Directors’ Duties in association with the Institute of Directors Ireland
MHC.ie
Recent Court Decisions – Consequences for Directors
Shelley Horan
BL, BCL, LL.M, CEDR Accredited Mediator,
Adjunct Assistant Professor of Law, Trinity College Dublin
MHC.ie
3 types of offence
• Mens rea offence:
– Need to show guilty mind. – i.e. accused intended to commit the offence.
• Strict liability offence:
– No need to show guilty mind.
– Must prove offence committed.
– Accused may have a defence, i.e. due diligence or took all reasonable steps not to commit the offence.
• Absolute liability offence:
– No need to show guilty mind.
– Must prove offence committed.
– No defence available.
Constitution
• Courts tend not to allow serious offences be construed as strict or absolute in serious cases.
• Strict or absolute liability offences are confined to regulatory offences and minor offences.
• Considered repugnant to Constitution/unfair to impose a lengthy prison sentence on a person who has done an act without moral blame.
Anglo Trial: Section 60 CA 1963
• S 60 CA 1963: Unlawful financial assistance to purchase a company’s own shares.
• S. 60(15): If a company acts in contravention of S. 60 every officer of the company who is in default shall be liable.
Officer in default
• What does this mean?
Section 383 CA 1963 –Pre 2001
• “Officer who is in default” meant:
– Any officer of the company who knowingly and wilfully authorises or permits the default, refusal or contravention mentioned in the provision.
Section 383 CA 1963 –Post 2001
• “Officer who is in default” now means:-
– Any officer who authorises or who, in breach of his duty as such officer, permits the default mentioned in the provision.
– An officer shall be presumed to have permitted a default by the company unless the officer can
establish that he took all reasonable steps to prevent it or that, by reason of circumstances beyond his control, was unable to do so.
Reduction in threshold of liability
• An officer who knowingly and wilfully authorises or permits the default.
Vs.
• An officer who authorises or who, in breach of his duty as such officer, permits the default.
+
Presumption unless defence available.
Practical effect of change in 2001
• Strict liability offence.
• No need for prosecution to establish a guilty mind.
• Only need to prove officer permitted offence to happen.
• Plus, officer is presumed to have permitted the default unless he took reasonable steps to prevent it or could not prevent it.
Anglo: Defence arguments
• Defendants had created a compliance department which had obtained legal advice.
• Investment bank with specialist expertise in the area had also advised.
• Financial Regulator was kept informed.
• Defence argued that the defendants had acted with
due diligence which was a defence open to them in this strict liability offence.
• Relied on the presumption of constitutionality in relation to a statute, i.e. the offence must be interpreted in a constitutional manner.
Anglo: Prosecution arguments
• Ignorance of the law is no defence.
• Legal advice was irrelevant.
• Needed to only prove that:
– The transactions were not in the ordinary course of business (under S.60).
– The directors were aware of the transactions and did nothing to prevent them.
Judge’s Charge
• Agreed with the prosecution.
• Once the jury were satisfied that the loans were not in the ordinary course of business, only 2 questions:-
– Was the officer aware that the transaction was going to take place (as oppose to whether the transaction was a breach of S.60)?.
– If he was, did he do everything he could to prevent it?
– If not, he was guilty.
• Legal or other advice was not relevant.
• No defence of due diligence available.
Outcome?
• Judge: “strict liability offence” or “normal offence”.
• But, the effect of the finding was that it was an
“absolute liability offence”.
• Not open to CCJ to consider constitution, could only take the section as he found it.
• Interpretation not legally binding, another CCJ may differ.
• Possibly persuasive.
How to proceed?
• “Officer in default” – at least 74 other offences in CA 1963- 2013.
• This question will arise again.
• Serious issue given that corporate criminal conduct carries serious penalties.
• One thing that is certain – this will, one day, go to the Supreme Court.
• But, dangerous for a director to proceed on the basis that the trial judge was incorrect.
• External advice taken by directors is not relevant under S.383.
• Decision may call for a complete revaluation of how directors approach matters.
Criminal Liability for Directors:
Risk, Responsibility and Avoidance
Paul Egan pegan@mhc.ie
MHC.ie
Not for today
• Codes
• Best practice
• Ought and should
Today
• Direct
– €10,000,000 and above – 10 years
– Disqualification
• Process
– Detention up to 24 hours
– Public trial, denial of legal fees
• Ancillary
– Reputation, defamation – Travel
How does corporate criminal liability arise?
