The SFA Investigates Craig Whyte and Why Nothing Will Come of it, But is he Falling Foul of Company Law?

 

Regarding the SFA “investigation” into Craig Whyte, revealed by the BBC, I have a few thoughts.

 

First of all, and as an aside, it is interesting that the SFA list of reasons not to be a “fit and proper” person is longer than the SPL list, although if the SFA declares someone to be unfit, this binds the SPL too.

 

As has been stated, the SFA list of factors to be considered is “illustrative and not exhaustive”. Thus factors other than those mentioned in the last can be taken into account, at the discretion of the SFA, as long as they do so fairly and reasonably. Therefore persistent non-payment of HMRC, for example, could be taken into account.

 

On the basis of “comparative justice” however, I am not aware of any other directors of football clubs in Scotland being disqualified for anything other than the specific reasons and therefore barring CW for tax issues, for example, would run into the problem that no one else has been.

 

In any event, the decision is at the “discretion” of the SFA. This was and remains the ace up CW’s sleeve as regards being in control of a newco. Despite the statement that having been a director of a club which fails within the last five years (I paraphrase) is on the list, I am sure that, if insolvency took place after the FTT decision, CW would have argued that he had bravely, but in vain, attempted to plug the holes in the sinking ship, but the damage caused by Captain Murray and his crew had been too great. And as a man who had thus lost some of his hard earned cash, surely the SFA would not punish him further by preventing him being at the helm of RFC 2012. (I have clearly inhaled too much sea air, as the nautical metaphors are coming at a rate of knots.)

 

As far as the “disqualified in the last 5 years” issue goes, as Adam had said, it is in these circumstances date of “conviction” which counts. I accept that there is a way to read it which indicates that not having had the ban end till a date within the last five years would fall foul, but I see no way that any court, for example, would uphold that interpretation should the SFA take action against him on the ground. If the SFA did, then CW and his lawyers would have a “stonewall” case against them.

 

It was asked earlier if that did not mean that a person serving a ban of over 5 years could run a football team whilst still banned. The answer is no, because such an individual would still be banned from being a director or shadow director. For example, with CW having been banned in 2000, he could not under SFA rules (and subject to the SFA’s discretion) been a “fit and proper person” until the relevant date in 2005. However, even if at that stage he was seen as a “fit and proper person” by the football authorities, he was still not permitted to be a director or shadow director till the ban expired in 2007. The day after the ban expired, the disqualification per se would not have been a bar to him being a fit and proper person although the SFA could consider the reasons for the ban and, if they were felt to be particularly reprehensible, decline to award “fit and proper” status. However, as we know CW was banned for 7 years over a mere technicality, this cannot apply to him.

 

It would technically be possible for a football team to be bought by an individual or a partnership, and not through a limited company. In those circumstances, an individual disqualified as a company director could still, during any such ban, run the club as sole owner or as a partner. The SFA might decide that the person was in those circumstances not a fit and proper person. However, as buying football clubs through anything other than a limited company is as out of fashion as the 2-3-5 formation, this is merely an academic point.

 

Is it possible that the SFA will decide to take action against Mr Whyte? Yes, it is possible. Will they? No. The embarrassment factor for the SFA caused by only now “seeing the light” bearing in mind how much has been publicised already would be huge. They cannot, unless some other bombshell is revealed, base any action on what is now known and as mentioned above, if no other directors have been declared not to be fit and proper for falling foul of Stock Exchange rules, then it won’t start with Mr Whyte.

 

Turning to company laws, there is speculation about Rangers AGM and the effect of the unaudited accounts. The rules are summarised here. A PLC must hold an AGM within 6 months of the business’ year end. A private limited company does not need to have an AGM at all. Unless Mr Whyte acts remarkably quickly, Rangers FC PLC will remain a public company till 31st December, being the last date for an AGM.

 

Section 336 (3) of the Companies Act 2006 states that failure to hold an AGM in time is an offence and the offence is committed by every officer of the company who is in default. The penalty on conviction is by way of a fine. Section 307A requires 21 days notice to be given of the meeting.

 

The Companies Act is also very interesting on duties of directors. It is failure to fulfil those which really get up the Insolvency Service’s nose!

