Once you have decided that your business could do with engaging someone external, you need to decide on the capacity in which you would like them to join the team. The appointment of a Director and the engagement of a Consultant are two of the most common.
The nature of a consulting position is that they are engaged on a short to medium term basis to provide specialist advice on a particular area of the business, for instance in IT, marketing or recruitment. The role of a Director is to govern the business and make decisions about its strategic direction. Directors are focused on the long-term and the overall picture of your business.
The responsibilities attached to each position are also very different. The obligations imposed on a Consultant are limited to the purpose and terms on which they are engaged. In contrast, given the holistic nature of the work they do, Directors owe a range of duties to the business which they are legally obliged to meet. There can be severe consequences imposed on Directors which are set out under the Corporations Act, including fines, compensation and disqualification. In some cases, a breach may also constitute a criminal offence.
Deciding whether to bring someone in as a Consultant or a Director is not merely a matter of choosing a title. Under the Corporations Act, a person who is not appointed as a Director but acts in that position (‘Defacto Director’), as well as a person whose instructions the appointed Directors have become accustomed to following (‘Shadow Director’), can be deemed a Director.
For example, if a Consultant exercises functions such as calling Director’s meetings and participating in Board level decision-making, they would likely be found to be a Defacto Director. Similarly, if a Consultant gives directions on how to act in relation to the business, and the Directors are accustomed to acting in accordance with those directions, they will likely be deemed a Shadow Director.
As you can see under current law, a Consultant can unknowingly accrue Director’s Duties. If you engage someone as a Consultant, but they ultimately end up functioning as a Director, they will become responsible for the duties of a Director. Because of this, it is essential that you carefully consider the purpose and role you intend your new recruit to play, ensure that they perform within that role, and make sure that both they and any other Directors understand what their actual position is.