B2.1: Acting as Director of Client Company

From time to time the Law Society is asked to provide guidance to solicitors who have been asked to act as a director of a company which is also a client of the practice unit (and also where a company of which the solicitor is a director becomes a client of the practice unit). This is a complex subject and it is impossible to provide more than an indication of the main points which a solicitor in this position should bear in mind. Many practice units have their own policies on this, and this guidance is not intended to displace them in any respect. The Society would appreciate any comments with a view to improving this guidance.

There is no prohibition on a solicitor acting as a director of a client company, but there are a number of issues of which a solicitor should be aware if asked to act in this capacity. A directorship should not be accepted or retained if any of these give rise to difficulty.

The law relating to the duties and responsibilities of a company director, and the inherent risks of that office, is complex. A solicitor asked to act as a director of any company (not just a client) should only accept office if he or she is fully aware of the relevant law. A director also has to keep abreast of changes in company law which occur very frequently.

A director is obliged by statute to disclose to the directors of the company any arrangement or transaction between the company and the director or any firm of which he is a member (Sections 182 to 187 of the Companies Act 2006). This applies, in particular, to the provision of legal services to the company.

The Articles of the company may impose additional conditions beyond those required by statute.

A solicitor acting as a director of a client company must be aware that there is an inherent conflict of interest between the solicitor and his or her practice unit with respect to fees for legal services and related matters. The solicitor should ensure that any decision on these matters is taken by the directors other than himself or herself.

As a director, a solicitor's primary duty is to the company in which he holds that office. This may give rise to particular difficulties (1) if the company is a wholly owned subsidiary and there is conflict between the interests of the subsidiary and the parent company and (2) where a solicitor director has confidential information about another client which is relevant to the interests of the company.

Point (2) is a particular instance of the circumstances considered by the House of Lords in Hilton v. Barker Booth [2005] 1 All ER 657 in which a solicitor was found liable in damages to a client from whom information was withheld on the grounds of a duty of confidentiality to another client.

Another issue which needs careful thought is the matter of legal professional privilege, particularly in relation to EU competition issues. The European Court of Justice has recently reaffirmed (in Akzo Nobel Chemicals Ltd v The Commission) that in an EU context legal privilege only applies to the extent that the lawyer is independent - i.e. not bound to his client by a relationship of employment. The Commission accepted in its submission that it is possible for documents written by in-house lawyers in preparation for legal proceedings to be subject to privilege but not other documents, and the court appears to have accepted that argument. While this decision obviously applies to executive directors, it is possible that the court could extend it to non-executive directors, particularly if there is an issue of breach of competition law before the court.

As noted above, it is impossible in guidance such as this to give a full account of the risks and responsibilities borne by a company director. The following may be taken as indications of the main areas: 
 
1. Legislation contains numerous criminal offences which arise if a director is responsible for the company's failure to observe the provisions of the legislation, as well as his or her own failure to do so.

2. A director may be subject to a claim by a member (or a liquidator etc) that an act or omission in which he or she participated amounts to a breach of duty and this may expose the director to liability to compensate the company.

3. It is important for a director, whatever the terms of his or her appointment, to participate fully in the management of the company and, in particular, to ensure that he or she receives and understands regular management accounts where the company is actively trading.

4. If the company goes into insolvent liquidation the liquidator may consider imposing personal liability on a director in respect of his or her failure to take adequate steps to protect the interests of creditors.

5. If the company goes into insolvent liquidation, administration or receivership all current directors and those who held office in the recent past will automatically be the subject of a report to the Secretary of State on whether proceedings to disqualify them from holding the office of director (and certain other offices) should be taken, on the grounds that the conduct of the director makes him or her unfit to hold that position. This constitutes a particular risk for those solicitors whose practice units have become limited liability partnerships. Disqualification as a company director also disqualifies the individual from being a member of an LLP (and vice versa).

6. The duties, responsibilities and risks of a company director also extend to "shadow directors" i.e. persons on whose instructions the board of a company is accustomed to act. The definition contains an exception, however, for professional advice. This exception may be lost if the person in question is actually a director, and in those circumstances, his or her practice unit may be deemed to be a "shadow director" of the company and exposed to the same risks as outlined above.

7. It would be imprudent for a solicitor to act as a nominee director for another person.