Directing the blame

Draft guidelines from the Office of Fair Trading are set to give the body greater power to disqualify company directors. Joanna Goldsworthy reports on related recent cases

Company directors have once again come under scrutiny in the past couple of months, with the Office of Fair Trading (OFT) publishing draft guidelines that could give the regulatory body the power to disqualify entire boards of directors for up to 15 years, for breaches of competition law.
The OFT has made it clear that directors will not be able to plead ignorance as a defence against disqualification and that this power will not only be used against those who are obviously guilty. The guidance states that &#34all directors of all companies&#34 may reasonably be expected to know that companies must comply with competition law. Although the OFT has been keen to assure directors that it is not planning a witch hunt, boards of companies that have already had a brush with the regulators will be even more at risk of disqualification.
But before we start feeling too sorry for the directors, we must remember that new regulations were brought in on 2 April under the Criminal Justice and Police Act 2001, to protect directors who may be vulnerable because of the nature of their directorship. The new regulations mean that company directors who can prove that they are under threat of intimidation or violence may prevent their home address details from appearing on public records held at Companies House. The new procedure requires that a Confidentiality Order is filed with the Secretary of State which, when approved, allows the director to register a service address for the public record that should last for around five years. The orders are aimed particularly at protecting directors of companies in the biotechnology, oil, chemicals, pharmaceutical and defence industries.
Recent commercial case law has continued to focus on directors and their duties or, more often, breaches thereof. The conduct of directors was an issue in Christopher Paul Reynard v Secretary of State for Trade & Industry (2002), in which the Court of Appeal held that in disqualification proceedings under Section 6 of the Company Directors Disqualification Act 1986, a director&#39s deceitful conduct when giving oral evidence could be taken into account when determining the questions of unfitness and the appropriate period of disqualification imposed. The court accepted that the expression &#34conduct of a person as a director&#34 in Section 6(2) of the act was wide enough to include a director&#39s conduct in the proceedings taken against him for a disqualification order. However, the fact that the court had found in favour of the Secretary of State on the point of principle or practice did not mean that the appeal had to be allowed, or that the length of the period of disqualification should be restored to the level set by the registrar. The court declined to enter into a detailed review of the judge&#39s exercise of discretion and declined to interfere with the period of disqualification.
The matter of Ciro Citterio Menswear Plc (2002) involved the administrators of the claimant company claiming an interest in a property bought in the name of the first defendant, who was a director of the company at the relevant time. The claimants asserted misappropriation of company funds and a resulting constructive trust. There had been an arrangement in place between the directors whereby those with unused credit balances on their directors&#39 accounts would make them available to other directors. Balancing entries were made in the directors&#39 accounts at the year end, but no balancing entries were made in the first defendant&#39s case by the year end and administration then intervened.
The court found that this was not a case of the first defendant simply appropriating company funds with no intention of repaying them. It was effectively an informal loan intended to take effect at the year end. It was therefore a payment in the nature of a loan from the company to the first defendant, albeit casual and undocumented, and was not a straightforward misappropriation. The judge held that, under Sections 330 and 341 of the Companies Act 1985, a loan to a director from company funds was voidable and stood until voided. However, following that incident there had been no inherent breach of the director&#39s fiduciary duties to the company in the transfer of funds and no special facts to show that this was the case. The loan did not give rise to a constructive trust and the company could not trace the money into property acquired with it. The court observed that although there had been a consensual element by way of the arrangements in place between the directors, a straightforward misappropriation might well give rise to a constructive trust, as would some Section 330 cases.
In Secretary of State for Trade & Industry v Selby & ors (2002), a director appealing against disqualification had his appeal dismissed when the appeal proceeded too slowly. Problems with the legal aid authorities and failings by the director&#39s solicitors meant that the appeal was not heard until March, some 10 months after the disqualification period had expired. The Secretary of State applied, by way of a preliminary issue, for an order striking out the appeal on the grounds that it was now totally stale. The court held that it would be wrong to allow the appeal to proceed because, as the disqualification order was no longer in force, the appeal was completely stale and the director would not be prejudiced if the order was not overturned because it was a civil, not criminal, matter. In addition, it was held that the appeal had been conducted in a &#34most unsatisfactory way&#34. The Treasury Solicitor had not been kept fully and fairly informed of what was going on, it would discredit the system of appeals if the director were to be allowed to revive the appeal from its previous state of suspended animation, and even once revived the appeal had still not been conducted in an entirely satisfactory fashion.
In Michael Patrick Sayers v Clarke-Walker (2002), the Court of Appeal held that a director&#39s failure to take independent financial advice had not broken the chain of causation arising out of the admitted negligence of the defendant accountants.
In his principal judgment, Mr Justice Buckley found that, although the defendant was not negligent in advising the claimant that the price he was paying for a substantial shareholding in a private company was &#34about right&#34, it was negligent for failing to structure the purchase in such a way as to minimise any tax liabilities. The defendant had acted for both parties to the transaction. The defendant&#39s proposed appeal did not challenge the judge&#39s finding of negligence, but asserted, on the basis of those parts of the evidence that showed that the director had ignored advice from both the defendant and his solicitor that he should obtain independent financial advice, that the director had acted so unreasonably by failing to do so as to break the chain of causation. However, the Court of Appeal held that an ordinarily competent firm of accountants would have advised the claimant to structure the transaction in such a way as to avoid the tax liabilities he subsequently encountered. The mere fact that the defendant was acting for both sides did not absolve it of its duty to act as an ordinarily competent firm should have acted. It followed that the director&#39s failure to seek advice elsewhere was irrelevant to the issue of causation.
Joanna Goldsworthy is specialist products editor, commercial at Lawtel