The role of a company director already carries with it a large number of wide-ranging responsibilities. Forthcoming legislation is set to increase them.
Company law reform
The Company Law Review was launched by Margaret Beckett, the then Secretary of State for Trade and Industry, in March 1998. It is now reaching its conclusion, with the publication of the steering group’s final report. This is the culmination of a number of consultation documents, through which the steering group has conducted a fundamental review of core company law for small companies. Its aim is to develop a simple, modern, efficient and cost-effective framework for business activity in Britain in the 21st century.
The steering group has recommended effective and proportionate criminal and civil sanctions to underpin company law reforms. It considers they will enhance investor and creditor confidence, and encourage a regime of compliance, without endangering competitiveness.
One of the purposes of the reform proposals is to clarify the role of company management. The steering group has recommended a number of measures, including a statutory statement of directors’ duties. The draft statement prepared by the group is intended to set out the general principles which bind directors. It includes:
The statement incorporates a duty to have regard to the interests of creditors where there is a risk of insolvency and also duties in relation to conflicts of interest and benefits. The statement does not in itself seek to impose new duties on directors. But it brings together in one place those duties already recognised by common law and other statutes.
Criminal sanctions
The steering group reviewed the criminal sanctions provided under the Companies Act 1985. It considered the systematic decriminalisation of offences, but concluded that there was a continuing need for a proportional deterrent. It recommended in most cases maintaining, and in some areas strengthening, the existing criminal sanctions. In analysing the criminal offences, the steering group adopted the categories proposed by the Law Commission in an earlier consultation paper - offences of dishonesty, intermediate offences and regulatory offences.
The definition of offences of a dishonest and regulatory nature is self-evident. The group defined intermediate offences as as those existing offences where dishonesty is likely, but where the law merely forbids commission, usually knowingly, of an act which breaches a provision in the legislation which has more than merely procedural significance. This would include, for example, a director authorising a transaction in which he has an interest.
It is in respect of this category of offence that the group suggested significant change. It proposed that existing intermediate offences became two-tier offences. One would be an offence of simple failure to comply with the relevant requirement. The second would be where failure to comply was with dishonest intent; the latter attracting a more severe penalty than the first. New ‘two-tier’ offences have been proposed in respect of the following existing laws: disclosure by directors of interests in contracts (Section 317 CA 1985), failure to keep accounting records (Section 221 CA 1985), false statements to auditors (Section 389A CA 1985), and approving defective accounts (Section 223 CA 1985).
Regulatory sanctions
The report also examined regulatory sanctions. It endorsed the powers of the Secretary of State to seek a winding up of a company or disqualification of a director on public interest grounds under the Insolvency Act 1986 and The Company Directors Disqualification Act 1986. It also welcomed the introduction in the Insolvency Act 2000 of disqualification undertakings.
A particular focus was the issue of ‘phoenix companies’, where those responsible for a company’s failure continue its activities, using the vehicle of a new company. The group recommended various amendments to the Companies Act and the Insolvency Act and new powers for the Secretary of State to apply for interim disqualification orders against delinquent directors.
Civil sanctions
The steering group analysed the civil sanctions contained in the Companies Act. It recommended that, following the proposal that directors’ duties be codified, the Department of Trade & Industry should also consider codification of civil remedies for breach of directors’ duties. The group believes this will assist in clarifying directors duties/liabilities.
Competition regime
In addition to reforming the Companies Act, the Government is also in the process of overhauling UK competition law. This will bring further responsibilities for company directors. An Enterprise Bill is under consideration, which will target hardcore cartels in particular. It contains a proposal to introduce criminal sanctions against individuals engaged in such operations. There are also proposals for new criminal offences to cover price fixing, dominant market shares and bid rigging.
The US, Germany and Japan all have criminal sanctions for cartels, and it seems likely that similar measures will be introduced in the UK. The US Anti-Trust Law provisions are contained inter alia in the Sherman Act 1890, which includes the following: ‘Section 1 - Agreements which restrain the trade are illegal and will be punished with fines - US$10m for a corporation or twice the gain or loss suffered if this is greater; US$350,000 for an individual and/or imprisonment not exceeding 3 years.’
