When running a company, whether it is financially successful or it is moving towards insolvency, the importance of taking appropriate professional advice cannot be underestimated. Our brilliant team is here to help.
It is essential for directors and shareholders to take professional advice on setting up a company correctly, including how to maintain the books and records and accounts required to meet their duties under the law.
It is also important for directors and shareholders to take professional advice on their personal duties, both when a company is successful, and when it enters the arena of insolvency, when their duties change.
Professional advice can take many forms. Most companies use accountants and lawyers. Insolvency advisers or turnaround professionals may also be instructed in if the company is looking at a company rescue or formal insolvency. If a company is having particular financial difficulties then it is common for their bank put a member of their own team on the board, to oversee company decisions, make suggestions for turnaround, and review financial information available.
The risk of shadow directorship
A shadow director is “a person in accordance with whose directions or instructions the directors of a company are accustomed to act,” but is not registered as a director at Companies House – read more about this on our webpage Directors Disqualification – what is a director? A shadow director can be targeted for director disqualification or for many of the claims against directors brought by liquidators.
- the definition of a shadow director under company legislation explicitly excludes a person who is acting in a professional capacity advising the company, for example an accountant or a lawyer;
- this gives protection to professional advisers if they give professional advice to the directors on which they base decisions.
However, this is not a blanket exclusion.
- it is important to note that this protection is limited to advice given in a professional capacity only;
- if the adviser goes beyond that, then they may be found to be a shadow director;
- advice given by that person in a non-professional capacity, which could be construed as an instruction or direction, might cross the line into shadow directorship, particularly if this is something that happens on a regular basis.
To avoid this, all business decisions must be taken by the board, and the reasons behind these should be recorded in the minutes. It is important that all directors are fully aware of the financial state of the company, so that they are not wholly reliant on an adviser. A company must ensure it retains up to date management accounts which are available to all directors.
Is taking professional advice a defence to proceedings for a director?
It is possible for a director defending a claim against them to rely on the fact that they took professional advice. For example, if the company accountant has produced inaccurate accounts that were relied on for key decisions which led to misconduct allegations.
Howver
- it has often proved difficult in practice to claim professional advice in defence of proceedings, particularly disqualification proceedings;
- this is because the professional adviser is often not given the full picture by the directors in the first place;
- if the adviser was not fully aware of all of the circumstances, then the directors should have known that their advice could not be fully relied on, and may not rely on this as a defence.
At Francis Wilks & Jones we have many years of experience in advising directors and shareholders in claims against directors, including defending claims by directors and shadow directors involving professional advisers. If you are concerned either about your position as a director taking advice from a professional adviser, or if you are a professional adviser accused of being a shadow director, contact us at your earliest opportunity to discuss your options.
