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Directors’ disqualification orders: High Court decision reinforces move towards greater enforcement

  • United Kingdom
  • Commercial litigation
  • Competition, EU and Trade

28-07-2020

On 3 July 2020, following an application by the Competition and Markets Authority (“CMA”) under s9A of the Company Directors Disqualification Act 1986 ( “CDDA”), the High Court issued a seven year disqualification order to a former director of a residential estate agent in Somerset (Competition and Markets Authority v Michael Christopher Martin [2020] EWHC 1751 (Ch)).

The case follows an investigation by the CMA which concluded in 2017 with a decision that six estate agents in the Burnham-on-Sea area had entered into a cartel agreement to fix a minimum commission rate for residential estate agency services. It is the first case in which the CMA's application for a disqualification order has come to trial. The judgment, therefore, contains valuable  guidance on the approach of the courts to the application of the CMA’s disqualification powers.

The decision brings the total number of directors disqualified following a CMA investigation to nineteen, all but three of which have occurred since the CMA issued its revised guidance on disqualifications in February 2019 (“Guidance”)[1]. It provides further evidence that the CMA is increasingly willing to use disqualification, alongside the imposition of corporate fines, as a tool to encourage compliance with competition law by directors of UK companies. 

Directors should therefore be aware that they have a personal responsibility for ensuring that their companies comply with competition law, and that they may be disqualified even if they have not been directly involved in, or had direct knowledge of, competition law breaches. This is particularly important because the CMA now appears to be pursuing director disqualifications as a matter of course following a competition investigation.

Disqualification orders and the wider CMA enforcement approach

Disqualification orders have historically been underutilised by the UK competition regulator. The Office of Fair Trading (“OFT”) had been given powers to make disqualification orders in 2003 (when the Enterprise Act 2002 (“EA02”) came into force) but never made use of those powers[2]. This was despite the OFT releasing its first guidance on competition disqualification orders (“CDOs”) in 2003 and, as early as 2009, launching a public consultation on changing its approach to CDOs - with the intention of increasing their deterrent effect and potentially allowing their wider use.

Various subsequent consultations culminated in the publication of the CMA’s February 2019 Guidance, which has prompted a sea change in the CMA’s approach to CDOs. Significantly, the Guidance: (i) introduced a more flexible, non-exhaustive, list of general principles the CMA may take account of when deciding whether to apply for a CDO; and (ii) moved away from the more rigid 5-step process previously in place.

Reflecting on the Guidance in May 2019, the CMA noted that it had increased its efficiency in using the disqualification power, meaning it could pursue more cases, and that it would now consider whether to pursue director disqualification in all cases where competition law has been breached. As a result, the CMA stated that “the risk of director disqualification to those who break the law has never been higher”.

The increasing use of the disqualification powers by the CMA has been accompanied by a move away from the CMA’s pursuit of criminal cartel prosecutions. This suggests that it views the increased use of these powers as a more effective means of deterring individuals from breaching competition law than the use of its criminal prosecution powers in relation to individuals participating in cartels[3].

Legal background

Sections 9A to 9E of the CDDA, as introduced by the EA02, give the CMA the power to apply to the court for a disqualification order, for a maximum period of 15 years, to be made against a director (including shadow and de-facto directors). The court must make a competition disqualification order where:

(i) a company of which the individual is a director has committed a breach of competition law – an infringement amounting to either restrictive practices or agreements in concert with another company, or the unilateral abuse of a dominant position; and

(ii) the court considers that the individual’s conduct as a director makes him unfit to be concerned in the management of a company – having regard to:

  1.  
    1. whether the director's conduct contributed to the breach of competition law (irrespective of whether he knew it did); or, if not
    2. whether he had reasonable grounds to suspect that the conduct of the company constituted a breach of competition law and he took no steps to prevent it; or
    3. that he ought to have known that the conduct constituted a breach even if he did not know of it.

