Carillion- NEDs off the hook for now
The Insolvency Service have recently decided not to proceed with disqualification proceedings against five former non-executive directors (NEDs). Given the changing landscape of corporate governance and the decision in Secretary of State for Business, Energy and Industrial Strategy v Selby [2021] (Selby) many may find this a surprising turn of events.
Following the winding order made against Carillion in 2018, the Insolvency Service acting on behalf of the Department of Business & Trade issued proceedings against three executive and five NEDs in 2021. Despite the decision in Selby, the IS decided not to proceed against the Carillion NEDs three days before the “test case” was due to start last month.
Unlike the Special Managers for Carillion who were appointed by the High Court and act without personal liability, NEDs are captured by the Companies Act 2006 (CA) and the Companies Disqualification Act 1986 (CDDA). s.171-177 of the CA imposes seven statutory duties on directors. These duties appear to apply not only to executive directors but also to NEDs. Under s.250 CA a director is defined as including “any person occupying the position of director, by whatever name called.”
Under s.6 of the CDDA the court can make disqualification orders against a person that “is or has been a director…” and this includes a shadow director. The CDDA makes no distinction between an executive director and NED.
The executives
Whilst the 3 executive directors at Carillion have now given undertakings not to be concerned in the management of companies none have admitted fraud or having direct knowledge or involvement in the preparation of incorrect accounts.
The non executive directors
The IS alleged the following:
- The NEDs had a strict duty to know the true financial position of Carillion at all times and were in breach of the said duty (referred to as the “NED Duty”).
- The NEDs were “unfit” to be involved in the management of the company as a result of not knowing about the alleged fraud
- The NEDs were directly responsible for the publication of misleading accounts
The defence
The defence put forward by the NEDs was that there had been a “fundamental misunderstanding” on the role of NEDs and the statutory duties of directors. The IS argued that the NED Duty in part arises from the judgment in Re Westmid Packing Services (No.2) 1998. The NEDs said that reliance on this case was erroneous and misguided as a matter of law.
The NEDs stated that such a strict NED Duty would be:
- inconsistent and contradictory to s.174 CA (Duty to exercise reasonable skill and care).
- impracticable and impossible to comply with;
- unfair and unworkable;
- contradictory to the understanding and expectations of those serving on boards and those advising them
It is unknown how the court would have dealt with the arguments submitted by the IS and the NEDs and whether the NEDs would have been held to have owed the strict NED Duty. We have seen significant changes to corporate governance and whilst many will welcome the decision by the IS to abandon its case, many continue to question the role of NEDs and argue that they should be held to account. For now, NEDs are off the hook.
