Defending Directors: Hidden Gems in the Companies Act 2006
Lurking within the Companies Act 2006 are a number of strict liability offences, which are coupled with ‘reverse burden’ statutory defences (ie. those which require a director to prove the defence in question). In the event of prosecutions under these provisions, there are two interesting questions for defence practitioners to consider, namely (a) the extent to which the reverse burden defence in question is compatible with Article 6 of the ECHR and (b) if it is, how the statutory defence operates in conjunction with the additional, free-standing ‘defence’ which appears in s.1157 of the 2006 Act.
Both these points are considered below by reference to one of the offences most frequently encountered, namely the failure to file company accounts on time.
The reverse burden issue
Section 441 of the Act imposes a duty on directors to file accounts for each relevant accounting period. If the company fails to do so, each director in default of that obligation commits an offence under s.451(1).
This liability is subject to the statutory defence in s.451(2), which is in the following terms:
“It is a defence for a person charged with such an offence to prove that he took all reasonable steps for securing that those requirements would be complied with before the end of that period.”
As in any case involving reverse burdens, there are two issues to be considered. The first is whether, as a matter of statutory construction, Parliament intended to impose a legal burden on the defendant (ie. one which must be discharged by the accused to the civil standard). The second is whether, even if it did so intend, the resulting incursion into the presumption of innocence is a proportionate one. If it is, no difficulty arises under Article 6(2) of the Convention and the legal reverse burden will be lawful. If it is disproportionate, however, the provision must be ‘read down’ under s.3 of the Human Rights Act 1998, so as to impose an evidential burden instead (such that the accused need only adduce some evidence in support of the statutory defence, before the burden reverts to the prosecution to disprove that defence to the normal criminal standard).
There is no difficulty in this case with the first issue. Whilst arguments on the proper construction of other statutory provisions can arise, it is plain on the face of s.451(1) that a legal reverse burden was intended. The only remaining question therefore is whether this imposition is Convention compliant.
Whilst this issue has not previously been considered by the Court of Appeal in the context of s.451 of the Act, the general underlying principles have been reviewed on a number of occasions in relation to other reverse burden provisions (see in particular R v Lambert [2002] 2 AC 545; R v Johnstone [2003] UKHL 28 and the conjoined cases of Sheldrake v DPP and Attorney General’s Reference (No.4 of 2002) [2005] 1 AC 264). In each instance, the court has emphasised that the compatibility or otherwise of every such provision will turn on its own facts, taking into account, amongst other things, the nature of the mischief the provision is designed to address, the ease with which a defendant can prove matters said to be within his own knowledge or belief and the gravity of the offending in question.
In relation to this final issue, the perceived wisdom at one time was that the more serious the offence in question (and, as a result, the heavier the punishment which may follow), the greater the onus on the prosecution to justify a legal reverse burden. Conversely, of course, the less serious the offence, the easier it would be for the prosecution to get home on this point.
Based on this analysis alone, one might think that prosecutors would encounter little difficulty in upholding the legal reverse burden in s.451, which is after all a non-imprisonable and summary only offence (as are many of the other offences under the Companies Act 2006). More recent jurisprudence, however, has cast doubt on this approach. For example, in Urquhart v HM Advocate [2015] HCJAC 101, the court rejected the suggestion that, just because legal burdens may be inappropriate in serious cases, the converse necessarily applies:
“If, for example, the maximum sentence is life imprisonment, that would weigh very heavily indeed in the proportionality exercise, against the imposition of a legal burden. But it would, we consider, be false logic to suggest that where the maximum sentence is comparatively low, that will weigh in its favour. We consider that, in those circumstances, the sentence point will be neutral. It is not a matter of comparative arithmetic. The accused will still be facing the possibility of punishment.”
The point was addressed even more directly by Sir Anthony May in DPP v Wright [2009] EWHC 105 (Admin), a case involving allegations under the Hunting Act 2004:
“…….we are disinclined to accede readily to a submission that it is proportionate to bypass article 6(2) for summary offences in magistrates’ courts because they are relatively trivial. Chipping away at a fundamental principle of the criminal law has obvious dangers.”
In circumstances where reverse legal burdens continue to be struck down by the courts, these are significant judicial pronouncements. At the very least, they render the lawfulness of the reverse burden in s.451(2) open to doubt. Defendants facing charges under s.451 (or, for that matter, other offences under the Act) should therefore consider deploying Convention based arguments to this effect.
The meaning and effect of s.1157 of the 2006 Act
Tucked away at the back of the 2006 Act is the curious provision that is s.1157:
1157 Power of court to grant relief in certain cases
(1) If in proceedings for negligence, default, breach of duty or breach of trust against–
(a) an officer of a company, or
(b) a person employed by a company as auditor (whether he is or is not an officer of the company),
it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit.
On its face, there is no reason to think that this provision does not apply to offences under ss.441 and 451 of the 2006 Act. After all, the obligation to file accounts is described in both sections as a ‘duty’, whilst s.451 is headed “Default in filing accounts and reports: offences.” The term ‘proceedings’ in sub-section (1), meanwhile, is not restricted to civil cases, as is further made plain by s.205 of the Act (which permits company loans to a director who is applying for relief under s.1157 from either criminal or civil proceedings).
What is more perplexing is how s.1157 fits in with the ‘reasonable steps’ defence which already exists in relation to the failure to file accounts (per.s.451(2), see above). There is precious little case law on the subject. Some guidance can be gleaned, however, from the judgments in Re D’Jan of London Limited [1993] BCC 646 and The Northampton Regional Livestock Centre Ltd v Cowling & Others [2014] EWHC 30 QB. In these cases (which, as it happens, were both civil) the court was pondering how a director who has been negligent in his dealings on behalf of a company, may nonetheless be found to have acted ‘honestly and reasonably’ for the purposes of s.1157. On the face of it, and given that any finding of negligence automatically imputes a further finding of unreasonableness, the two outcomes are mutually inconsistent.
In resolving this conundrum, the court in both cases relied on the extent of the breach in question. As a result, in circumstances where there has been an egregious breach of duty, the director will not only have been negligent but is also likely to be denied discretionary relief under s.1157. If, on the other hand, the breach might be described as marginal, the court may grant relief under s.1157, even if a finding of negligence could technically be upheld.
This has significant ramifications for prosecutions under ss.441/451, whereby a director can only escape liability if he or she can demonstrate that all reasonable steps were taken to file the accounts on time. In light of the above authorities, it appears that s.1157 may provide a secondary line of defence if that gold standard hasn’t quite been reached.
Two further points arise on the face of s.1157. Firstly, leaving aside the extent of the breach in question, there are no limits on the matters which the court may take into account in the director’s favour, even if technically an offence is made out. Secondly, even if the burden of establishing the statutory defence under s.451(2) does fall on the accused to the civil standard (see above), the court is not similarly constrained under s.1157. Rather, it has an overarching power to acquit if it appears that, in all the circumstances, this is the right course to adopt. That makes s.1157 a potential gem for any director facing charges under the Act, whether pursuant to s.451 or otherwise.
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