Why a single lawyer cannot normally advise both a company and an individual director






Introduction to Limited Companies

A limited company is created by a process of registration under the Companies Acts and is a legal "person" separate from the individual shareholders in the company. The ability to create a limited company by a simple process of registration (rather than, for example, by a private Act of Parliament) dates from the Nineteenth Century and was and is designed to encourage business enterprise. An individual or group of people may be willing to risk their money on a new business venture but the risk of losing, not just the money they have put into the business, but everything they have and being made bankrupt, if the business is not successful, is a strong disincentive. By creating a limited company the entrepreneurs can limit the risk - they still risk losing everything they have put into (or agreed to put into) the company but that is the extent of the risk: their other assets are not at risk, and they do not risk personal bankruptcy. There may be special situations where particular shareholders are at greater risk, for example if a shareholder personally guarantees a bank loan to the company, if a shareholder has induced others to invest in the company by a misrepresentation, or if a shareholder is actively involved in running the company and is responsible for carelessly causing a bodily injury to a customer, but the normal principle is that the liability of a shareholder is "limited" to the amount they have paid, or agreed to pay, for the shares they hold.

The flip side of limited liability for shareholders is potentially increased risk, at least in theory, for those who deal with the company, such as customers and suppliers, and for that reason limited companies are subject to regulations which require them to file accounts with Companies House every year which are then available to the public. There are also legal restrictions on the ability of companies to pay out dividends to shareholders (they can only be paid out of profits) and on giving loans to directors and related persons. And of course limited liability companies (with a few exceptions) have to include the word "limited" or "plc" (or the Welsh equivalents) at the end of their name to alert those dealing with them to their limited liability status (though, with a few safeguards, a company can use a trading name which will not include the word "limited" etc.).


Who is the lawyer to advise - the company or the individual?

If you are a director and shareholder of a limited company, and particularly if you are a 100% shareholder and sole director, you may be surprised if, when you first go to a lawyer for advice, the lawyer asks for clarification as to whether you as an individual are asking the lawyer for advice for yourself or whether you, as a director of the company, are asking the lawyer for advice for the company.

You will be aware that you and the company are separate legal "persons" but you may think that that does not make any practical difference in that, because you are a sole shareholder, what is good for your company must be good for you also, so that the same lawyer should be able to advise both you individually and (through you) the company, but that is not always necessarily the case.

In many companies where there is a sole director/shareholder that individual is also the only or main worker for the company, and in many situations where legal advice is sought there will be a real risk of a conflict between the interests of the company and the interests of that worker. For example it might be the case that the company has entered into a restrictive covenant with a customer which is or may be binding on the company but which might not be binding on the worker personally, at least not if the worker resigned from the company, as director and worker, and became self-employed. If legal advice were being given to the worker which encompassed the possibility of the worker resigning from the employment of the company, and working on a self-employed basis, that would be advice about a possible course of action which would not normally be in the interests of the company - hence the conflict of interest with the company.

Take another example: suppose a company has signed a contract which includes a restrictive covenant but there is doubt about exactly how far the restriction applies and/or can be legally enforced. The company director is considering whether the company will take a risk and take up the business opportunity. If the company does take up the opportunity there is a risk that the other party to the restrictive covenant may bring court proceedings for damages for breach. Those court proceedings might be brought against just the company or they might be brought against both the company (alleging that the company is in breach) and against the director personally (alleging that the director procured the breach by the company). In this situation there is a conflict between the interests of the company and the interests of the individual director. Of course the best thing, for both the individual director and the company, would be if the court decided that there was no breach of the restrictive covenant at all. But the court might decide that there was a breach of the restrictive covenant and, in that event, the best thing for the individual is that the court finds that although the company breached the restrictive covenant the individual director is not legally liable for procuring that breach. But the best thing for the company, in that situation, is that the court decides that the company was in breach but is not solely liable because the individual director is also legally liable for procuring the breach. So there is a conflict of interest between the individual director and the company.

A lawyer has to act in the best interests of their client and this means that they cannot advise both a company and its individual director if there is a conflict of interest because advising in the best interests of the company would mean giving advice not in the best interests of the individual director, and vice versa. Hence the reason why an individual lawyer can normally only advise the company, or the individual director, not both.                  

You might be thinking that this is all rather theoretical because if either the individual or the company (or both) are held liable that means that, one way or another, the individual loses out if the individual is 100% shareholder: if the company has to pay out then that reduces the money available within the company for dividends to be paid to the individual as shareholder accordingly. 

However if the company becomes insolvent (as it may do if it loses a court case) then it can sometimes make a very real practical difference whether the individual director is liable or whether the company alone is liable. If the company becomes insolvent (unable to pay its debts as they fall due) then the creditors of the company (which would include the other party which has won the court case) can petition the Companies Court for the winding up of the company. If a winding-up order is made a liquidator will be appointed whose role it is to take control of the company, realise the assets of the company, and distribute the proceeds to the creditors. The assets of the company include the value of any legal claim the company might have and the liquidator may be able to commence, in the name of the company, proceedings against the individual director if the individual director has been found liable for procuring the breach by the company (on the basis that if the individual director is found legally liable to the third party for procuring the breach they may also be liable to the company itself for not acting in the best interests of the company when procuring the company's breach). So if the company becomes insolvent it may make a big difference to the individual director whether the director was found liable for procuring the breach or not. If the individual director is held not liable for procuring the breach then although the value of the director's shareholding is reduced to nil the director has no further loss, whereas if the individual director is held liable for procuring the breach then not only is the value of the director's shareholding reduced to nil but the director may have a further liability for damages to the company now controlled by the liquidator.

