What happened to Carillion?
Carillion was once the UK’s second largest construction company, employing around 43,000 people, 19,000 of those in the UK. It came as a shockwave to the company’s stakeholders and the public at large when Carillion issued its first profit warning on 10 July 2017, stating that its profits would be hit to the tune of £845 million.
Carillion went into compulsory liquidation in January 2018. At this point, the company had liabilities of nearly £7 billion and just £29 million in cash reserves.
The collapse of Carillion was investigated by the IS, the Financial Conduct Authority, the Financial Reporting Council and the Pensions Regulator, as well as three enquiries by the Select Committees of the House of Commons.
Following the investigation by the Official Receiver into the conduct of each director, the IS issued proceedings against eight directors and former directors of Carillion under s.6 of the Company Directors Disqualification Act 1986 (CDDA 1986).
What happened to the executive directors?
Three disqualification undertakings were agreed with the IS: 12.5 years for Richard Adam (finance director to 31 December 2016), 11 years for Zafar Khan (finance director from 1 January 2017 to 11 September 2017) and 8 years for Richard Howson (CEO to 10 July 2017).
What was the case against the NEDs?
The IS’s case against the NEDs centred on the allegation that they were in breach of a strict duty to know the “true” financial position of Carillion. On that basis, the NEDs were said to be unfit to manage a company such that they should be disqualified under section 6 CDDA 1986.
The IS’s approach was seen as a “test” case for what could have been a more onerous interpretation of the duties of NEDs.
Section 174 Companies Act 2006 (“CA 2006”)
Under section 174 of the CA 2006, directors are required to uphold “the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and the general knowledge, skill and experience that the director has”.
Although the s.174 CA 2006 duty makes no explicit distinction between the duties owed by executive and NEDs, it could be argued that the “function” of a NED is different from the “function” of an executive director. Whether a NED is in breach of s. 174 CA 2006 could be said to depend on what their “functions” are.
The NED role was examined in Re Continental Assurance [2001] B.P.I.R. 733: “[o]ne of the duties of non-executive directors is to monitor the performance of the executive directors. But I do not think that those responsibilities can go so far as to require the non-executive directors to overrule the specialist directors, like the finance director. The duty is not to ensure that the company gets everything right.”
In Bishopsgate Investment Management v Maxwell [1993] BCC 120, 139, the court confirmed that the extent of what is now the s.174 duty “must depend upon how the particular company’s business is organised and the part which the director could reasonably have been expected to play”.
According to the UK Corporate Governance Code, NEDs should amongst other things seek “informed debate and challenge at board meetings”.
The House of Commons Enquiry evidenced that the Carillion NEDs insisted that they went to extensive lengths to provide oversight and challenge.
Conclusion
The decision to withdraw proceedings should provide some reassurance to NEDs. A negative outcome against the Carillion NEDs might have sent a message that NEDs need to manage their role as if they held a full-time post in the manner that executive directors do. This could have led to an attrition of NEDs, particularly those on the boards of listed companies where they are perhaps more likely to act on behalf of more than one organisation and where there is typically greater public scrutiny.
However, this area of law is far from settled. The precedent around NED liability is expected to develop in the future, given the limited case law established to date.
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