Alternatively, the CMA may, under section 9B of the EA02, accept a disqualification undertaking (“CDU”) from a director where the above conditions are met and the director offers such an undertaking. A disqualification undertaking has the same legal effect and the same maximum period as a disqualification order. However, the CMA has made clear in the Guidance that the offer of a CDU by a director may lead to a shorter disqualification period.

Background to the case

The case against Mr Martin followed an investigation by the CMA into the conduct of six estate agents in the Burnham-on-Sea area in Somerset, which found that they had agreed to fix a minimum commission rate of 1.5% for residential estate agency services. The cartel agreement, between estate agents which together held a market share of around 95%, began in February 2014 and lasted for over a year.

The infringement finding resulted in fines of £370,084 being imposed on five of the six estate agents involved, with the sixth receiving immunity under the CMA's leniency policy. In April 2018, the CMA accepted disqualification undertakings from directors of two of the real estate agencies involved, Abbott and Frost Estate Agents Ltd, by which the directors agreed to disqualification for a period of three and three and half years respectively.

Subsequently, in February 2019, the CMA announced that it had started proceedings before the High Court to seek the disqualification of two further directors: Mr Thompson, a former director of Saxons PS Limited and Mr Martin, a former director of Gary Berryman Estate Agents Limited (“Berryman”). A five year disqualification undertaking from Mr Thompson was ultimately accepted by the CMA in April 2019 whilst the case against Mr Martin proceeded to trial.

Arguments before the Court

The CMA argued that, whilst acting as a director, Mr Martin either: (a) had a responsibility for Berryman's participation in the agreement and/or concerted practice to fix a minimum level of commission fees; or (b) had failed to take any steps to prevent the prohibited conduct of Berryman despite having reasonable grounds to suspect it was occurring. The CMA submitted that Mr Martin ought (at least) to have known that the conduct in question was prohibited.

In his defence Mr Martin asserted that he was neither involved in nor aware of the cartel conduct. At all material times the ethos and policy of Berryman was to be more competitive on price than competing estate agents, whilst providing excellent customer service. In light of this he argued that: (a) whilst he did not take part in the day to day operation of the business and he was not an estate agent, he was responsible for that approach being a foundation of the business; and (b) therefore, the concept of an anti-competitive agreement would have been an anathema to his approach.

Judgment

Misconduct

The evidence examined by the Court showed that Mr Martin was not concerned with day-to-day sales, nor did he attend any of the meetings with the other estate agents at which the fee-fixing agreement was made. However, the Court was satisfied that evidence submitted by the CMA, in particular meeting minutes supplied to Mr Martin and emails between Mr Martin and other Berryman employees regarding the minimum level of commission fees being agreed, showed that Mr Martin was made aware of the cartel agreement and took no steps to prevent or end Berryman's participation.

In contrast, the Court identified weaknesses in Mr Martin’s witness evidence. In particular, the Court found that Mr Martin’s affidavit showed evidence of ‘cherry picking’ from contemporary documentation to support his defence and that in a number of instances he had provided justifications after the event. In addition, the Court noted Mr Martin sought in his evidence to minimise his role in and knowledge of the Berryman's business, as part of his keenness to ensure that his defence was advanced in the best light. Mr Martin did not sufficiently engage with the fact that there was evidence he had a direct involvement in the topic of commissions.

The Court therefore concluded that, given his knowledge, Mr Martin's failure to inform the board of Berryman’s and/or to prevent the agreement being made and performed amounted to misconduct, and contributed to the breach of competition.  

Unfit to manage a company?

Having concluded that Mr Martin’s actions and omission amounted to misconduct, the Court also held that the level of misconduct was below the standards of probity and competence appropriate for persons fit to be directors of companies. The Court held that Mr Martin's conduct therefore made him unfit to be concerned in the management of a company.

Whilst Mr Martin was not directly involved in the cartel activity, he bore responsibility in his capacity as a director for Berryman's involvement. In particular, he did not oppose Berryman's attendance at an initial meeting during which the agreement over commission fees was discussed. This enabled Berryman to reach agreement with other local agents. When informed of that agreement, Mr Martin allowed Berryman to participate in and perform it.

