Over the last two issues we have explored the position of professional advisors and the potential exposure to liability from either an insolvent client’s liquidator or from the client or third party through the Trade Practices Act (TPA).
This last article in the series looks at two issues:
1. potential exposure under sections 79 of the Corporations Act (CA) and 75B of the TPA.
2. whether bankers and other financiers have any exposure.
We have already discussed the potential liability of advisors being classified as a shadow or de facto director of a client company, and from claims under the TPA for misrepresentation or misleading conduct.
Two more sections might concern advisors. Section 75B of the TPA says that a person is involved in a contravention of the Act where that person has been in any way, directly or indirectly, knowingly concerned in, or party to, a contravention of the Act. Section 79 of the CA deems a person to be involved in a contravention of that Act if they are, by act or omission, knowingly concerned in a contravention by another.
These sections mean that any transaction entered into by the client that results in a contravention of either Act may also result in the advisor being liable for that contravention – if that advisor is ‘knowingly concerned’ in the transaction.
To be knowingly concerned the advisor must be a willing participant and know that the action contemplated will be a contravention of one of the Acts. There must be actual knowledge, or an inference of that knowledge based on the circumstances, of the essential facts.
Any advisor that gives advice designed to assist a director breach his duties under the Corporations Act, or provides information knowing that it will be provided to a third party and may be misleading or deceptive, runs the risk of being a part of a contravention and paying the price alongside the director.
Bankers and other financiers need to be aware of their client’s financial position, particularly if the client is suffering some financial difficulty. The question of potential exposure may arise if the financier takes some action outside the role of financier.
To date there are no cases where a financier has been deemed to be a director of a company – though some corporate shareholders have been deemed to be a director where they have controlled the board through either a significant shareholding or by nominee members on the board. In one case at least, a corporate shareholder was held liable for insolvent trading as a director because it showed a ‘willingness and ability to exercise control and an actuality of that control’.
The courts have not written off the possibility of financiers also being deemed as a director of a client. The potential for exposure arises when a financier gives support to an ailing client to try to see it through its difficulties. In most cases this support should not cause a liability problem. But when that support is contingent upon the client taking some action demanded by the financier, that potential arises.
In reality a financier of any description is unlikely to keep giving money and support to a client in financial difficulty without imposing some fairly strict conditions on what it can and cannot do. It is this conditional support that has the potential of crossing the line from protecting one’s interest to controlling the client. There are conditions that are designed entirely to protect the funds lent (like maintaining certain debt/equity ratios, or regular payments to reduce the debt), and there are conditions that could cause exposure, like the financer directing the board to undertake certain transactions or not. The difference is directing or controlling the company.
Financiers have to ensure that conditions do not become control. They must stay within their role of financiers, taking whatever steps necessary to get their money back. But they should not direct or control the company or its board.
We realize that this series of articles is only the briefest of summaries of these issues – a detailed explanation could fill volumes. But we hope that we have raised some awareness of the potential problems.