Consulting can be an interesting and varied role bringing you into contact with a diverse range of industries and clients, but for every silver lining there’s a cloud.
In this case, it’s the dark cloud of unwittingly finding yourself liable for your client!
In Green (Liquidator for Sports Management Group Ltd – “the Company”) v Marston & Another, the Company was placed into creditors’ voluntary liquidation and a liquidator was appointed. The liquidator subsequently made a claim against the Company’s accountant and its consultant in respect of various payments made from the Company’s accounts at a time when it was insolvent.
The claim was eventually pursued solely against the consultant on the following basis:
- Payments had been made to him personally
- Payments had been credited to the loan account he held with the Company
- That he was not simply a consultant but in practice a director of the Company. As such he owed the same duties as a formal director and consequently was in breach of duty as he had made payments to himself at a time when the Company was insolvent.
According to the information held by the Registrar of Companies, the Company’s accountant was also the Company’s sole shareholder and sole director. The consultant claimed not to be a director of the Company and requested that the court grant him relief in respect of breach of a director’s duty.
So was the consultant a director?
The consultant claimed that he had no access to financial information, had not made any decisions and had acted on the instructions of the Company director.
The court ruled:
There was no single decisive test which could be applied to determine whether or not an individual was a director moreover it was a question of degree. The court took into account all relevant factors. Those factors included, at the very least:
- whether or not the Company had ‘held out’ the consultant to be a director,
- whether or not he had used the title of director,
- whether he had been provided with the proper information (such as management accounts) on which to base decisions,
- and whether or not he had to make major decisions.
Taking all those factors into account the court then had to decide if the consultant had been part of the corporate management structure. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they had truly been in a position to exercise the powers and discharge the functions of a director. Otherwise, they would be made liable for events over which they had no real control.
On the facts the consultant had held himself to be a director of the Company. There was no evidence that he had written or spoken to the Company Director in order to get instructions. In fact, quite the opposite was true; evidence showed that the Company director had acted on the instructions of the consultant.
Accordingly, the consultant had been involved in the Company’s management structure. He had:
- taken operational and strategic decisions,
- entered into numerous contracts for the Company with staff, landlords and clients,
- made payments on behalf of the Company to third parties and to himself.
The impression he gave, through express representations and how he had been treated, was that he had been a director, with the company accountant being what he was, the accountant and not a director in practice. In the circumstances, the consultant had assumed a role which imposed on him the fiduciary duties of a director.
Accordingly, there was no defence to the liquidator’s claim in respect of payments sought and the consultant was found liable to make the repayments sought.
The message is clear: think before you act. By doing so, you protect yourself from potentially serious consequences.
For further advice or assistance please call 0800 088 6004