Section 204 of the Enterprise Act 2002 (the Act) introduces new provisions into the existing Company Directors Disqualification Act 1986 which provides for the disqualification of company directors in certain circumstances. Due to the serious impact which disqualification may have on the future career of a director these provisions are designed to encourage companies to be even more vigilant in ensuring compliance. Section 204 provides that a director of a company may be subject to a Competition Disqualification Order (CDO) if:
- a company of which he is a director has committed a breach of competition law (defined as being the Chapter I and II prohibitions under the Competition Act and Articles 81 and 82 EC); and
- his conduct as a director makes him unfit to be involved in the management of a company.
In considering whether a director is unfit the court must consider the extent to which the director was aware of or involved in the breach of competition law. A CDO may be imposed if:
- the director contributed to the breach of competition law,
- if his conduct did not contribute to the breach of competition law but he had reasonable grounds to suspect that the company was in breach of competition law and he did nothing to prevent it, or
- if he did not know that the company was in breach, but ought to have done so.
Directors therefore have a considerable responsibility to ensure compliance with competition law by the companies they direct. Ignorance of whether a particular conduct breached competition law is not a defence to an application for a CDO. The risk of imposition of a CDO is increased where a director has been director of a company in relation to any other breach of competition law, for example where he was formerly director of another company which had breached competition law.
The maximum period for which a director can be disqualified is fifteen years. Whilst a person is subject to a CDO it is an offence not only for him or her to be a director of a company but also to act as a receiver of a company or as an insolvency practitioner or to be in any way, either directly or indirectly concerned with, or take part in, the promotion, formation or management of a company. These provisions are interpreted widely and the courts tend to look at the substance of the activities of a disqualified director rather than the formal job-title; in practice this will in most cases have a very serious impact on the career of the disqualified director. A person acting in breach of an order will be personally liable for all relevant debts of the company.
Details of a CDO will be kept on a public register.
CDOs may be made against shadow or de facto directors of a company.
The Guidelines on Competition Disqualification Orders state that the OFT is likely to apply for a CDO where the director has been directly involved in the breach of competition law, quite likely to apply where there has been a failure to take corrective action and does not rule out an application where the director failed to keep himself or herself sufficiently informed. It will not apply for a CDO against any beneficiary of a no-action letter in respect of the activities covered by that letter.
On the face of it, in situations where the cartel offence may have been committed by a more junior member of an organisation but where a director or directors had direct involvement or knowledge of the arrangements there may be advantages in those directors also seeking no-action letters so as to avoid the possibility of a CDO. However, as one of the requirements for benefiting from a no-action letter is that the director would need to admit dishonesty (which may well have serious consequences for his ability to continue to enjoy shareholder confidence), this is likely to make it an unattractive option.
Given that the CDO will depend upon the breach of competition law it may be important for directors to be involved in the defence of such proceedings (which are against the company) to ensure that their position is not prejudiced in a way which would make it more likely that the OFT would apply for a CDO against them.
By Angelo Basu
© Herbert Smith 2003