Newsflash Business Crime & Financial Services 7th Jun 2018

Sentencing Company Directors

The Sentencing Council has today published the Definitive Guideline for Breach Offences which includes, for the first time, a guideline for sentencing in cases where disqualified directors have acted in breach of their disqualification. The Guideline arrives following a long period of consideration post consultation. The consultation opened in October 2016 and closed as long ago now as January 2017.

The overall penalties for acting in breach of disqualification are set out in s13 Company Directors Disqualification Act 1986 and are:

  • On conviction on indictment a maximum of two years imprisonment or an unlimited fine or both.
  • On summary conviction a maximum of six months imprisonment or an unlimited fine (by virtue of the amendment made to s13 CDDA 1986 by s85 LASPO 2012 ).

Until now those looking to advise company directors who face prosecution under s13 CDDA were not assisted generally by Court of Appeal authorities, as many made it clear that they were fact specific, rather than an attempt to lay down any particular hard and fast rule for the lower courts to adopt. In R v Cowley-Hurlock [2014] EWCA Crim 1702 Foskett J said:

“We do not intend to set out any kind of guideline and what we say is for illustrative purposes only, but there is plainly a difference between a relatively short period of inadvertent breach of a disqualification order or undertaking and a prolonged period of obvious, deliberate and cynical breach aggravated by a past history of similar activity.”

The Court was referred in Cowley Hurlock  to  R v Atterbury 1996 2 Cr App R (S) in which a distinction was drawn (at first instance and not criticised by the Court of Appeal) between reckless contravention of the order and those where there was dishonesty. Although there is no requirement for the prosecution to prove dishonesty to secure a conviction that does reflect the sentencing approach generally in these cases and where there has been flagrant breach, prolonged activity or attendant dishonesty sentences of immediate imprisonment follow almost automatically. That said even in cases where there is no suggestion of dishonesty or bankruptcy in the background persuading the Court not to impose an immediate sentence of imprisonment requires careful analysis of the harm (if any) caused by the disqualified director, the financial advantage to him or her of continuing to act, the level of sophistication of concealment (through the use of nominee directors) and the reasons lying behind the decision to continue to act. It has long been the case that where there has been “phoenixing” of companies to avoid liabilities to creditors or where financial or other harm has been caused then absent very significant personal mitigation indeed company directors in breach go to prison.

The new Guidelines require the Court to assess culpability and then harm.

Culpability

The more serious cases, in Category A, are where the breach involves deceit or dishonesty in relation to the director’s actual role within the Company or where there has been deliberate concealment of the disqualified status. Where there is evidence of the use of nominee directors, or proof that the defendant has acted as a shadow director the case will fall into this category. Cases where the Director has not told other members of the company that he has been disqualified – whether through a dishonest desire for financial advantage or simply embarrassment – are likely to fall within Category A also. If it is possible to show that these elements are missing, the case will fall into Category B.

Harm

Harm is split into three levels.

Level 1

Where the breach results in the significant risk of or actual financial loss or results in the significant risk of or actual non-financial harm to the company or others.

Cases where the disqualified director has mismanaged the company to its (or its creditors) detriment are likely to fall into this first category. If there is evidence of substantial quantities of money leaving the company (insufficient to found an allegation of fraud or an insolvency offence) that is likely to place the case in to level one. The appearance of non-financial harm in the guidelines would also appear to include serious reputational damage to the company itself.

Level 3

Where the breach results in very low risk of or little or no harm (financial or non financial) to the company or others.

It follows that all other cases are Level 2 – where the harm could properly be characterised as neither significant nor minimal.

The most serious cases (1A cases) have a starting point of a year’s imprisonment and a range of 6 months to 18 months. All cases in category A have starting points of custody and it is only when the case falls into 2B (not significant harm and no dishonesty or concealment) that the starting point falls below the custody threshold.

Aggravating Factors

Directors who ignore the disqualification and breach it soon after the order was made, who are directors of multiple companies, who are motivated by personal gain or who act over a sustained period of time will be aggravate their sentences.

Mitigating Factors

Cases where there has been genuine misunderstanding about the terms of disqualification – which may arise in cases where complicated undertakings have been given – where the breach activity was minimal or short lived will see the Courts looking less unfavourably on the defendant.

Those defending Company Directors should also look to the Imposition of Community and Custodial Sentences Definitive Guideline. Plainly as any sentence up to and including the maximum could be suspended the guidance set out in that guideline, looking at risk to the public, prospects of rehabilitation and appropriate punishment will be of significant assistance in trying to persuade a Court not to send the Director straight to prison.

The new guideline will be effective from 1 October 2018, you can access it at page 45 of the Guidelines here.


Leon Kazakos                                                                                              7 June 2018


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