In a recent case in the US known as the ‘Vitamins’ case, three executives from BASF AG and one from F Hoffman - La Roche received prison sentences ranging from three to four months and were fined between US$75,000 and US$350,000. The introduction of similar measures in the UK with corresponding sanctions is likely to have a real impact on cartels and the directors of those companies involved.
Health and safety
Further innovations are being considered by the Health & Safety Commission, which has published a new guide, recommending health and safety responsibilities for company directors. It defines an action plan for directors, to help ensure that they manage the health and safety risks arising from their organisation’s activities properly.
The guide also requires a company’s board to accept a collective role in prioritising health and safety, and to appoint a specific director to champion health and safety issues. It is currently unclear whether this guide will be enshrined in statute. It is apparent, however, that further health and safety issues will be formally introduced shortly.
Corporate killing
One of the most significant changes to health and safety law proposed in recent years has been pending for some time. In May 2000, following a number of fatal rail crashes, the Home Office announced that it would introduce legislation which would create a new offence of corporate killing. The proposed reforms were largely based upon The Law Commission’s recommendations of 1996. It was thought that a Bill to amend the Health & Safety at Work Act of 1974 would be in the Government’s programme for the first session of this Parliament, but it did not appear in the Queen’s speech. The Government has, however, repeated its intention to introduce new provisions shortly.
Under the new proposals, a company can be prosecuted for corporate killing without the need for the prosecution to identify a senior individual who represents the controlling mind of the company. The Bill also proposes two other offences aimed directly at management.
The first offence of reckless killing requires the offender to be aware that his action involves a risk of causing death and that it was unreasonable for him to take that action having regard to the circumstances. It is little different from the essential ingredients for a successful prosecution for involuntary manslaughter under the present law.
The Bill, however, introduces a second new offence which may have a more significant impact. This is an offence of killing by gross carelessness. It applies in circumstances where
Under present law (Section 27 of the Health & Safety at Work Act), where a corporate body commits an offence which proves to have been with the consent or connivance of, or attributable to neglect on the part of, any director, he as well as the corporate body is deemed guilty of that offence and is liable to be prosecuted and punished. However, in the vast majority of cases, the prosecution does not pursue an individual where the case can be brought more conveniently against the company.
With this new offence, however, we will move to a position where that individual will find himself facing separate criminal charges for killing by gross carelessness. With a maximum sentence of ten years imprisonment, this is likely to be taken very seriously by directors. We now wait to see what prosecutions follow, and what practical effect this has on the way companies are run.
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William Allison is a partner, Davies Arnold Cooper, Tel: 020 7293 4629,
Email: wallison@dac.co.uk
AIRMIC COMMENT
Mark Butterworth, a former AIRMIC chairman, says that the Approved Persons Regime arising from the Financial Services and Markets Act has developed a much wider umbrella for individual accountability. He comments:”Directors and officers are used to the concept of potential personal liability for wrongful acts. However, the regime, which came into effect on 1 December, extends that concept to a wider range of employees.
“The regime lists 27 controlled functions, of which 1-20 are for people of significant influence, such as directors and compliance managers, and 21-27 relate to client advisers and those handling clients’ money. They have now got wider responsibility.
“How should the wide range of financial institutions that are affected manage this risk? First, they should communicate to people just how important it is that they are aware of their personal accountabilities. It may be necessary to revise training programmes and to change employment contracts to ensure that they clearly state what an individual’s role is, what personal accountabilities they have and what their responsibilities are.
“The regime is aimed at preventing situations such as arose with the collapse of Barings Bank, where a number of executives disclaimed responsibility. In the growing litigious state in which we live, people look for someone to blame. On the positive side, however, it represents an extension of good corporate governance. It should reduce potential financial losses - and that is good for everyone.
DISQUALIFICATIONS INCREASE
Recent statistics suggest that the courts have been taking an increasing interest in the management of companies and are adopting an increasingly hard line to counter breaches of duty by directors.
Under the Company Directors’ Disqualification Act 1986, courts have extremely broad powers to disqualify directors. They are using these powers increasingly frequently. In 1986/87, just after the Act came into force, there were only 16 disqualifications. This rose to 497 in 1992/93. Lately, the Department of Trade & Industry has reported that the number of directors banned from serving on company boards due to malpractice has risen to record levels, with 1,500 directors banned and 1,593 new proceedings issued in 2000. The new company legislation/provisions increase the likelihood of such proceedings.
