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 meant by being involved in the “management” of a company?

The meaning has been interpreted extremely widely. There are no hard and fast rules as to what it means as every company is run differently. The courts look at matters on a case by case basis to determine whether a person’s role is effectively involved in the management of a business rather than that of an employee.

However, there are indicators that a person is acting beyond the remit of a mere “employee” and is effectively involved in the management of a business:

(i) Being a signatory on the company bank account;

(ii) Attending board meetings;

(iii) Being involved in strategic planning;

(iv) Being the “go to” person for customers and clients;

(v) Otherwise making decisions that no other person can make and/or having no one to account to.

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.

“Help: my client’s gone bust!”

We all have a pretty good idea of what this phrase means, but what are the most common types of insolvency that you might meet among your clients? As someone who is owed money by a client who has ‘gone bust’, what does this mean for your business and what can you do?

Types of insolvency

There are a number of possible insolvency procedures that may apply if a business has ‘gone bust’. If your client is a company or a limited liability partnership (it has “Limited”, “Ltd”, “PLC” or “LLP” at the end of its name) the most likely occurrence is that it has entered administration,  liquidation or a company voluntary arrangement. If your client is a sole trader or partnership, the insolvency more commonly will be that of an individual, such as bankruptcy.

So many different terms for what can seem to be the same thing; but each procedure means something different for the business and its creditors. Depending on the first procedure entered into, it is possible that a business may move between insolvency procedures over time. Some common types of insolvency are:

• Administration is a ‘rescue based’ procedure: the primary statutory purpose is to rescue the business as a going concern. This may be done by the administrator taking over the trading of the business and/ or by selling the valuable part of the business and its assets to a new owner to raise money for creditors. The administrator is under a duty to consider the interests of the all the creditors when making any decisions about the company or its assets.
• Liquidation is a ‘terminal’ procedure: the business is being wound up, the assets realised for the best possible price and the proceeds distributed to creditors. A company may enter liquidation voluntarily upon the resolutions of its shareholders and creditors (company voluntary liquidation, “CVL”) or compulsorily by the order of the court upon a creditor’s petition (compulsory liquidation, “CL”). In CVL, these resolutions will include the appointment of a liquidator. The Official Receiver is often first appointed liquidator in CL but may later be replaced by an Insolvency Practitioner (“IP”) from a specialist firm. You may also come across a members’ voluntary liquidation (“MVL”), which whilst terminal is a solvent procedure.
• A company voluntary arrangement (“CVA”) is a contractual arrangement between the company and its creditors for the payment of the company’s debts (or an agreed part) over an agreed period of time. A supervisor is appointed to monitor the company’s performance of the terms of the CVA.
• Bankruptcy is the terminal procedure for individuals and, as for corporate entities, can be commenced voluntarily by the debtor or by order of the court on the application of the creditor. A trustee in bankruptcy, possibly or initially the Official Receiver, is appointed in respect of the bankrupt’s assets and affairs. Individuals may also agree individual voluntary arrangements with their creditors, as with companies this is a contractual commitment to pay debts over time.

Notification and next steps

You may first become aware that a client is in difficulty from the client itself. If this is the case, ask who the IP appointed is, in order that you can inform them of your interest as creditor. However, the administrator, liquidator or trustee will be examining the records of the business to identify creditors and will contact you on his appointment. This notification will tell you what type of insolvency procedure applies or is being proposed (for example a CVL or CVA) and what is your entitlement to vote.

If there is an intended insolvency and you have an entitlement to vote for or against it, the notification will include a proxy form for voting purposes and a proof of debt form. The value of your vote will reflect the amount of the debt you say you are owed. Be aware that there are strict deadlines for responding to these notices. You may also have the ability to vote at different stages during an insolvency process.

After any insolvency appointment, you will only be entitled to share in any money realised by the IP (a “dividend”) if you have submitted a proof debt form which then will be used to establish the amount of your claim. When you receive a notice of intended dividend, note again the specific deadlines for returning the requested information in order to have a share in the dividend.

Be aware that the interval between being notified of an insolvency procedure commencing and being notified of an intended dividend can be extensive. As a creditor you are entitled to regular periodic reports on the progress of the conduct of the procedure and the likelihood of any dividend.

Creditor claims

The primary concern when a client ‘goes bust’ is how are you going to get paid.

