the party imposes conditions for the giving of its consent, while this might influence the outcome of the decision, it does not of itself mean that the party participated in the making of the decision or that it was involved in the management of the company.
The court gave as an example "a lender who is entitled to demand repayment of a loan and appoint a receiver can say, for example, that it will stay its hand only if the borrowing company sells certain assets". - Considering and being actively involved in discussions about a proposal (including attending meetings), conveying concerns about the proposal and requiring those concerns to be addressed as a condition of giving consent are simply parts of an arm's length commercial negotiation: they do not automatically indicate participation in the making of the decision.
- Where the directors of a company acquiesce in a third party's demands, this does not of itself mean that the third party participated in the company's decision making.
"Unless something more intrudes, the directors are free and would be expected to exercise their own judgment as to whether it is in the interests of the company to comply with the terms upon which the third party insists, or to reject those terms."
In other words, while Buzzle's directors may have felt that they had no choice but to comply with Apple's demands, clearly they did have a choice: either they comply with the demands and proceed with the proposal, or they do not proceed with the proposal.
The case provides comfort and represents a win for common sense. Something more than imposing conditions and being actively and intricately involved in dealings with a company is required to make a third party a shadow director.
An appeal has now been filed, and we await its outcome.
[1] Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233