Your question omits significant details which are required to give a definitive answer. I can therefore only give general guidance.

Your question implies that your friend would be ‘a director’ and is prepared to work for no pay. You do not state how many hours the friend would work and for how long the ‘no pay arrangement’ would continue. You also state that ‘business is bad’.

Firstly it is important to get a clear understanding of exactly what the arrangement would mean for both parties. Is there any consideration for the friend working in the business? The reason for being clear is dependent on the situation that the person appointed as a director might be classed as a non-executive director. This has implications for the National Minimum Wage (NMW) requirements. Is there any suggestion that the consideration might include a bonus or shares in the company on which a dividend may be paid?

NMW rules only apply if you have a contract (written or implied) of employment with the company. The National Minimum Wage Act applies only to ‘workers’ as defined under the National Minimum Wage Act 1998 s.1(2)). A company director is therefore covered by the act only if he counts as a ‘worker’ within the definition in National Minimum Wage Act 1998 (s.54).

A director may be an employee as well as being a director but this is not automatic. Professional advice should be sought if there is any doubt about the status of a director.

You should also consider that it is not uncommon for ‘friends’ to fall out in an employment situation. It is quite possible for disputes regarding NMW to be brought to the attention of the authorities by employees whose employers are breaking the law by paying less than the act stipulates (currently £6.08 from 1st October 2011)

Employers breaking the NMW regulations can be fined and made to pay the implied wages of the employee.

There is one further aspect of your question. You state ‘business is bad’. Your friend may be taking a risk if the company’s trading position becomes so bad that it cannot continue trading and becomes insolvent. Directors of companies in that situation face the possibility of ‘trading whilst insolvent’.

Under UK insolvency law trading once a company is legally insolvent can trigger several provisions of the Insolvency Act 1986, including ‘wrongful trading’ – section 214. Under wrongful trading legislation if the company continues to trade while it is insolvent the directors of the company may become personally liable to contribute to the company’s assets and help meet the deficit to unsecured creditors if the company’s financial position is made worse by the directors continuing to trade instead of putting the company immediately into liquidation.

Overall, you need to take professional advice on a number of issues in a meeting where all the implications and possibilities can be discussed.