There are well established rules for the ordering of different types of creditor claims in an insolvency. Unsecured creditors, typically including suppliers such as you, rank lowest in the order of payment and will only share in a dividend after all other categories of creditor have been paid in full. Amongst all unsecured creditors, everyone will have the same proportion of debt paid; for example if the dividend is ‘5 pence in the pound’, you will receive 5 pence for every pound you are owed.

This dividend can be disappointing. Your recoveries may be enhanced if you have a guarantee in respect of the client’s payments that you can enforce; if you can set off any amounts you owe the client against the amount you are claiming, but note there are special rules relating to set off in insolvency or if you hold deposits that you can apply against outstanding payments. 

If a company is in administration, one thing you cannot do is start or continue legal proceedings for the payment of any debts.

Some further thoughts

Does your contract with the client continue in insolvency? Liquidation automatically terminates a contract, but look at what your contract provides in respect of other insolvency events.

If you are supplying staff who are crucial to the continuation of a business in administration you may find that the administrators are willing to continue paying for them during the administration, but not for the period before. If the administrators sell the business, you may be able to negotiate with the purchaser that they take over your contract with the client and whether they would be willing to pay for any arrears.

Do you have insurance for bad debts that you can claim under?

What happens to your contract with the worker? Are you still required to pay the worker or the worker’s tax or national insurance contributions even if you are not paid by the client? (Note that the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (‘the Regulations’) prohibit you from withholding payment from temporary workers you supply to clients on the basis that your client has not paid you, so this option will only be available if the workers are entitled to and have ‘opted out’ of the Regulations.) Does the worker receive benefits such as on-site accommodation, if this is withdrawn, do you have any further responsibilities?

All IP’s conduct is governed by the laws of the relevant insolvency procedure and the rules of their regulatory body. If, however, you have any concerns about any IP’s conduct of a matter, as a creditor you may be able to require the conduct to be investigated.

Any questions?

If you have received notification that a client has ‘gone bust’ and are unsure what to do next or need any assistance with any claim against an insolvent business, please feel free to contact someone in Francis Wilks and Jones LLP’s insolvency team.

 

The Importance of a Shareholders’ Agreement

Year on year many small limited companies are successfully set up by family members, friends and former colleagues with great business ideas, yet for some such happy beginnings may not last. Disputes may arise shortly after the company’s birth or many years after, often as a result of changes in the strategy and management of the company.  Ranging from the differing or competing business interests of individual shareholders to the implementation of a contentious dividend policy creating an contentious salary disparity between shareholders, these disputes can have serious financial implications and can cause irrevocable damage to a small business.  Despite this fact, the drafting of a shareholders’ agreement, the pre-nup of the corporate variety, is often way down the to-do list when individuals decide to start-up a company.  Ironically, a well drafted and structured shareholders’ agreement can provide a company and its shareholders with the very protection and flexibility it needs to flourish and grow in a dispute free environment.

At FWJ, we are seeing an increasing number of boardroom disputes or disgruntled shareholders as businesses face ongoing difficult trading conditions.  These conflicts between directors and/or shareholders can seriously destabilise a business by distracting valuable management time away from the essentials of attracting customers, delivering the product and maintaining cashflow. We can, of course, assist parties in progressing a claim against a business partner, be it a co-director, another shareholder or as an investor against a single director or the entire board, or by helping parties arrive at a satisfactory settlement of any such dispute, but these actions can be slow, divisive and expensive.  As with your domestic arrangements, forward planning is the answer. So what is the best preventive treatment?

When setting up a new business, or becoming involved as a new director or shareholder-investor of an existing business it is always best practice to record in writing the internal agreements that will govern the relationship between you: how are the decision making powers divided between you?  How are they challenged?  How can you replace a director or shareholder?  How do you get your value out of the company in future? No-one wishes to appear to be uncommitted or planning for failure, but time and again, these questions, if not thought about and the parties’ agreements recorded, will have the capacity to cripple a business if they occur at a later stage.  As financial pressures on a company or its directors or members increase, so these issues become more prominent.  There is no need to wait until a problem actually occurs; would your company benefit from an interim health-check?  A full, open discussion between all the relevant parties may be difficult at the outset, but could result in a robust organisation containing committed and confident members who trust each other and are motivated to maintain their investment of time, money or skills for the greater benefit of the company and its trading counterparties.

