It matters greatly. Accountants who give directions and instructions to their clients, who in turn act upon them, could be perceived by the courts as ‘shadow directors’.
The courts have defined a shadow director as somebody who claims not to be a director and shelters behind others who he or she claims are the only directors of the company, while in the courts’ eyes he or she is in fact acting as director.
If found to be a shadow director, an accountant faces all the sanctions a delinquent director could face – such as being found guilty of wrongful trading and being held personally responsible for misapplying, retaining or becoming accountable for money or property due to the company.
There is the possibility of examination and being forced to produce documents for a liquidator or DTI inspectors. If found guilty, you could be disqualified as a company director and reported to your professional body.
Accountants have to be wary of their ‘practical advice’ blurring into ‘direction and instruction’ especially, for example, in the case of a ‘one-person’ company where the proprietor turns to their accountant and blindly follows their advice.
It is not uncommon, particularly in small, family companies, for the every day formalities of the company administration to be overlooked.
In that situation, there may be only one director who could also be the company secretary. If there is another officer it could be the director?s spouse. In this instance it is fair to assume that the director will be extremely reliant on the advice of his accountant.
When the director becomes accustomed to taking advice to the extent that every time an issue arises they immediately phone their accountant and follows the accountant’s advice then the terms ?advice? and ?direction and instructions? could become blurred.
A 1993 case, Re:Tasbian Limited, involved an accountant who was also a company doctor.
He had been disqualified from acting as a director after he was found to be a shadow director when he recommended the company trade thorough its difficulties.
The company subsequently ran into further difficulties.
The court relied upon the fact that:
- the defendant had become a signatory of the company’s bank accounts;
- was appointed and paid by the company as its external accountant;
- negotiated an informal moratorium with the company creditors;
- monitored trading and assisted the Board; negotiated with the Inland Revenue and factoring companies;
- and the real directors regarded him not only as a shadow director, but effectively as the managing director.
A decision at the turn of the year in the case of Re: Deverell widens the definition of a shadow director. In this case the court was prepared to make findings that the two ‘consultants’ in the case were shadow directors simply because they exerted ‘real influence’ over the directors.
It was not necessary to make a finding that the directors acted upon the directions and instructions – or that there was a degree of compulsion – but simply that the Board was accustomed to acting on their instructions.
Points to consider
What few cases there have been, show there are several points accountants should bear in mind.
In the case of an insolvent company, an accountant needs to show that any decisions regarding the cause or consequences of insolvency are based on up-to-date financial information, not just an accountant’s advice.
If a director or an accountant has any doubts about the financial viability of a company, they should seek independent financial advice, including, if necessary, advice from an insolvency practitioner.
Accountants must ensure that all difficulties are fully discussed with the company’s director and, crucially, ensure these discussions are documented.
Shadow directors are in an awkward position insofar as they are not entitled to call meetings nor are they able to attend Board meetings unless required to do so. The onus, therefore, is very much on the adviser.
Accountants should always make notes of telephone conversations and meetings. It is vitally important to record advice in a letter weighing up the various arguments for and against a decision, while making it clear that the final decisions rest with the directors.
Sending the director concerned a properly constructed letter of engagement, setting out clearly the function of the adviser and your relationship with the directors is also crucial.
If an accountant believes the steps being taken by the directors are wrong, then they should say so in writing. It would be good evidence of the director not being accustomed to acting at your direction or on your instruction.
If retained as an adviser, it may be wise to consider declining to act additionally as the company’s auditor or to take any other appointment on a regular basis.
Following the decision in the Deverell case, accountants providing consultancy services or who are simply proactive in their advice, will need to be careful not to step over the line between ‘direction and instruction’ and ‘advice’, otherwise the consequences could be very serious.
- Ali Zaidi is a partner with Commercial Law Firm, Edwin Coe.
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