Legal Issues Faced by Lawyers Advising Directors on Personal Guarantees
In many cases, the company and its directors may believe that having one lawyer handle both the property conveyancing and advice on personal guarantees is efficient and cost-effective.
However, this can place the lawyer in a challenging position, leading to potential legal and ethical issues.
When dealing with property conveyancing, especially in transactions involving companies, lawyers are often confronted with a complex ethical and legal landscape.
One of the most significant issues is a conflict of interest, which arises when a lawyer acts for the company in a property purchase and is also expected to provide independent legal advice to the company’s directors on their personal liabilities, such as the risks of providing a personal guarantee.
As observed in Lie Hendri Rusli v Wong Tan & Molly Lim [2004] 4 SLR(R) 594: “Solicitors should not act in a matter where there is or will be a real risk of potential conflicts of interests or actual conflict between different clients in a transaction. In the final analysis, it is the integrity and common sense of the solicitor that will provide the answer as to whether to proceed in any proposed transaction – a balance between principle and expediency must be struck.“
Understanding Conflict of Interest in Conveyancing
A conflict of interest occurs when a lawyer’s ability to act in the best interest of their client is compromised, typically by competing interests with another party.
A company is, in it’ own right, a legal entity, separate from its directors and shareholders, and usually (without wrongdoing) those directors are not responsible for the acts of the company, nor any debts or liabilities the company may incur.
In property conveyancing, a conflict often arises when a company is purchasing property, and the directors are required to give a personal guarantee for the company’s debts or liabilities.
Lawyers acting for the company on the conveyance transaction must balance their duties to the company (as a whole) while also ensuring that the directors fully understand the risks they are personally assuming, when becoming a guarantor for the company.
It is sometimes difficult to understand that the company has different financial interests in the transaction than the directors personally. The directors do not legally benefit from the transaction and will not ‘own’ the property being purchased.
Giving full, frank and forthright legal advice to a personal guarantor about the risks, what might be able to be done about them, and even advice that the legal risk and burden of the personal guarantee is too great for the guarantor, may not be in the company’s best interest.
Hence, a conflict arises to the lawyers position when acting for both parties in the transaction.
Legal and Ethical Dilemmas for Lawyers
Lawyers must navigate several important considerations when acting for a company purchasing property and advising its directors on personal guarantees:
1. Duty of Loyalty to the Company vs. the Director’s Interests
The lawyer’s primary duty when acting for a company is to the company itself. However, when advising a director on the risks of a personal guarantee, the lawyer must ensure the director receives independent legal advice that prioritises their personal interests.
This is where a clear conflict of interest arises, as the lawyer cannot adequately serve both the company and the individual director in the same transaction.
It is a primary duty of all lawyers to avoid conflicts in our duties.
2. Informed Consent and Independent Legal Advice
To mitigate a conflict of interest, it is essential for lawyers to ensure that both the company and the directors fully understand the implications of the lawyer’s dual role.
Informed consent is a crucial concept here, if the lawyer is prepared to act for both, then the parties must acknowledge and agree with the lawyer acting in both capacities.
However, in many cases, directors will be advised to seek independent legal advice to fully understand the risks of providing a personal guarantee.
This independent advice ensures the directors are aware of the potential consequences, including the financial exposure they may face if the company defaults. Without such advice, the lawyer may be exposed to future claims that the director was not properly informed.
3. Managing the Conflict of Interest
In practice, lawyers handling the conveyancing transaction for the company should avoid providing personal legal advice to the directors.
The Law Society’s ethical guidelines often recommend that lawyers handling the conveyance refer directors to a different solicitor for advice on personal guarantees.
This approach helps to manage the conflict of interest and ensures that the directors receive impartial and independent legal advice regarding their personal risks.
By maintaining a clear boundary between the legal advice provided to the company and the personal advice offered to the directors, lawyers can safeguard themselves from potential ethical breaches and protect the interests of both parties.
3. What Risk Does the Lawyer Take On?
In the event the advice is not provided properly to the director, or even if provided, but in a conflict circumstance, potential conduct complaints can arise.
If the directors suffers personal loss and considers they were not properly advised on the risks of the personal guarantee, the potential compensation claims can arise.
There are potential issues to be faced in such claims when acting unethically or in conflict which may also affect a lawyers insurance coverage.
How Lawyers Can Protect Themselves from Conflict of Interest Claims
To protect against claims of conflict of interest, lawyers should implement the following strategies:
- Clear Communication: Clearly explain the limitations of the advice provided and ensure that all parties understand who the lawyer represents in each aspect of the transaction.
- Document Informed Consent: Ensure that any consents are provided in writing, documenting that all parties have been informed of the potential conflict and have agreed to proceed.
- Referral to Independent Lawyers: Always recommend that directors receive independent legal advice on the risks of providing personal guarantees, even if they initially appear comfortable with the dual role.
Conclusion
When acting on a company’s property conveyance, lawyers must be cautious about the ethical and legal challenges posed by potential conflicts of interest.
Advising directors on their personal liability for company debts, such as through a personal guarantee, is a sensitive issue that requires careful consideration. Lawyers should strive to manage these conflicts by ensuring full transparency, securing informed consent, and recommending independent legal advice wherever necessary.
By taking these precautions, lawyers can effectively protect both their clients and themselves from the risks associated with conflict of interest in conveyancing transactions.
