When the Financial Services Authority (FSA) issued Land of Leather chief executive Paul Briant with a personal fine of£14,000 a fortnight ago, a loud warning shot was fired over the bows of retailers.
Briant’s punishment was incurred as a result of Land of Leather’s failures in the selling of payment protection insurance (PPI) and came despite its co-operation with the investigation and action to remedy problems. It was a clear message that individual directors – and not just their companies – are expected to take responsibility for adhering to the tangle of regulatory red tape that governs business seriously.
Briant’s fine is symptomatic of a growing trend of making examples of individual directors over various issues. And the potential penalties are not only financial. Depending on the rules breached, they can include disqualification and even imprisonment.
Field Fisher Waterhouse solicitor Nick Thorpe says: “There seems to be a growing trend for enforcement bodies to prosecute individuals on the basis that this will have a greater deterrent effect than fining the company.
“The FSA’s decision to fine not only Land of Leather, but also its chief executive, for failing to properly oversee the sale of PPI is a good example.”
An FSA spokesman confirms that, where appropriate, it is seeking to target directors, because that is often a more effective deterrent. She says: “We can and will take action against chief executives, because they are responsible for ensuring the firm is compliant. In general, we are moving more towards senior management, but each case has to be justified.”
PPI is one of many areas where retail directors should be wary of personal liability. The grocery sector has been under heavy scrutiny of late. Despite the completion of the Competition Commission’s investigation, the Office of Fair Trading’s (OFT) latest probe into possible price-fixing indicates that the spotlight is still firmly on the supermarkets.
The OFT’s rules on competition, price-fixing and cartels give the regulatory authority scope to not only fine directors, but to disqualify or prosecute them.
Directors’ personal liability is not limited to financial and competitive issues. They may be personally liable under health and safety law, environmental legislation, food hygiene, trade descriptions and consumer protection. All these fields are governed by strict regulations and observation of the rules is an unavoidable reality for retailers.
Chris Green, a partner at law firm Weightmans, agrees that there is a growing trend – particularly in health and safety cases – for the authorities to pursue individuals. “I would say that the role of the individual in all of this is coming under the microscope,” he says.
However, he notes that prosecution of a company is far more common. He also observes that being a director of a company where a breach alone has occurred is not enough to put someone in the firing line. There must be proof that the individual has either consented to the action that led to the breach or closed their eyes to what was happening (for instance, not necessarily knowing, but admitting that they did not know how issues were dealt with), or that their negligence led to the breach.
David Young, partner at law firm Eversheds, says: “Generally, unless the personal breaches or personal contribution to the corporate breaches are obvious and significant, most enforcement activity will focus on the corporate body – particularly where it is a well-known or significant one.”
But directors need to be aware that delegation of authority does not mean delegation of responsibility. In Briant’s case, he was aware there were issues with PPI and had tasked senior managers and compliance specialists to deal with them.
However, in its Land of Leather statement, the FSA said: “Mr Briant’s fine sends out a strong message that senior management are responsible for ensuring that their firm has robust and effective systems and controls and is complying with its regulatory obligations.”
The lesson is that if proper systems are not in place in a business, then directors cannot say in their defence that they have instructed senior managers to act.
Green says that if individuals are called in for a personal interview with investigators, they should be alerted to the fact that they are being considered for singling out. “I think the key practical advice would be if and when they are invited into [individual] interviews, there is perhaps a little bit more against them personally than meets the eye,” he says.
Laws are updated constantly and retail directors need to keep on top of changes that can affect them. One illustration is the new immigration laws introduced in February. Company directors can be issued with two-year prison sentences and fines of up to£100,000.
Under the new rules, directors face prosecution if they employ someone who is subject to immigration control and not entitled to undertake the work in question. Kate Gater, partner at law firm Berwin Leighton Paisner, points out that, in the past two and a half months, 150 company fines have been issued.
Adhering to the letter of the law is not as simple as it may seem. Even those directors heading organisations with unblemished records cannot afford to be complacent.
