B2.1: Acting as Director of Client Company

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.

This is a complex subject, and it is impossible to provide more than an indication of some of the points which a solicitor in this position should bear in mind.

A solicitor asked to act as a director of a client company should only accept office if they are fully aware of the relevant law.

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 they are 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 their 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 other directors, (i.e.not the solicitor director)..

If the client company is a charity, the additional requirements  on remuneration of charity trustees (which expression includes directors of charitable companies) should also be borne in mind. Further information can be found on the OSCR website here.

As a director, a solicitor's primary duty is to the company in which they hold that office. This may give rise to particular difficulties if, for example, (1) the company is a wholly owned subsidiary and there is conflict between the interests of the subsidiary and the parent company and/or (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.

A solicitor asked to act as a director of a client company should accept office only if and for so long as they are entirely satisfied that the request is not an attempt to disguise the beneficial ownership or control of the company in question, and that accepting or continuing in office will not in any other way facilitate or enable money laundering.

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 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 their 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 to give a full account of the risks and responsibilities borne by a company director. The following should only be taken as examples of areas where risk exists:
 
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 their 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 they 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 their appointment, to participate fully in the management of the company and, in particular, to ensure that they receive 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 any  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 them 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, their 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. A solicitor acting as nominee director would have the same duties as other directors and, therefore, whether the solicitor considers themselves a nominee director or not, is irrelevant for this purpose. There is also the risk of disguised management or control of a company which would be inappropriate for a solicitor to be engaged in, and it further imposes a risk to the independent judgement of the solicitor as director.