Put simply it is the prospect or possibility of the company being would up by a creditor's petition coupled with the fact that if in liquidation it comes under the control of a liquidator (whose duty to the creditors is to maximise the money available to pay the creditors which could include making a legal claim, on behalf of the company, against director or former directors if they have legal liability to the company) which can create a real risk of conflict of interest between the company and an individual director even if a sole director and 100% shareholder.

Exceptions: non-contentious advice about director's duties 

If routine non-contentious advice is required about, for example, the role of a director and the procedure to be adopted in board meetings of the company, it is possible for a single lawyer to provide that advice both to the company and to the individual director. This is because lawyers only have to avoid advising two clients where there is a real risk of a conflict of interest and there should not be any risk in this case because company directors have a duty of good faith - a duty to act in the best interests of the company, putting aside their own personal interests, so routine advice to a director about their duties to the company will not conflict with advice to the company about the same matter. Of course it will be different if the role of one director is disputed by another director, or if advice is required about whether a director's past actions were or were not in breach of their duty to the company. But routine non-contentious advice about what the director's duties require now and in the future should not normally give rise to a conflict of interest.

Advice to a director about their service contract

Often a director will have a contract of employment with their company and, even if not, there may be terms which have been voted or minimum terms implied by law. Providing the contract of employment has been properly entered into in accordance with the company's constitution and the general requirements of company law, a director is, of course, for example entitled to be paid in accordance with their contract of employment - their duty to act in the best interests of the company does not mean that they cannot hold the company to the agreed terms of their contract of employment, nor that they cannot have time off and must devote every waking hour to the business of the company! But a director has to keep separate, in their mind, what they are actually and properly entitled to as an employee, as an exception to the general rule that they must act in the best interests of the company.

Although the terms "employee" and "service contract" are often used in a technical sense, using the expressions in a more general sense it is convenient to distinguish between the director as employee (whether strictly under a contract, formal or informal, or not) and the director as director and to think of the director as wearing two hats:-

A. The director as employee is subject to the terms and conditions including entitlements such as salary and time off contained in their service contract. The terms and conditions may also include specific restrictions on what the director is allowed to do. Some restrictions such as not competing with the company whilst the director remains a director would apply in any event because that would be a breach of the director's general duty to act in the best interests of the company (see B below) but such restrictions are often included as specific restrictions in service contracts on a "belt and braces" basis. In addition there may also be some further specific restrictions in the service contract, particularly post-termination restrictions, which go beyond what the director's more limited post-termination obligations under general company law or employment law would otherwise require.

B. Subject only to the entitlements in A above, the director, while remaining a director, has a duty as a director to act in the best interests of the company. 


Where an individual director is seeking legal advice as an employee the advice sought normally falls into one or more of the following categories:

1. Advice about what their current entitlements are and about specific restrictions applying to them while they remain a director/employee.

2. Advice about future entitlements and and future specific restrictions which would apply if they were to leave the company.

3. Advice about what their past entitlements were and whether they received them, and/or whether their past actions breached any specific restrictions, or general duties, binding on them in the past and, if so, what the consequences for them might be.


Where an individual director is seeking legal advice about their duties as a director the advice sought is normally:

4. Advice about what those duties to the company currently require the director to do or might require the director to do in the future. Where the matter involves an element of commercial judgment the lawyer can explain in general terms what the legal duties are but the commercial judgment is a matter for the director.

In theory it is possible for a single lawyer to advise an individual director both as an employee (1, 2, and/or 3) and as a director (4) but in practice, given that the individual director is wearing two hats - A and B - and has to keep them separately in mind, it is usually best for a director who requires "employment" advice to go to one lawyer, and if the director also requires "directors" advice to go to a different lawyer.


When a director and the company are both defendants in a civil court claim 

It sometimes happens that someone brings a court claim against both a company and against one or more directors. There are a number of possible reasons for this. It might be that the claimant is not certain whether it is the company or the individual director who may be legally liable. It might be that the claimant hopes that both company and the individual director will be liable but is uncertain which has assets sufficient to meet any judgment. For example it may be that an individual director is believed to have a large amount of equity in their house but the company has limited assets. The strongest case may be against the company but the individual director is added because they will be more able to pay any judgment obtained. Or the reverse may be the case.

Where both an individual director and the company are defendants there will nearly always be a conflict of interest between the individual and the director and each will need to be represented by different lawyers. This will be so even if the director is, or was, the sole director and is the only shareholder. If the individual director is still the director of the company and is the person communicating, on behalf of the company, with the lawyer who is representing the company, then normally that lawyer would also be able to advise the director, as director, on their current duties to the company (point 4 above) but a different lawyer will be needed to advise the individual director about their liability to the claimant and on any collateral issues which may arise involving employee responsibilities and duties (points 1 and 3 above).              




Disclaimer

The above explanation of the law is only an overview and in order to be reasonably concise I have had to leave some details out - details which are likely to affect what the law would say about your own situation. So please do not rely on the above but contact me for advice 

This page was lasted updated in April 2020          Disclaimer