 

172 Duty to promote the success of the company

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

(2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

 

Has Mr Whyte, in his stewardship of the club, fulfilled his duties to it, as opposed to his duty to himself or the Group? Has his tenure fostered “the company’s business relationships with suppliers, customers and others”?  Has the company the company maintained “a reputation for high standards of business conduct”?

 

I think I can guess the answers to those questions!

 

Quick thoughts too re the SPL TV contract – there has been a lot of fuss about the so-called guarantee of four Old Firm games a year, with some suggesting this proves a deal is already in place. This is though a prosaic issue.

 

Old Firm games are most lucrative for Sky. If there are less than four, through relegation, the teams not being in the same half of the league at the split, or insolvency of one, the TV contract will not be void. There will be penalty clauses however reducing the price payable in such an event. Many have a low opinion of the SFA/SPL but they would not openly gerrymander the league in the feared way, or at least not do so in such a blatant way. The TV contract is not evidence of that.

 

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13 Comments

Filed under Football, Rangers, SFA, SPL

13 responses to “The SFA Investigates Craig Whyte and Why Nothing Will Come of it, But is he Falling Foul of Company Law?

  1. eddiek

    Paul, I posted on RTC about the interpretation on this ‘Date of conviction’ argument. Are you suggesting that if I had committed a serious enough offence to be banned from driving for 5 years that the day after my ban expired, I would not need to inform my insurance company that I had a conviction in the last 5 years?

  2. TheBlackKnight

    Paul, another well balance post. Put simply,

    Permit me if you will, to use a common situation, a driving analogy;

    a ‘convicted’ drunk driver, banned from driving for 3 years in October 2008, is going for a delivery man(woman) position. In the interview they are asked “have you been ‘convicted’ of any driving offences in the last 5 years?”

    The answer is no. Only because the question was, “have you been convicted”.

    If the question was, “have you been disqualified” then the answer is YES.

    I therefore cannot see in what way, despite my own initial interpretations posted on RTC, that The Whyte Knight had been disqualified for a period falling within the past 5 years.

    More power to your elbow! TBK

    • TheBlackKnight

      Ooops!! 🙂

      Should have read:

      “a ‘convicted’ drunk driver, banned from driving for 5 years in October 2006, is going for a delivery man(woman) position. In the interview they are asked “have you been ‘convicted’ of any driving offences in the last 5 years?”

      The answer is no. Only because the question was, “have you been convicted”.”

      Doh!

  3. TheBlackKnight

    Paul, how about a post on the ‘Plus Markets’ situation?

  4. It seems to me that if I was disqualified for five years on, say, 20/02/2002, I’d still be disqualified on 19/02/2007. But then there has traditionally been a big difference between what is the right thing to do and what the SFA chooses to do. There doesn’t seem to be any point in the SFA having a “fit and proper person” test if it doesn’t even go as far as what the law has already set out. There could hardly be a more unnecessary rule than to disqualify someone for two years when he’s already disqualified for five.

    Regarding the Sky deal, I fear I don’t share your confidence that the SFA would not gerrymander the league in order to aid Rangers. Would they suddenly change the habits of a lifetime when the stakes are now higher than they’ve ever been?
    (Answers on a postcard to Jorge Cadete.)

    • Thanks Henry.

      As I mentioned, the use of the word “disqualified” can be taken two ways – there lies the ambiguity.

      However there is nothing clear from the SFA to suggest that somehow football club directors should be held to significantly higher standards than normal ones. I suspect that, if the SFA tried to use the 5 years from the end of the ban argument, no court would uphold it.

      As for the Sky TV deal, you are right that the Cadete affair showed what the SFA could do to thwart Celtic, but perhaps now we have a new age of glasnost which has shone its light on the SFA and made such interference no longer possible (at least in such obvious fashions)?

  5. Ian Ferguson

    Paul,

    As a layman I can’t accept your reasoning concerning the 5 year ban.

    The question asked is ” Have you been disqualified as a Director of a Company in the last five years?”

    For 5 years after the FINAL day of disqualification the honest answer is “YES.”

    If the law is so convoluted that it cannot recognise a simple “YES/NO” answer as being right or wrong then it is no wonder people of dubious character can run rings around it.

