How to avoid becoming a shadow CRO

Individuals helping Australian businesses to restructure or wind up may be putting their careers and livelihoods at risk by not understanding how their role is perceived under the law. If things go wrong, they can be pursued as a company ‘shadow director’ and may be held personally liable.

Andrew Beck said, “When companies are in trouble they don’t usually have the internal resources to either restructure or effectively wind up the business. Until now, Australian businesses have not followed the USA’s and Europe’s lead and appointed an official Chief Restructuring Officer (CRO). Instead, Australian businesses tend to employ a consultant to see them through the difficult period”.

This consultant acts as a CRO and is often considered a ‘shadow CRO’. They are temporary advisers whose role is to identify opportunities for change and manage the process while business managers focus on keeping the business running. They can bring expert knowledge and experience as well as an impartial perspective to the process. If the business needs to be closed, they protect board members’ and shareholders’ interests.

Andrew Beck said, “In Australia most insolvencies are handled by the big four banks but overseas there can be thousands of creditors involved so it pays to employ an expert. While this means Australian companies aren’t necessarily familiar with the term ‘CRO’, it doesn’t mean businesses aren’t employing people in that role.

“Getting expert help when the company is in trouble is the ideal response. However, the consultants must take steps to protect themselves; they mustn’t assume they’re untouchable just because they aren’t official company directors”.

If the consultant is involved in a company’s management and decision-making, or has similar responsibilities to a director, then they can be seen as a ‘shadow CRO’ and subject to the same legal ramifications as a company director. This means, if a company becomes insolvent, liquidators can pursue actions against them. Shadow CROs can also be subject to disqualification orders that prevent them from being a director of any company.

RSM recommends the following to avoid being seen as a shadow director:

  • offering advice and recommendations as opposed to instructions and directions
  • avoiding any financial responsibility or decision-making
  • ensuring board meeting minutes clarify the consultant’s position and role

Andrew Beck said, “If there is any chance you could be seen as a shadow director or shadow CRO, it is vital that you protect yourself. Ensure you are fully insured and, if there is any doubt about your role, seek professional advice”.