If you are about to enter into a new or significant commercial relationship or, as a financier, you are looking at taking on a new client, or simply as part of your regular client audit, ask if they have adapted their articles to reflect how the business is intended to run in reality, rather than just adopting the statutory Model Articles or some company incorporation agent’s standard form that does not take into account this company’s specific circumstances or needs.  Is there an agreement between the shareholders governing the scope of shareholder influence and control of the distribution of the company assets either on an ongoing basis or on a sale or break up?  From a financier’s objective, would you be more attracted to a business where the owners and management demonstrated in their business plan and constitutional documents that they were well prepared and forward-looking in their housekeeping as well as their commercial thinking?

FWJ’s Shareholders and Directors Advice team can assist your company, or your client,
in developing structural documents such as modified articles of association or shareholder agreements suitable for your business needs. It is recognised that further capital outlay, at this difficult time, may not be attractive, but our experience of dealing with disputes where no prior agreements are in place indicates that there is merit in making this investment. Whilst having a shareholders’ agreement is not the complete inoculation against the problem, such an agreement, properly drafted, can help structure discussions between parties and assist in the effective negotiation of a pragmatic solution to enable the company to survive the difficult market conditions.

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

Directors' Duties – The Basics and the Risks

Directors' duties were codified by Part 10 of the Companies Act 2006:

1. Chapter 1 of Part 10 (sections 154-169) sets out the laws relating to company Directors (appointment, register and removal).
2. Chapter 2 of Part 10 (sections 170-180) sets out the statutory duties on Directors.

The provisions of the Act extend to all Directors, including shadow Directors (being those who are not appointed Directors but whose decisions the company follows) and de facto Directors (those who act as Directors although they have not been formally registered as a Director at Companies House).

The main statutory duties of a Director under the Companies Act 2006 are as follows: 

1.         Section 171 – Duty to act within powers – Directors should not exceed the powers conferred on them by the company’s Articles of Association nor should the Company exceed (at the Director’s direction) what it is allowed to do in its Memorandum of Association.

2.         Section 172 – Duty to promote the success of the company – a Director must act in the best interests of the company and for the benefit of its Shareholders having regard to the likely consequences of any decision. This includes considering the interests of employees, business relationships with suppliers, customers and others, the impact on the community and environment, maintaining the reputation of the company and acting fairly between members of the company. 

3.         Section 173 – Duty to exercise independent judgement – As the company is a completely separate entity, its Directors must consider all decisions independently from their own interests, any professional advice received or any third party influences.  Directors have a duty to personally consider whether each decision taken is in the company’s best interests, rather than just relying on third party advice or influence as authority for their subsequent decisions. 

4.         Section 174 – Duty to exercise reasonable skill and care and diligence – Directors should act in a manner that any reasonably skilled Director would generally act in their particular area of management.  Directors should attend board meetings (or as many as reasonably possible) to ensure good corporate governance and supervision of their fellow Directors and to ensure the correct management of the company’s affairs.   Ignorance of decisions taken and lack of participation is often the catalyst for Director disqualification proceedings where Directors fail to act on information they ought reasonably to have been aware. 

5.         Section 175 – Duty to avoid conflicts of interest - Directors must avoid situations where they have or could have a direct or indirect interest that conflicts or may conflict with the interests of the company.  Where a conflict of interest may exist, the Director must ensure that the company’s interests prevail and a common way to avoid issues over conflicts is to disclose all matters to the board of Directors so that the company (acting through its Directors) can make a decision with all the facts in front of them (see Section 177 below).  This may mean that conflicted Directors do not participate in decisions where their conflict of interest exists.   

6.         Section 176 – Duty not to accept benefits from third parties – This section extends Section 175 as Directors must not prioritise their own interests above that of the company's when dealing with company business and property and must not, for example, make a secret profit from any undisclosed and unauthorised transaction or divert work away from the company for their own benefit. Any benefits obtained in this way may have to be accounted for to the company.  Furthermore, Directors should not accept loans or the benefit of guarantees from the company.  This duty can quite often overlap with a Director’s duty to promote the success of the company (Section 172 above). 

7.         Section 177 – Duty to declare the nature and extent of any interest in a proposed transaction or arrangement – Directors must disclose all interests in relation to all transactions (eg property, information, shares held etc) irrespective of whether or not the company could take advantage of it.  Directors should again obtain board and Shareholders approval, where required, before steps are taken.  Again, this extends the other duties in Sections 171 to 176.

