Many breaches of the Companies Act 2006 Constitute a criminal offence
This is the sixth in a series of articles in which we explore the role of a director from various angles, some of them slightly unconventional. Each article identifies a fact of which directors need to be aware - whether concerning their duties, their relationship with other key players or their responsibilities under the Companies Act 2006 - and uses it as a starting-point to illuminate a particular aspect of their role.
This article considers what the liberal use of criminal sanctions in the Companies Act 2006 tells us about the scope of a director's role.
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All manner of breaches of the Companies Act 2006 carry a criminal sanction. For example, it is an offence:
for the company to fail to file a special resolution at Companies House within a 15-day time limit (section 30):
for the company to fail to keep and preserve accounting records (sections 387 and 389);
for the company to fail to file an annual return at Companies House within a 28-day time limit (section 858);
for the directors to allot shares without shareholder authorisation (section 549);
for a person to be knowingly a party to the carrying on of the company's business for a fraudulent purpose (section 993);
for the directors to make a solvency statement in connection with a reduction of capital without reasonable grounds for the opinions which they express in it (section 643);
for the company to fail to keep a register of its members (section 113); and
for the company to fail to circulate a proposed written resolution when requested to do so by the shareholders (section 293).
This may seem to be a long list, but it is just the tip of the iceberg. The Act contains literally dozens of offences. The circumstances in which a breach constitutes an offence depends upon the provision in question. A failure to file the company's accounts by the deadline specified in the Act, for example, constitutes an offence on the part of any director who did not take all reasonable steps to ensure that the deadline was met (section 451), whilst a director commits an offence in relation to a recommendation under section 571 that the shareholders pass a special resolution to disapply the statutory pre-emption right if he "knowingly or recklessly authorises or permits the inclusion of any matter that is misleading, false or deceptive in a material particular" in the recommendation (section 572). In many cases, an offence is committed both by the company and by any officer who is "in default" (ie any officer who "authorises or permits, participates in, or fails to take all reasonable steps to prevent, the contravention" (section 1121)). This is the case, for example, where the company breaches the financial assistance prohibition (section 680), or does not send its accounts to its shareholders (section 425).
Cause for concern?
From a director's perspective, this extensive reliance on criminal sanctions should not be a cause for undue concern. As will be apparent from the paragraph immediately above, the focus of the law is on directors who are behaving dishonestly or without due care, and so an honest director who takes the trouble to enquire into his - and his company's - obligations under the Act, and who makes a reasonable effort to comply with them, has little to fear. Take the following scenario:
the board appoints a new director pursuant to a power in the company's articles
the board instructs the company secretary to notify Companies House of the appointment and update the company's books
the secretary miscalculates the deadline by which Companies House has to be notified, with the result that the notice is filed a week late.
Although section 167 provides that a failure to notify Companies House of the appointment of a director within the specified period constitutes an offence on the part of the company and every officer who is in default, it is inconceivable that criminal proceedings would be brought against the directors (or, indeed, the secretary) on these facts. After all, the directors took steps to try to ensure compliance with section 167, and the secretary was guilty of nothing more than an innocent mistake. This is not to say that the Act's criminal sanctions are never used. The authorities take a very dim view of breaches of the obligation to keep and preserve accounting records, for example. Generally, though, and certainly in relation to essentially administrative provisions such as section 167, the liberal use of criminal sanctions is designed not so much to punish those who are involved in minor infringements as to focus directors' minds on the statutory requirements, and thereby to encourage compliance with them.
The importance of compliance
Why is compliance so important? The answer lies in the fact that the Act is designed to balance the interests of various parties, including shareholders, creditors, directors and the company itself. If its provisions are breached, the balancing exercise does not work as well as it should, and the smooth operation of our entire system of company law is put at risk. Take, for example, the basic filing and record-keeping requirements. Why does the Act require articles and special resolutions to be filed at Companies House? Why does it require accounts to be approved by the board and filed within a specified period? Why does it require the company to keep its internal registers of members and directors available for public inspection? The answer to all of these questions is that, as a matter of policy, the view is taken that creditors (who are in the unfortunate position of dealing with a company whose shareholders enjoy limited liability) and shareholders (who have handed over the management of the company's business to the board) should have access to a certain minimum amount of information concerning the company's operations. If they do not have access to sufficient information, it is thought, they may be less inclined to risk their money by dealing with, or investing in, companies, thus reducing the effectiveness of the company as a vehicle for carrying on a business.
The scope of a director's role
Some directors may feel that their role is simply to manage the company's business affairs. In other words, as long as the company is making money under their stewardship, they may feel that they do not need to worry about such mundane matters as complying with filing requirements or obtaining shareholder authorisation before issuing shares. Directors who adopt this view fundamentally misunderstand the scope of their role. It is true that the board is often entrusted with the task of running the company's business (see, for instance, article 3 of the model articles for private companies), but this management function is only half the picture. The fact that many breaches of the Act's provisions expose them to the risk of personal criminal liability should serve as a reminder to directors that it is a crucial part of their role to ensure that they - and their company - comply with the Act. For an honest and diligent director, then, the lesson to be drawn from the Act's heavy reliance on criminal sanctions is not that he should worry about the risk of facing criminal proceedings, but rather that ensuring compliance with the Act is just as much a part of his role as the task of running the company's business.