Company
Group
Employees
How does corporate criminal liability arise?
Company
Group
Employees Managers
“Directing mind and will”
How does directors’
criminal liability arise?
• Under the Companies Acts:
– Non-compliance with provisions directly applicable to directors.
– Being an “officer in default”.
• Under other legislation, by specific provisions.
– Where the offence has been authorised, or consented to by, or is attributable to connivance or neglect on the part of, a director, manager or other similar officer.
– In some cases, presumption of director’s consent.
Classification of offences under the Companies Bill
Summary prosecution Indictment Extras
Fine Imprisonmen
t Fine Imprisonmen
t
Market abuse €5,000 1 year €10,000,000 10 years Disq, CBoI Prospectus,
Transparency €5,000 1 year €1,000,000 5 years Disq CBoI
Category 1 €5,000 1 year €500,000 10 years Disq
Category 2 €5,000 1 year €50,000 5 years Disq
Category 3 €5,000 6 months - -
Category 4 €5,000 -
Classification of offences under the Companies Bill
• Securities law offences:
– Market abuse, prospectus, transparency
• Category 1
– False accounting, fraudulent trading
• Category 2 - General
– Financial assistance, loans etc to directors
– Unlawful acquisition of own shares, unlawful offering of securities – Personation of shareholder, unlawfully acting as director
– Dishonest dealings before a company becomes insolvent or goes into liquidation
• Category 2 – false information – Generally
– In dealings with DCE, Courts, mergers, divisions
• Category 2 – Accounting and dealings with auditors – Failure to keep adequate accounting records
– Denying access to and failure to retain accounting records
– Non-compliance requirements as to contents of annual financial statements – Failure to communicate with and make full disclosure to auditors
• Category 3
– Shares not being paid up
– Non-filing of annual returns, documents relating to issued share capital and insolvency – Not having AGM, selective sending of proxies
– Trading under misleading name, without trading certificate
• Category 4
– Failure to make routine filings
How do the Companies Acts impose liability?
• If a company contravenes [provision] the company and any officer of it who is in default shall be guilty of a
category [#] offence.
• An officer who is in default is any officer who:
– authorises the default or,
– in breach of duty as such officer, permits the default.
• Directors have duty to ensure compliance with Companies Acts.
• It is presumed, unless the contrary is shown, that an officer in default permitted the default if it appears that no steps were taken by that officer to prevent the default.
Defences to presumed liability#1
• Defences:
• (3) … it shall, subject to subsection (4), be a defence for [an officer] to prove that, due to circumstances beyond the [officer’s] control … that [officer] was unable to take all
reasonable steps, being steps that were reasonable in the circumstances to have been taken by [the officer], to
prevent the default.
• (4) The defence provided for in subsection (3) is not available if this Act elsewhere provides for a defence in proceedings for the offence concerned.
Defences to presumed liability #2
• Accounting offences
• In any proceedings against a person in respect of an
offence under subsection [-], it shall be a defence to prove that the defendant had reasonable grounds for believing and did believe that
– a competent and reliable person was charged with the duty of ensuring that the provisions of the subsection[s]
concerned were complied with, and
– the latter person was in a position to discharge that duty.
Companies Act examples
• Director fails to notify his or her interest in personal group shareholding within specified period.
• 9 months pass since financial year end without AGM taking place.
• Annual financial statements contain an inaccuracy or have a technical omission.
• Company allows “director’s drawings account” to exceed 10% of net assets.
Other Legislation #1
• Competition Act 2002, s 8(6), (7)
• Where an offence under section 6 or 7 has been committed by an undertaking and the doing of the acts that constituted the offence has been authorised, or consented to, by a person, being a director, manager, or other similar officer of the undertaking, or a person who purports to act in any such capacity, that person as well as the undertaking shall be guilty of an offence and shall be liable to be proceeded against and punished as if he or she were guilty of the first-mentioned offence.
• Where a person is proceeded against as aforesaid for such an offence and it is proved that, at the material time, he or she was a director of the undertaking concerned or a person employed by it whose duties included making decisions that, to a significant extent, could have affected the management of the undertaking, or a person who
purported to act in any such capacity, it shall be presumed, until the contrary is proved, that that person consented to the doing of the acts by the undertaking which constituted the commission by it of the offence concerned ….
