Friday, 12 September 2008

Friendly advice at a cost

Friendly advice could cost you dearly if another company follows your suggestions.

Stuart Haynes, who leads our Commercial Team, said company bosses were often approached for advice by business colleagues.

“But such an informal arrangement could have serious consequences and you could even find that you are now considered to be a ‘shadow’ director. This situation occurs where someone who’s in the background and is not listed as a formal director, but has real influence over the actions the company takes.”

Stuart said the role was set out in the Companies Act 2006, and was described as someone whose directions and instructions the directors of a company were accustomed to following.

“The actual decision on whether you are a shadow director or not depends on how much the board takes and follows your advice when it comes to making key decisions. Your influence has to be over the entire board, or at least the majority of directors, and there has to be a history of influence, rather than just occasional advice.”

Stuart said problems would arise if the company you’re advising found itself in trouble either financially or otherwise.

“You could be treated as an official director, who must comply with the new duties that a typical board must follow – all of this sounds like a lot of responsibility when you were only offering to help out by sharing your knowledge.”

He said there were also many examples of shadow directors becoming personally liable for paying creditors when the company had gone bust.

“The best approach if you want to avoid being classified as a shadow director is to make sure that you only give advice to a minority of the board. Make it clear in writing that you’re not giving them a direction or instruction, but just a suggestion that they should consider for themselves."