8.         Insolvency - Whilst a Director is generally under a duty to act in the best interests of the company and its Shareholders, the moment the company is deemed to be insolvent, they are under a legal duty to protect the interests of the creditors instead of the Shareholders and the company must then function for the primary purpose of getting the best return for creditors. 

Risks Faced by Directors for Breach of their Fiduciary Duties

We list below the main claims for personal liability faced by Directors.

1.         Wrongful Trading - This is when a Director continues to trade or enter into contracts after he/she knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation.

2.         Fraudulent Trading - This is when the Director carries on business with the intention to defraud creditors or for any other fraudulent purpose, eg taking deposits for orders they know the company cannot fulfil or entering into contracts when the Director knows there are insufficient funds to conclude the contract.

3.         Misfeasance - This is a breach of the fiduciary duties of care owed by a Director, as detailed above, e.g. wrongly taking out money from the company, using company money for matters not associated with company business or directing payment to associated parties.  Such a claim is normally issued to seek recovery of the losses arising from the misfeasance from the Director(s).

4.         Preferences – This applies where Directors make payments or transfer assets to one creditor (or a group of creditors) in preference to the remaining creditors.  Whilst such a claim would be issued against the Director personally, a liquidator or administrator can seek to reclaim such monies as a preference transaction from the recipient directly (together with their legal costs, if necessary).

5.         Transactions at an undervalue - Where the company transfers assets for significantly less than their market value, the undervalue amount can be reclaimed by a liquidator or administrator in a similar manner to a preference transaction. 

6.         Voidable transactions – This is another antecedent transaction (i.e. one occurring pre-insolvency) which allows the reclamation or setting aside of any transaction carried out between the date of the presentation of a winding-up petition and the final winding-up order.  This includes share transfers. 

7.         Transactions defrauding creditors – This provision applies to both companies and individuals where a transaction at an undervalue has occurred where it can be demonstrated to have occurred with the intention of putting such assets beyond the reach of creditors.  Directors can be liable under this section where they transfer company assets, either to a third party or for their own benefit.  This provision enables the Court to set aside the transaction, make a compensatory award or any other order deemed appropriate to protect the interests of the prejudiced creditor(s).

8.         Director Disqualification – A Director can be disqualified from acting in the promotion, formation or management of a limited company where it can be established that the Director’s conduct evidences them to be unfit to act as a Director.  The grounds of disqualification are very wide and unrestricted, in a similar manner to claims for misfeasance (see above).  It should be noted that, following disqualification, there is a statutory provision enabling disqualified Directors to seek leave to act as a Director of a specified company(s).

For more information, please feel free to contact Partner Andy Wilks Shareholder Disputes team on 0207 841 0390.

Background to Francis Wilks & Jones

Francis Wilks & Jones was founded in 2002 and is based in Central London. We specialise in providing legal services to a number of business sectors together with more bespoke advice to individuals. We count amongst our client base members of the Asset Based Lending Industry (we are an affiliate member of the ABFA), Insolvency Practitioners, Recruitment companies, brokers and accountants.

FWJ is primarily a commercial practice with a strong emphasis on commercial litigation, debt recovery, commercial finance and insolvency and restructuring work. We also offer property-related services to our clients.

The firm’s two founding partners, Andy Wilks and Tim Francis, gained much of their early expertise at former niche Receivables Finance law firm Wildes and then, after its takeover, at a leading London firm.

We employ a highly capable team of solicitors and support staff, all of whom are accessible to our clients. This ensures prompt and effective response times, coupled with cost effective solutions for our clients, something often unattainable for our larger competitors.

We also employ a full time Finance Director, David Coles, and retain the services of Paul Saunders as a consultant to the firm, bringing with him 34 years of experience at Lloyds TSB Commercial Finance Limited, much of it at director level and latterly specialising in the provision of cash-flow finance to the Recruitment industry.

Expert commercial litigation, debt recovery and fraud work

Our litigation solicitors are experts in all types of commercial litigation. The team has many years’ experience in all types of debt recovery claims, ranging from County Court claims to higher value High Court claim and multi million pound fraud cases. The litigation team also has exceptional experience in all types of alternative dispute resolution claims including high end mediation work.

Corporate Restructuring & Insolvency team

The insolvency team provides advice on a wide range of non-contentious insolvency matters and corporate rescue options. These include corporate administration, liquidation and corporate voluntary arrangements as well as providing advice on individual insolvency matters.

