Does Providing Professional Advice to a Limited Company put the Advisor at Risk?

The answer is generally no. Giving advice in a professional capacity to a limited company does not normally make someone a shadow director. However, you may be more at risk in certain situations - for example as an in-house lawyer or a financial adviser.

To minimise risk liability a person concerned should:

1. Ensure that all business decisions are properly taken by the board;

2. Ensure that any advice given does not take the form of a “dictat”;

3. Avoid taking control of the financial affairs of the company you are giving advice to;

4. Always make sure that minutes of board meetings reflect that decisions have been made by the board;

5. Always ensure the minutes reflect the capacity you are attending in (i.e. not as a director – for example as an advisor to the board).

There have been instances where management consultants have been disqualified and held to be de facto directors but the above should help avoid this situation arising.

What is a Director?

A “Director” is not generally defined in legislation, but relates to any person occupying the position of director by whatever name called. This can include senior managers, partners, trustees or governors. Conventionally, a director appointed to a company’s board and registered at Companies House is referred to as a De Jure director.

A director will always include non-executive directors who, although not having a role in the company’s day-to-day affairs, have identical responsibilities to the executive directors (i.e. the active directors) in respect of company affairs and duties under the Companies Acts.

Other individuals may also be defined as a director and therefore be subject to the same responsibilities and requirements of ordinary De Jure directors. These generally fall into one of two definitions, either a “Shadow Director” or a “De Facto Director”.

“Shadow Directors” are specifically included within the definition of a director by statute, which describes such persons as, “a person in accordance with whose directions or instructions the directors of a company are accustomed to act,” although this excludes roles where the directors acted in reliance of an individual acting in a professional capacity (e.g. an accountant). “De Facto Directors” are not generally defined by the legislation but are well recognised in common law as comprising those individuals who act as a director even though not validly appointed as so.

Shadow Directors - Beware

A recent press release from the Department for Business Innovation and Skills (BIS) reports that a disqualified director has been sentenced to 6 months imprisonment pursuant to s.13 of the Company Directors’ Disqualification Act 1986 (CDDA) for breach of a 7-year undertaking imposed in 2007.  His fellow director was also found guilty of aiding and abetting the breach and sentenced to a 12 month community order and 180 hours of unpaid work.

The two individuals were held to have actively attempted to circumvent the sanctions of a BIS undertaking by allowing the disqualified director to sign off cheques on behalf of the company, take part in the management of the company and intentionally turn a blind eye to his undertaking by allowing the non-disqualified director to register himself as a sole director.

This case undoubtedly serves to send a clear message to all disqualified directors that the Insolvency Service and BIS are monitoring disqualified directors and will not hesitate to take firm action in respect of any breach of undertakings given to protect the public and the business community.  Furthermore, caution must also be paid by anyone who currently is or is looking to work alongside a disqualified director, as they too can be subjected to sanction for the actions of a disqualified “shadow director”.

S.17 CDDA Leave

It should be noted that options are in fact available to disqualified directors who can apply for leave to continue to act as a director under s.17 of the CDDA.  Such an application allows disqualified directors to act as a director of one or more specified companies, despite their disqualification, and opens up opportunities to disqualified directors to continue to run or be involved in the management of a business.  

This area of law is rarely black and white and the need to obtain specialised advice upon a director’s options cannot be underestimated.  For more information on seeking leave applications or defending disqualification claims, please contact Andy Wilks, Partner and head of FWJ’s Director Disqualification team on 0207 841 0390.

Decision making – shareholder trumps director

It is fairly commonplace for a director to hold a dual role within a company, acting as director and/or shareholder, officer or representative of a shareholder. These roles should for the most part align with one another, however, if these dual interests come to conflict, the importance of reconciling the terms of any shareholders’ agreement with the company’s articles of association soon becomes paramount.

The recent case of Jackson v Dear and another [2012] EWHC 2060 (Ch) examines the position of parties to a shareholders’ agreement who are also directors of that same company and are accordingly subject to the usual fiduciary and directorial duties.

Facts

The case concerned three individual founders of a company who together owned a second company, which held all the voting shares in their founding company. The Claimant, being one of the founders, entered into a shareholders’ agreement with the other founders, which provided for (amongst other things) his appointment as director of both the founding company and the second company, terminable upon the occurrence of agreed termination events. The Articles, however, provided for the removal of a director by notice given by two or more other directors. This latter power was invoked by the 2 remaining founder Defendants on the premise that they viewed the Claimant to be unsuitable as a director and as such were fiducially required to remove him.

Essentially, the Defendant directors sought to remove the Claimant in their capacity as directors through the use of the company’s Articles thereby actively circumventing their commitment to the Claimant as parties to the shareholders’ agreement.

Decision

It was held by Justice Briggs that it was an implied term of the shareholders’ agreement that the Claimant would not be removed unless there was an event justifying termination under that agreement. Furthermore, the Claimant, as a contracting party, was entitled to assume that the other parties would not voluntarily render the agreement inoperative. Significantly, Justice Briggs went on to outline three alternative methods to avoid a breach of fiduciary duty on which the Defendants’ case so heavily relied, as follows:

1.      By making the second company sanction the breach of fiduciary duty in not removing an allegedly unfit director, or

2.      By the Defendants’ giving a direction to the board not to remove the Claimant under the Articles of the second company; or

3.      By amending the Articles of the founding company so as to disable the Article against the Claimant, save for a Termination Event occurring.

Conclusion

Crucially, in as much as this case essentially reconciles the current case law relating to implied terms and interpretation of contracts, it also acts as a caution to all directors who may be under the illusion that, by regarding themselves as two separate entities (being director and shareholder), they can advantageously rely upon a company’s Articles to circumvent onerous clauses within the shareholders’ agreement. It is instead the case that, unless there’s an effective carve out in the shareholders’ agreement; the contract principle that a party must do nothing of his own motion to render an agreement inoperative, will prevail.

For more information on the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact Partner Andy Wilks, 0207 841 0390.