Non-executive directors may have no involvement in the day-to-day management of the companies they serve but, as a High Court ruling emphasised, that does not detract from their duty to ensure that they are properly and honestly run.
The case concerned a distinguished businessman who was, throughout its trading life, a director of a company that was alleged to have become involved in a missing trader intracommunity fraud (MTIC). The fraud was said to have resulted in the company wrongfully claiming VAT repayments totalling over £1 million.
After the company went into liquidation, the Secretary of State for Business, Energy and Industrial Strategy took action under the Company Directors Disqualification Act 1986. Disqualification orders were sought against the businessman and three other men who at various times were either directors or shadow directors of the company.
Ruling on the matter, the Court found that the company entered into 28 transactions that were connected to MTIC fraud. They were manifestly not genuine commercial deals and each of the other three men was aware that they were connected to the fraudulent evasion of VAT. The trio were disqualified from acting as company directors for periods ranging from 11 to 14 years.
The businessman was in a different position in that the sole allegation against him was that he had abrogated his duties as a director. He was not claimed to have had any knowledge of the fraud. A highly experienced non-executive director, he played no operational role in the company’s management and had no involvement in trading decisions. He was paid modestly for his work and was primarily concerned to ensure that the company met its obligations to its investors and shareholders.
Despite his acknowledged obligation to ensure that the company was properly run, however, the Court found that he was blind to what was actually happening. He had abrogated his duty by failing thoroughly to investigate an extraordinary uplift in the company’s turnover. His failure to engage fully with HM Revenue and Customs also amounted to a serious dereliction of duty. Overall, he had lost sight of the interests that, even on his own account, he was there to represent.
The Court noted that the impact of a disqualification order on a man whose career had been one of distinction was particularly pronounced. However, he had continued to insist on the fact that he was not running the business and had shown no real appreciation either of what went wrong in the company’s management or the seriousness of it. A four-year disqualification order was imposed.