  6. A legthy reply here but i had been working on a similar blog article and kind of lost my way with it however here is a large amount of information in regard to disqualification of directors:

    Disqualification
    A director can be disqualified from being a director of a specific company, or from being a director of any company registered in the United Kingdom under certain circumstances. For instance formerly a director could be disqualified from holding the position of director in a public limited company if they had attained the age of 70, unless the shareholders passed a resolution to allow the director to continue in post. Section 293 CA 85 has however been repealed by CA 2006 to bring company law into line with the general policy against age discrimination.

    Disqualification may result from cases of fraud, or other breaches of duty by a director under the Companies Act. Under the Insolvency Act, a director may be disqualified if the courts consider that his, or her conduct as a director makes them unfit to be concerned in the future management of a company. There are an increasing number of directors being disqualified and the threat should not be taken lightly.
    It is important to be aware of the provisions of the Company Directors Disqualification Act 1986 (“CDDA”). If a director is disqualified and they continue to participate in the management of the company then they will be committing a criminal offence under the CDDA – section 13 – and they may in fact be held personally liable for the debts of the company – section 15. It should be noted that whilst someone may be disqualified from being a company director from anything between 2 and 15 years, it does not mean that that person cannot earn a living. A disqualified director can continue to trade in the same line of business either as a sole trader or as a partner within either a general, or limited liability partnership.
    The CDDA contains a number of grounds for disqualification, namely:
    (i) Section 2 – conviction of an indictable offence relating to the promotion, formation, management, or liquidation of a company. The maximum disqualification period in this instance is 15 years. There is no requirement to establish actual misconduct of the company’s affairs under this section.
    (ii) Sections 3 & 5 – persistent breaches of company law; for example the late filing of the company’s accounts, or the annual return. This is the “three strikes and your out” rule. Three failures to comply with the statutory obligations imposed on a director within a 5 year period can lead to disqualification for a maximum period of 5 years. The difference between sections 3 & 5 is that a court can impose a disqualification order under section 3 without an accompanying conviction, whereas under section 5, a court can disqualify at the same time as convicting for the failure.
    (iii) Section 4 – if a director is involved in fraudulent trading under section 993 CA 06, or any other fraud in connection with the company then a director may be disqualified for a maximum period of 15 years. The company does not require to be insolvent for a disqualification under this section, nor does there need to be a finding of guilt under section 993; involvement can be sufficient to lead to a disqualification order.
    (iv) Section 9A (introduced by the Enterprise Act 2002) – if a director commits a breach of competition law, such as preventing, or distorting competition, or abusing a dominant position in a market, and is unfit to be a director then they can be disqualified. A director does have the option here to provide an undertaking to accept disqualification under section 9B.
    (v) Section 10 – if a director is found liable in the civil courts for either fraudulent or wrongful trading under the Insolvency Act then they can be disqualified for a maximum period of 15 years.
    (vi) Sections 11 & 12 – a bankrupt cannot continue as a director of a company unless they have the leave of the court to do so; any director continuing to act is leaving them self open to prosecution and a period of further disqualification.
    (vii) Sections 6, 7 & 8 & Schedule 1 & 2 – a court must disqualify a director who is unfit to be such; section 6 only applies where the company in question is insolvent. It applies equally to directors and shadow directors and covers all types of insolvency – administration, receivership and liquidation. The maximum disqualification period is 15 years.
    The question of whether or not a director is unfit to manage is obviously an extremely subjective issue and has over the years produced a great deal of case law. The CDDA details who is entitled to make an application for disqualification – section 7. If the Secretary of State, considers it “expedient, in the public interest” to make an application to disqualify then either he, or additionally in England, the Official Receiver, can make an application. It should be appreciated that in Scotland any such application would require to be dealt with through the Procurator Fiscal’s office.

    Any application for disqualification must be commenced within two year’s of the company’s insolvency, unless the court is prepared to grant an extension to this time period. The fact that the Secretary of State has two years to initiate proceedings does not mean however that they simply have to raise proceedings within this time period and then not progress matters speedily. The Secretary of State is obliged to process any proceedings as a matter of urgency, given that the director seen as being unfit is still free to continue as a director of another company until a disqualification order has been granted.

