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.

Zombie companies – the Need for Advice

Contrary to the predictions of many commentators at the start of the credit crunch, the continued recession has not led to a surge, but a decline, in corporate insolvencies and numbers now are now at their lowest level since 2008[1].

Instead there has been a rise in the number of so-called ‘Zombie’ Companies[2]. These companies are carrying a heavy debt burden, but with few assets, that financiers are allowing to continue to service their interest charges without reducing their debt instead of pursuing any formal insolvency procedure against the company due to the poor prospect of any dividend.

Zombie companies need expert insolvency and financial advice now if they are to survive the much anticipated economic recovery. Restructuring existing finance arrangements is a key strategy for a Zombie company and the company’s accountants should be encouraging directors to think seriously about their present situation as well as preparing for their future.

Outof court restructuring can be either by a consensual route with the financier to obtain the relaxation of financial covenants, payment holidays, revised payment plans, standstills or other amended terms or by using the companyvoluntary arrangement regime under the supervision of an insolvency practitioner which would give the company the necessary time and flexibility to resolve its financial difficulties.

Directors of Zombie companies also need advice from insolvency practitioners and lawyers on the risks of trading in this twilight zone of the company being insolvent on any of the conventional insolvency tests or if the directors ought to have known the company was insolvent (particularly if they are concentrating on meeting the cash flow test at the expense of satisfying the asset test). It may be crucial in the event of any investigation of the conduct of a director and defending any director disqualification action in the event of the company entering administration or liquidation in the future, if it can be shown that the director was taking professional advice throughout this time.

Rather than wait for what many insolvency experts view as the inevitable collapse of Zombie companies, now is the time for insolvency practitioners and financiers to become involved in the strategic planning of this crucial phase of SME survival.

For more information please feel free to contact Ambuja Bose, Partner, on 0207 841 0390.

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[1] Insolvency Service statistics released on 2 November 2012

 [2] 146,000 zombie companies in the UK, around 8% of all businesses: R3