Blame the lawyers is a familiar refrain. As one myself, I recognize the accusation. There is perhaps a connection between the uncertain times in which we live and the stellar earnings reported recently by Magic Circle law firms. From sanctions to Brexit and from anti-trust to bribery and corruption the world is becoming more complicated. In a recent and wide-ranging consultation paper the U.K. government is now asking whether company directors are becoming over reliant on professional advice.
There are many eye-catching and important issues covered in this consultation which closed in June 2018. Several deserve attention in their own right and I intend to cover them in future blogs. They include:
- Strengthening corporate governance in pre-insolvency situations: This section considers whether steps should be taken to improve governance, accountability and internal controls within complex company group structures;
- Investigation into the actions of directors of dissolved companies: This section explores proposals to extend existing investigative powers into the conduct of directors to cover directors of dissolved companies.
- Protection for company supply chains in the event of insolvency: This section explores whether supply chain and other creditors should be better protected and, if so, how this could be achieved while preserving the primacy of the interests of shareholders.
Among these important questions, the issue as to the appropriateness of reliance on professional advice seems to have attracted little press comment so far. The Consultation paper puts it this way:
“Many companies, particularly larger and more complex ones, will often seek professional advice, for example on financial, legal or competition matters, so that directors have access to the expertise needed to help them make important decisions for the company. Indeed, in some cases they will be required to do so.
It is important to recognise, however that the duties and responsibilities of directors to the company are different from those of professional advisers. Directors are subject to the duty under section 172 of the Companies Act, as well as duties to exercise independent judgement and to exercise reasonable care, skill and diligence. Professional advisers, on the other hand are subject to whatever legislation, standards or supervision applies to their particular profession and contractual obligations to their client.”
Readers will recall that the Section 172 duties to promote the success of the company referred to above are themselves the subject of controversy about which I have blogged previously. Leaving that to one side, the question seems to be: is there a danger that directors are relying too much on legal and other professional advice? How can this be? Normally, the advice given is to seek professional input on difficult issues. Indeed, and especially in an insolvency context, failure to obtain professional advice is itself a possible indicator of an absence of the exercise of due skill and care. I’ve written about this as well in my blog, The Benefits of Seeking ‘Appropriate’ Legal Advice ‘at the Right Time’.
Squaring the Circle
Perhaps one way to square this circle is to draw a distinction between the seeking of professional advice and the reliance on it. The consultation seeks input on: “whether some directors are commissioning and using professional advice without a proper awareness of their duties as directors, and in particular the requirement to apply an independent mind”. One example given is that of a tax adviser asked to provide advice on tax planning and avoidance schemes. The adviser would need to ensure that they were legal schemes, but the director on receipt of the advice would need to comply with the directors’ duty to promote the success of the company having regard to the matters in section 172, such as the desirability of maintaining a reputation for high standards of business conduct, and the likely consequences of the decision in the longer term.
This is tricky stuff. In the first place, as already noted, there are ever increasing numbers of technical and complex issues on which advisers may feel it necessary to give nuanced and qualified advice not least to protect themselves from liability. Directors then have to assimilate and understand the advice given but are also required to stand back from it and decide whether and to what extent to follow it in the company’s best interests. How does this work in practice? Assume for example that the lawyers advise that there is a very small risk of sanctions infringement in entering into a supply contract which would have a transformative effect on the company’s fortunes. Do you vote for against the contract as a board member?
Are we perhaps nearing the time when professional (and especially legal) advice is sought and given not simply on behalf of the company, but also by individual board members looking to protect themselves from future personal liability? Will even that measure be effective? Is this a trend which is discernible in the more litigious United States? It will be interesting to see what the Government Consultation produces.