Prosecutions under the Companies Act 2006: Essential Points for Defence Practitioners – by Christopher Coltart KC
Lurking within the Companies Act 2006 are numerous strict liability offences, which are coupled with ‘reverse burden’ statutory defences (ie. those which require the defendant (usually a company director) to prove the defence in question). In the event of prosecution 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 European Convention on Human Rights and (b) how the statutory defence operates in conjunction with the additional, free-standing ‘defence’ in s.1157 of the 2006 Act.
The reverse burden issue
Section 441 of the 2006 Act imposes a duty on directors to file accounts on behalf of the company for each relevant accounting period. If no such accounts are filed, 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 burden defences, 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 Parliament 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 ECHR 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 the defence to the 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 by Parliament. The only remaining question therefore is whether this imposition is ECHR compliant.
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 authority from the Court of Appeal, however, has cast doubt on this approach, indicating that retaining the presumption of innocence in relation to summary only offences can be just as important. This is a significant development, leaving the lawfulness of the reverse burden in s.451(2) open to doubt.
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 and applies also to summary only criminal offences within the 2006 Act (as confirmed by the Court of Appeal).
The more acute issue is how s.1157 fits in with the statutory defence in s.451(2) of the 2006 Act. After all, if a director has failed to take ‘all reasonable steps’ to avoid the late filing, as required by s.451(2), can he/she nonetheless be held to have acted ‘honestly and reasonably’ for the purposes of the discretionary relief in s.1157? Based on the available authorities, and however odd it may sound, there is an argument that they can.
The starting point is to consider the position in relation to negligent directors. Given that any such finding necessarily imputes unreasonable conduct, one would imagine that s.1157 relief, which requires both honest and reasonable behaviour, would not be available. It is plain from the wording of s.1157 itself, however, that it is (see above). In seeking to rationalise this surprising outcome, the courts have held that what is deemed ‘reasonable’ for the purposes of s.1157 is less onerous than what is required to avoid a finding of negligence. Put another way, if the director’s breach of duty might be described as marginal, the court may grant relief under s.1157, even if a finding of negligence could technically be upheld.
By analogy, this has ramifications for late filing prosecutions, whereby directors can only avail themselves of the statutory defence in s.451(2) if they can demonstrate that all reasonable steps were taken to avoid this outcome. In light of the above authorities, s.1157 may provide a secondary line of defence if that gold standard hasn’t quite been reached.
Whilst the ‘reverse burden’ point and the s.1157 point have been considered and resolved by the higher courts in relation to other statutory provisions, there has been no judicial consideration of the position under ss.441/451 of the 2006 Act. Unless and until this has happened, and only then if there are findings adverse to the defence, practitioners should take these points in prosecutions brought by Companies House.
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