INSOLVENCY LEADING TO FRAUDULENT OR WRONGFUL TRADING
Punishment: seven years in prison and/or an unlimited fine
Directors are personally liable if they allow a company to continue to trade when, to their knowledge, there is no reasonable prospect of debts being paid, either when they are due or shortly after. This is viewed as fraudulent trading, because it amounts to an intention to defraud creditors.
Anyone knowingly party to the fraud is liable for the debts of the company without any limit. It is also a criminal offence punishable by up to seven years in prison.
Wrongful trading is when a director of an insolvent company knew, or ought to have known, that there was no reasonable prospect of the company avoiding liquidation and from that point onwards failed to minimise the loss. The penalties are less severe than for fraudulent trading, but not insignificant. And the penalties apply whether the director knew the situation or not – it is judged on whether they should be expected to have the skill and expertise.
It is the responsibility of the liquidator to bring an action and the court can require a director to personally contribute to the assets of the company, which are then made available to creditors.
ANTI-COMPETITIVE BEHAVIOUR/PRICE-FIXING
Punishment: up to five years in prison, disqualification and an unlimited fine
Under the 1998 Competition Act, companies can be fined up to 10 per cent of turnover if found guilty of anti-competitive behaviour. In 2002, the Enterprise Act also made it a criminal offence – punishable by substantial fines and up to five years in prison – for individuals who fall foul of the law.
Directors face imprisonment if they engage dishonestly in price-fixing, market-sharing (where companies agree not to compete by devising how to share customers among themselves), limiting production or supply, or bid-rigging.
Co-operating with the authorities can limit the damage. As seen in the recent British Airways/Virgin price-fixing case, Virgin escaped a fine because it notified the OFT when it became aware of a possible breach of the law.
As well as a fine, if a director is found responsible for a breach of competition law, the OFT can apply to the High Court for them to be disqualified from running a company through a Competition Disqualification Order (CDO). The OFT is most likely to do this if a director has been actively and directly involved in the breach of competition law and obstructed any subsequent investigation. The maximum period of disqualification is 15 years.
DATA PROTECTION
Punishment: disqualification, fines and liability to pay damages
This issue hit home for retailers when Marks & Spencer incurred an enforcement notice by the Information Commissioner’s Office (ICO), which monitors compliance with the Data Protection Act 1998.
M&S was criticised for failing to require third-party contractors to take effective security measures to protect employee and customer data. The investigation arose following the theft of a laptop that contained confidential employee pension data, which was not encrypted or password-protected.
In M&S’s case, it was only slapped with an enforcement notice, but directors risk substantial personal fines and damages costs if they allow these breaches to take place.
Gater explains: “Where a data protection offence has been committed by a corporate entity and is proved to have been committed with the consent or connivance of – or to be attributable to any neglect on the part of – any director, manager or similar officer of that entity, that person will also be guilty of an offence and therefore liable. This means a director could be disqualified or liable to a fine or damages.”
HEALTH AND SAFETY
Punishment: imprisonment, disqualification and fines of up to£100,000
Directors and managers can be personally and criminally liable for offences committed under health and safety legislation. The director can be fined, imprisoned and face disqualification from holding office as a director. However, they are only considered personally liable if an offence is committed with their consent or involvement or as a result of their neglect.
One of the most common instances is when executives do not act on a notice issued by the Health & Safety Executive asking them to take specific action. Also, the failure to “to take all reasonable steps to protect employees” is often cited.
According to Gater, prosecutions are increasingly common, as are fines exceeding£100,000. “The implications are enormous – both for the individual and the company – in terms of bad publicity, brand reputation and the destabilising effect on the workforce.”
Prosecutions of directors for corporate manslaughter are difficult, but they are said to be on the rise. Directors found guilty of manslaughter face imprisonment. According to the law, an individual commits manslaughter when he or she “causes a death through gross negligence”.
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