    In one case [EDC v UK [1998] B.C.C. 370, ECHR] it was held that a delay of four and half years in obtaining a disqualification order was a breach of the director’s human rights in terms of Article 6 of the Convention of the Human Rights. This Article provides for a right to a fair and public hearing, within a reasonable time period by an independent and impartial tribunal established by law. The Secretary of State can to avoid lengthy court proceedings and if the director concerned is willing, accept an undertaking from the director to be disqualified.

    Section 8 permits the Secretary of State to make an application for disqualification following on from a Department of Trade & Industry (DTI) investigation. There is no two year time limit imposed here, given that DTI investigations take considerable time to conclude. It should be noted that a company does not need to be insolvent for a section 8 Application.

    What amounts to unfitness? Schedule 1 details the type of conduct, such as:
    (i) misfeasance or breach of a fiduciary duty, or other duty
    (ii) misapplication of the company’s property,
    (iii) the extent of the director’s responsibility for the company’s failure to make its returns of accounts, keeping up to date the various registers and/or records etc,
    (iv) the director’s responsibility for the company’s insolvency,
    (v) the director’s responsibility for the company’s failure to supply goods, or services,
    (vi) the director’s responsibility for the company entering into transactions that could be set aside on liquidation
    Standard of Unfitness
    Whilst the CDDA sets out the grounds for what should be considered unfitness to be a company director, difficulties can arise in interpretation of the actual standard that should be applied. What standard do we consider to be reasonable? Should it be:
    (a) commercial immorality
    (b) recklessness in management
    (c) gross incompetence
    (d) is the director a danger to the public if he were to continue in post?

    The Courts will consider all matters detailed in the legislation, especially those factors detailed in schedule 1, parts I & II and schedule 2. This covers both solvent and insolvent companies and relevant breaches of a director’s duties and the director’s responsibility for the company’s insolvency. It is important that the legislation should cover both solvent and insolvent companies, since a director cold be a director of a number of companies, not all of which will be insolvent. Should that director be allowed to continue other ventures where a company has become insolvent?

    The difficulty with all of the above is that there is scope for interpretation of what constitutes unfitness and it is for this reason that the Courts will look at additional factors, with a view to providing guidelines.
    Factors considered by the Courts are as follows:
    (i) the level of debt and any connected practice of delaying payment of such debts to allow the company to continue to trade.
    (ii) the number of companies the director is involved in and how many of them are/or have become insolvent.
    (iii) the manner in which the company has been managed.
    (iv) the personal circumstances of the director, although it should be noted here that there is no requirement for a disqualification order to be granted for there to have been any fraudulent behaviour; the court may attach a degree of moral blame to the director for the company’s failure – this tends to lead to confusing results.
    (v) the director’s state of mind.

    The minimum period of disqualification is two years and this could obviously have serious repercussions on someone’s ability to earn a livelihood. The granting of any disqualification is a serious interference with an individual’s freedom and it is not something the Courts will treat lightly. Indeed the court may take into consideration the employment of others such as in re Majestic Recording Studios [1989] BCLC 1 where the Court was of the view that whilst the director was unfit it would not be appropriate to grant a disqualification order as this would have had a detrimental affect on the company employees, and in that case the director was allowed to continue as such, subject to conditions imposed by the Court.
    The test for disqualification has to be an objective one, and this has been confirmed by the Courts – see re Bath Glass [1998] 4 BCC 130, where Peter Gibson, J said:
    “To reach a finding of unfitness the court must be satisfied that the director has been guilty of a serious failure, or serious failures, whether deliberately or through incompetence, to perform those duties of a director which are attendant on the privilege of trading through companies with limited liability. Any misconduct of the respondent qua director may be relevant…”.

    On the basis that “serious failure” can occur through “incompetence” the test for unfitness has to be objective and liability can be established through no fault of one’s own. So what amounts to an objective test?

    The Courts guidelines are to the effect that a director must understand and keep accounts –as they are obliged to do by CA 2006. It is no defence to suggest that because a professional was employed that the directors cannot be held responsible. That may be a matter for mitigating the period of disqualification but not for avoiding it.

