Director disqualification – Are you whiter than Whyte?
The disqualification of Craig Whyte, former director and indirect owner of Glasgow Rangers football club, for the maximum period of 15 years has recently hit the headlines. Although the circumstances of this case are rather extreme, there are lessons here for all directors in relation to fiduciary duties and from another recent disqualification case, involving Roger and Michael Dymond.
The proceedings to disqualify Mr Whyte were based on his conduct as director of The Rangers Football Club plc ("Rangers") and Tixway Limited ("Tixway"). In particular, with regard to Rangers, Mr Whyte:
- caused Rangers, for the purposes of facilitating his acquisition of the club, to enter into a ticketing agreement, securitising season tickets for three years in return for £24m, such sum then being used to repay debt which had funded Mr Whyte's own acquisition of Rangers. The ticketing agreement was for Mr Whyte's benefit, not Rangers', and therefore constituted a deliberate breach of his fiduciary duty as a director. There was a strongly arguable case that this amounted to unlawful financial assistance prohibited under the Companies Act 2006.
- deliberately and dishonestly concealed the ticketing agreement from other Rangers directors and held no board meetings, so making it impossible for the other directors to fulfil their own duties.
- When Rangers sold shares in Arsenal football club and the proceeds were held by a company of stockbrokers connected to Mr Whyte, he did not instruct the stockbrokers to transfer the sale proceeds to Rangers. The stockbrokers subsequently went into administration, resulting in a loss to Rangers of 50% of the sale proceeds.
- He failed to exercise certain rights which Rangers had against another company connected with him.
- Acting to the exclusion of the other Rangers directors, he caused Rangers to stop making payments to HMRC in respect of PAYE, national insurance contributions and VAT.
In relation to Tixway, which had gone into liquidation with a deficiency of liabilities over assets of around £3m, Mr Whyte:
- Failed to ensure that Tixway maintained adequate accounting records: information was so sparse the liquidator was unable to discover what business, if any, the company carried on. Bank statements suggested that some of the company's funds had been applied to meet Mr Whyte's personal expenditure.
- failed to fulfil his duty co-operate with the liquidator, making no substantive reply to requests for information.
In summary, the court concluded that Mr Whyte's conduct made him unfit to be concerned in the management of a company as Mr Whyte demonstrated "a reckless disregard for the company to which he owed fiduciary duties". Mr Whyte's conduct was characterised by a combination of dishonesty, wilful disregard for his duties to the companies to which he owed duties. Mr Whyte placed his own interests before those of the company and knowingly permitted the company to trade using money owed to HMRC. Mr Whyte failed to fulfil his duties as a director to maintain adequate records which then had a direct effect on the ability of creditors to establish claims. The effect of all of which was considered by the court to be quite out of the ordinary and serious matters.
In the light of that assessment, and the fact that Mr Whyte had previously been disqualified from acting as a director for a seven year period which "seemingly resulted in no improvement in his attitude to conduct as a company director", the court imposed the maximum period of disqualification of 15 years.
The court allowed the court documents to be amended to state that the present whereabouts of Mr Whyte were unknown in order to facilitate an application for the court order to be served, if necessary, on Mr Whyte by alternative means, such as by publication in the press. The case highlights that a director should not utilise funds that should be used to pay creditors of the company, that directors who deliberately or wilfully disregard their duties face the most severe penalties and that any such director can not avoid an order being served upon them by deliberately avoiding details of their whereabouts becoming known.
Roger and Michael Dymond
Mr Roger Dymond was the managing director of RD Industries Ltd ("RD"). His son, Michael, was the sales director. The company manufactured stationery and traded successfully for many years, but was badly affected by the financial downturn in 2008 and especially by the administration of Woolworths which had been one of RD's major customers.
The allegations of unfitness against the directors in this case related to an invoice discounting agreement which the company entered into with a finance company in May 2009. The finance company terminated the agreement on the grounds that the company had breached its terms, and the company ultimately went into administration in July 2010.
Mr Roger Dymond was said to have caused the company to breach the terms of the invoice discounting agreement by re-aging invoices, delaying the issue of credit notes, assigning invoices before delivery of the goods to which the invoices related and not promptly notifying the finance company of rebates due to customers. The allegation against Mr Michael Dymond was that he had allowed the breaches of the agreement to occur.
Both directors argued that the company's finance manager was alone responsible for the breaches of the agreement.
The court decided that the finance manager had not been off on a frolic of his own. Mr Roger Dymond had taken a hands-on approach and knew of (and in some cases authorised) the breaches of the invoice discounting agreement, although it was likely that he had not considered that any of what he authorised was a breach.
In addition, he had taken no steps to investigate criticisms raised by the finance company, nor to put in place internal controls to ensure that the agreement was not breached. As managing director, he had failed to make enquiry or to engage with how the finance manager was running the accounts department. He should also have ensured there were regular board meetings to review the operation of the agreement, as it was critical to the company. In fact no board meetings were held.
These shortcomings led the court to disqualify him from acting as a director for a period of six years.
In relation to Mr Michael Dymond, although he had not caused the company to breach the invoice discounting agreement, he had a responsibility to keep himself informed of the company's financial situation. He had known of the finance company's concerns about the operation of the agreement, but had not taken any steps to find out what was happening in relation to those concerns. The court took into account that he had been unable to devote as much time to the company as he should have done because his wife had been seriously ill and they had four young children. He had not taken any steps to find out what was happening in relation to the bank's concerns and as such had fallen short of the minimum duties of a director. He was disqualified for three years.
Hopefully few directors will demonstrate Mr Whyte's reckless disregard for the interests of the company to whom they owe fiduciary duties. However, directors should be aware that they are responsible for ensuring that adequate internal controls and systems are in place for monitoring compliance with any financial instruments entered into by a company. These cases provide a useful reminder to directors that they have responsibilities for ensuring that adequate accounting records are maintained, that the accounts function is properly supervised and that they are properly informed and have a full understanding of their company's financial position. The cases also show the importance of regular board meetings to enable directors to fulfil their duties.
Christine Phillips is a Partner in Fieldfisher's Corporate Group in London.