Commercial Advice

The insolvency team is complimented by the Business Law team who advise on all aspects of corporate restructuring, rescue finance and other commercial work.

Our solicitors have advised numerous high-profile clients, and the firm is an affiliate member of both the Asset Based Finance Association and R3 – the Association of Business Recovery Professionals.

Specialist director and shareholder advice

Francis Wilks and Jones have a highly respected team which can provide advice on a wide range of directorial and shareholder issues – ranging from specialist director disqualification advice both pre and post issue to issues arising from shareholder disputes and roles and director responsibilities

Cutting edge technology and links to other professionals.

Francis Wilks & Jones has always recognised the importance of having the latest technology to support our bespoke law service offering. For example we have invested heavily in a sophisticated case management system to help deliver our litigation services in the most efficient and cost effective manner possible. Not only do our clients benefit from the high level of legal advice offered by our lawyers profiles they are also supported by the best possible IT systems available.

In addition we recognise that our clients will from time to time require assistance from other professionals such as accountants and financiers with whom we have built close ties over the last decade of being in business. Our Links page demonstrates our full service offering in this respect.

High level of one to one contact

Our business practice includes a high level of one to one contact with our clients and we offer the complete package our clients are looking for, whatever the case and whatever their requirements.

We boast a broad range of links to other professional advisors forged over a decade of working together. We can therefore provide our clients a “total solution” with assistance from whichever experts and advisors are required.

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.

---

[1] Insolvency Service statistics released on 2 November 2012

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

Avoiding Deadlock – Court Intervention or Shareholders’ Agreement?

If the attendance of a specific director is a requirement of a company’s constitution, can a decision made at a directors’ or shareholders’ meeting be valid if that director is not present?  Further still, can that director’s removal as a director of the company be possible without their attendance?  

Simply put, the answer to this question is no, which leads to a situation in which it may be impossible to remove an uncooperative director without breaching the company’s constitution, resulting in a deadlock situation.

Perhaps unsurprisingly this situation is commonly encountered by many small and often family run businesses and, whilst understandable that a director wishes to ensure that the management and strategy of the company remains under their control and that their interest remains secure, the situation becomes complicated when director relations start to fall apart.

Court Intervention

Section 306 of the Companies Act 2006 provides some comfort to companies, as a court may, at the request of a director or shareholder, order a general meeting to be called, held or conducted in any manner it thinks fit where it is impractical to call or conduct the meeting in the manner prescribed by the company’s articles (as supplemented by the Companies Act 2006).  Furthermore, the court has the general power to make any necessary directions to give efficacy to the operation of the company, which may include amending a company’s quorum from two to one, amongst other things.

Smith v Butler & another [2011] EWHC 2301 (Ch)

The case of Smith v Butler successfully illustrates s.306 in action.  The claimant, Smith, was the Chairman of a company and held 68.8% of the shares whilst the Managing Director, Butler, held the remaining 31.2%.  The quorum requirement for general and board meetings was two, one of which had to be Smith unless he waived the requirement.  In 2011 the parties fell out with suspicions of fraud being raised by Butler against Smith culminating in Smith wanting to appoint a new CEO and Butler seeking to suspend Smith as a Director.  Butler proceeded to hold a meeting in which Butler and a third director signed a resolution of the board authorising the suspension.  Following this, Smith requested that a general meeting be held in order to remove Butler and the third director as directors, Butler’s refusal to attend the meeting led to the meeting be held inquorate causing Smith to make an application to court to seek an order that a general meeting be called with a quorum of one.

It was held by the court that a quorum of one would be allowed as the Articles were designed to give excessive protection to Smith who could not be dismissed as a director.  As a point of interest, the court also commented that Butler, as a minority shareholder, could in fact have commenced unfair prejudice proceedings and/or sought permission to commence a derivative action.

Conclusion – the need for a Shareholders’ Agreement

Whilst this case is an example of court intervention in a deadlock situation, the reality is that a s.306 application is often an option of last resort, as the courts are generally hesitant to interfere in company matters unless absolutely necessary.  A preferable and potentially more cost effective option would be for a company to invest in the drafting of a clear and concise shareholders agreement to strike an effective balance between protection and flexibility and which contains specific provisions dealing with potential deadlock scenarios. This would enable the company to function successfully and thrive irrespective whatever the situation.

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

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.