In Part 1 of this article (December 2007) we discussed the potential exposures and consequences of giving advice to clients, including being classified as a shadow or de facto director of a client company, and the statutory exemption provided to professional advisors.
We also mentioned that advisors had further exposure to liabilities and other consequences even if they were not classified as a director. This exposure arose from section 79 of the Corporations Act (CA) and section 75B of the Trade Practices Act (TPA) amongst others.
But the first step in limiting exposure is for the advisor to ensure that they are not classified as a director. This will eliminate most of the potential financial consequences – and probably the ones that are the easiest to prove and prosecute.
The statutory exemption states:
“merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company or body”
One widely discussed example of what not to do is that of Mr Austin. The Australian Taxation Office (ATO) took on Mr Austin as a de facto director of a company. The ATO had previously disgorged a preferential payment to the company’s liquidator and was seeking recovery of the amount from the directors. Mr Austin was found to have been a de facto director under the expanded definition because he had, amongst other things:
- negotiated with the ATO on behalf of the company;
- given the impression that he was in charge of the company;
- co-signed an agreement on behalf of the company with the ATO;
- counter-signed company cheques
- negotiated extended terms with creditors
Albeit that he was not an accountant or solicitor and his actions were rather extreme, his acts lead the court to conclude that he crossed the line from advisor to director. This issue has been looked at often and one of the best recommendations we have heard is simply:
- have an engagement letter
- give opinions and options – not instructions
- let the directors make the decisions and take the actions
Not crossing the advisor-director line will protect advisors from director-related claims and liabilities – but not from claims under section 79 CA and the TPA.
The provisions of the TPA apply to advisors involved with a client whose conduct is regulated by the TPA. Advisors have a duty of care to their clients and that duty may extend to third parties when it is apparent that the advice or information will be given to a third party, even if there is no intention to mislead or deceive. Most people are well aware of this duty, but these duties extend further.
Silence on an issue or fact may also constitute misleading and deceptive conduct in circumstances where the advisor had actual knowledge of the information or fact, and there was a duty to disclose or a reasonable expectation that if some relevant fact exists it would be disclosed. The case of Williams v Manoun ) showed that an accountant could be exposed for ‘silence’ when there was an implied duty to disclose ‘vital’ information to another party in a negotiation.
The case of Pearce Tieleman & Wharton in Western Australia saw an accountant (a principle of the firm) and one of the firm’s employees convicted of ‘conspiracy to defraud’ and sentenced to imprisonment for providing tax advice to a client where the court found that the client’s scheme was a fraud. The accountants’ actions were found to be ‘objectively dishonest but not deliberately so’. Advisors need to be wary if they believe that their advice may be used in some fraudulent endeavor, as not all consequences are financial.
Next month we look at sections 79 CA and 75B TPA and also whether banks and other financiers may have some exposure.