directors' responsibilites - ignorance is no defence

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.

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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.

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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.

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Officer in default

• What does this mean?

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Criminal Liability for Directors: Risk, Responsibility

and Avoidance

Paul Egan

pegan@mhc.ie

MHC.ie

Not for today

• Codes

• Best practice

• Ought and should

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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

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How does corporate criminal liability arise?

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Company

Group

Employees

How does corporate criminal liability arise?

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Company

Group

Employees

Managers

“Directing mind and will”

How does directors’ criminal liability arise?

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• 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

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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

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How do the Companies Acts impose liability?

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• 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

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• 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

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• 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

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• 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 ….

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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.

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Other examples

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• 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?

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Company

Group

Employees

“Directing mind and will”

Managers

How WILL corporate criminal liability arise AND directors become liable?

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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.

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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

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• 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”

punishable by up to 5 years in jail / fine

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Three questions

• What is a “relevant offence”?

• What is “as soon as is practicable”?

• What is a “reasonable excuse”?

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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

damage to electronic storage systems)

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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

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“reasonable excuse”

• Legal professional privilege

• Privilege against self-incrimination

• Reporting by contractors – breach of confidentiality?

• ?

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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)

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Q&A

MHC.ie