Other Legislation #2
• Safety Health and Welfare at Work Act 2006, s 80(1) and (2)
• Where an offence under any of the relevant statutory provisions has been committed by an undertaking and the doing of the acts that constituted the offence has been
authorised, or consented to by, or is attributable to connivance or neglect on the part of, a person, being a director, manager or other similar officer of the undertaking, or a
person who purports to act in any such capacity, that person as well as the undertaking shall be guilty of an offence and shall be liable to be proceeded against and punished as if he or she were guilty of the first-mentioned offence.
• Where a person is proceeded against as aforesaid for such an offence and it is proved that, at the material time, he or she was a director of the undertaking concerned or a person employed by it whose duties included making decisions that, to a significant extent, could have affected the management of the undertaking, or a person who
purported to act in any such capacity, it shall be presumed, until the contrary is proved, that the doing of the acts by the undertaking which constituted the commission by it of the offence concerned under any of the relevant statutory provisions was authorised, consented to or attributable to connivance or neglect on the part of that person.
Other examples
• Suppliers to a supermarket chain of similar products have price “discussions”.
• Factory with loud equipment does not ensure that shop floor workers use ear protection.
• Scaffolding at a building site collapses causing injuries.
• Producer of electronic equipment is not a member of a recycling compliance scheme.
How does corporate criminal liability arise?
Company
Group
Employees
“Directing mind and will”
Managers
How
WILLcorporate criminal liability arise
AND
directors become liable?
Company
Group
Employees and agents Failure to take steps, conduct due diligence
Offence
Criminal Justice (Corruption) Bill
• Irish companies are regulated by the Irish Prevention of Corruption Acts 1889 to 2010, which are due to be consolidated and reformed in the next 12 months. Directors can be prosecuted under this law if they are complicit in the Company’s breach of the law, no matter where that has taken place.
• Proposed new Criminal Justice (Corruption) Bill has been published, with a view to aligning it with that of the UK and other OECD countries.
Where a bribery or corruption offence is committed by:
• a director, manager, secretary, officer, employee of a company
• a subsidiary of a company,
• agent of a company,
with the intention of obtaining or retaining business or an advantage in the conduct of the company's business,
the company is also guilty of an offence.
Where the offence is committed by a company and is proved
• to have been committed with the consent, connivance or approval of, or
• to have been attributable to any wilful neglect on the part of a director, manager, secretary or other similar officer of the company,
that director, manager, secretary or other similar officer is also guilty of the offence.
• It will be a defence to an offence for the company to prove that it took all reasonable steps and exercised all due diligence to avoid the commission of the offence, meaning that procedures must be put in place. This is a director responsibility.
Solutions
• Policies
• Procedures
• Personnel
Criminal Justice Act 2011, Section 19 – Directors’ duties to notify the Gardaí
of criminal offences
Catherine Allen callen@mhc.ie
MHC.ie
Section 19 CJA 2011
• Positive obligation on you
• To report information “as soon as is practicable”
• That you know or believe
• Might be of material assistance in
• Preventing the commission of, or
• Securing apprehension / prosecution / conviction for
a “relevant” offence
• Failure to do so “without reasonable excuse”
Three questions
• What is a “relevant offence”?
• What is “as soon as is practicable”?
• What is a “reasonable excuse”?
Relevant offences
• Schedule 1 to 2011 Act
• Offences relating to banking, investment of funds and other financial activities
• Company law offences involving dishonesty
• Money laundering and terrorist offences
• Theft and fraud offences
• Bribery and corruption offences
• Consumer protection offences
• Criminal damage to property offences (NB
As soon as is practicable
• ≠ as soon as possible
• Preliminary report but no protection for false reports
• GBFI may be happy to rely on an internal investigation pending developments
• Preservation of evidence
• Witness interviews – privilege against self-incrimination
• Separate legal representation may be necessary
39
“reasonable excuse”
• Legal professional privilege
• Privilege against self-incrimination
• Reporting by contractors – breach of confidentiality?
• ?
Third Party Investigations
• Design processes around how these will be managed
• Involuntary – like a dawn raid
• Voluntary – think about data protection and confidentiality
• Legal review of documentation
• Engagement by senior management essential
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Action Points
• Be aware of your section 19 obligations
• Have a process for making section 19 reports
• Have a process for dealing with:
• internal investigations that may lead to criminal prosecutions; and
• external investigations (similar to dawn raid processes)
Q&A
MHC.ie