    Commercial misjudgement, or minor incompetence, does not amount to unfitness. The Courts will be looking for gross negligence, or incompetence to establish “serious failure”. And what of the director’s age? Should they be allowed to learn from their mistakes? The case of Secretary of State for Trade & Industry v Gray & Another [1995] 1 BCLC 276 indicates that the courts can only consider alleged behaviour in making a decision on a disqualification order. They cannot take into account what may or may not happen in the future.

    What has however caused difficulties is the different interpretations put on similar issues by the courts over the years. For example in the case of re Dawson Print Group [1987] BCLC 601, Hoffman J took the view that the use of a VAT liability to keep the company afloat was equivalent to unfitness, whereas in the case of re Stanford Services [1987] BCLC 607 the court did not consider the same use of company funds as amounting to unfitness. This same difficulty arose in the Scottish case of Secretary of State for Trade & Industry v Mitchell reported at http://www.scotcourts.gov.uk/opinions on 09/11/2000.

    The Court’s position was however clarified in 1998, in the case of Secretary of State for Trade & Industry v Griffiths [1998] 2BCLC 646 in which the Court of Appeal indicated that the determination of what did or did not amount to unfitness required an application of common sense and a degree of flexibility on a case by case approach, but specifically considering factors such as that the aim of disqualification should be to protect the public, to act as a deterrent to others and for other directors to realise that being a director carries with it certain responsibilities.

    Lord Carloway in the Scottish case of Mitchell cited supra reconfirmed this method of handling disqualification applications. He stated that “the court is concerned with measuring whether the conduct … makes the director unfit to be concerned in the management of the company. That measurement is done by looking at the conduct at the time and not by reference to circumstances occurring after the conduct and/ or existing at the time of the hearing but potentially bearing on the director’s current fitness. Thus an improvement in the director’s general conduct, expressions of regret or remorse or a proved change of attitude … will not avoid a disqualification order. However, the conduct complained of cannot be looked at in isolation, outwith its context or setting. … Personal circumstances applying at the time of the conduct are one example of what may relevantly be taken into account. … Where issues of honesty arise, as they may do here in relation to non payment of Government debts, the mental state of the director may be a factor in assessing his commercial probity and general honesty.”

    This clearly indicates that the Court in making a decision about a disqualification order will only look at the conduct complained of at the time, not what may happen in the future, but that in coming to a decision the court has a discretion to take account of extenuation circumstances.
    Period of Disqualification
    Guidelines for the period of disqualification were set out in the case of re Sevenoaks Stationers (Retail) Ltd [1991] BCLC 325, namely:

    First Offence
    (i) 2 – 5 years for cases involving negligence, or incompetence,
    (ii) 6 – 10 years for cases involving misappropriation of company assets & prejudicing the creditors
    (iii) 11 – 15 years for serious cases

    Repeat offences
    11-15 years.
    Voluntary Undertaking Not To Act
    It is open to a director, rather than to wait to see if the court will grant a disqualification order, to undertake not to act as a director for a specified period of time. The court has a discretion, here to accept that undertaking or to grant a disqualification order.
    Consent to continue as a director – section 17 CDDA
    The Courts are entitled on cause shown to lift a disqualification order that has already been granted, or indeed to lift an undertaking given by a director not to act as such. This would normally be done in a situation where there was a distinct possibility that the company concerned might go into liquidation if the director could not manage the company, or where the court was of the view that there was no danger to the public in allowing the director to be reinstated as a director of that particular company. If the court was minded to lift the disqualification order then it can do so but at the same time impose conditions on the director concerned, such as ensuring that a person with the proper financial qualifications was also appointed to the board of directors.
    Protective Measures
    If only one thing is clear from all of this, it is that a director’s responsibilities cannot be taken lightly, particularly in view of the potential liabilities. Directors should familiarise themselves and their fellow directors with the obligations and responsibilities imposed on them. They should ensure that at all times a close watch is kept on the performance of their company and that appropriate advice (and action) is taken when necessary.

    A company cannot indemnify its directors from liability, but directors may protect themselves by means of Directors’ Professional Liability Insurance. Whilst this can assist in protecting the directors against civil actions for damages, it does not normally cover criminal offences. It can also be expensive.

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