Disqualification

The High Court noted that section 9A of the CDDA provides that a disqualification order must be made once the court has decided that the matters of misconduct justify a finding of unfitness.

However, Mr Martin submitted that the tests to be applied under section 9A of the CDDA must be construed in accordance with Article 8 of the European Convention on Human Rights and that pursuant to section 3(1) of the Human Rights Act 1998 a ‘necessary and proportional’ test must be added to ensure compliance. Mr Martin’s argument was that, in this case, a disqualification order would be disproportionate on the facts.

The High Court considered this submission and ultimately concluded that the infringement of Article 8 rights resulting from a disqualification order was lawful and necessary and that proportionality is achieved: (a) by the exercise of the court's discretion when deciding the period of disqualification; and (b) because the CDDA confers power upon the court to grant a director leave to act notwithstanding a disqualification order having been issued[4]. Therefore, the High Court concluded that Mr Martin must be disqualified and, in any event, such a decision is proportionate based on the findings of fact.

Having concluded that disqualification was appropriate the Court determined that a seven-year disqualification period was appropriate on these facts. The Court noted that it had discretion to determine the length of disqualification and that a ‘broad-brush’ approach should be applied when exercising that discretion.

The Court recognised the importance of fair competition and the seriousness of breaches of competition law, which indicated that the period of disqualification should be at the highest level (fifteen years). However, in arriving at the seven-year period the Court took into account that:

(i) despite the findings of knowledge above and Mr Martin's responsibility as a director for the actions of Berryman, Mr Martin was not at the forefront of the organisation and implementation of the cartel - even though he could and should have taken steps to stop it;

(ii) Mr Martin had exhibited previous good character as a director over many years within not insubstantial businesses, had not worked since July 2018, has not been a director since October 2018, and has since retired due to ill health; and

(iii) Berryman had introduced a compensation scheme following the CMA’s initial inspection of the business.

Ultimately the Court found that the ‘middle-bracket’ of seven years was appropriate, given the seriousness of the findings of misconduct in the context of the sale of houses/homes, when estate agents have to be trusted by vendors, and the serious effects the cartel had had on house sellers[5].

Comment

Reflecting on its Guidance in May 2019, the CMA noted that despite the ‘dangers’ posed by CDOs, and despite the revised guidance coming into force, competition law risk remained low on boardroom agendas at the time[7]. Given the subsequent increased use of CDOs and the risks and personal consequences of competition law breaches for directors, it is likely that these issues have moved up the agenda for most companies and their boards.

Nonetheless, Mr Martin’s case is a timely reminder that even an ‘unblemished record of good conduct’ may not prevent directors from being disqualified for competition law breaches (although it should be considered a mitigating factor in determining the length of the disqualification).

What remains to be seen is how courts approach cases in which directors did not have actual knowledge of the competition infringement, but instead ‘ought to have known’ about the breach. Ongoing proceedings against two directors in relation to the supply of precast concrete drainage products, before the Northern Ireland High Court, may provide further guidance on this point.



[1] Since publishing the Guidance, the CMA has sought and obtained disqualification undertakings following investigations into the supply of precast concrete drainage products, the design, construction and fit-out services, as well as the real estate agent cartel involved in Mr Martin’s case.

[2] The OFT was ultimately abolished in 2014 and its powers were distributed across a number of statutory bodies, including the CMA.

[3] The CMA, and the OFT before it, have historically found it difficult to bring successful criminal cartel cases. CDOs following criminal cartel cases have only been imposed where the defendants have pleaded guilty to the offences.

[4] Specifically, sections 1 and/or 17 of the CDDA mean that the requirement of ‘must’ in section 9A is in fact a requirement that the court ‘shall’ disqualify the defendant so that he cannot act as a director ‘unless (… ) he has the leave of the court’.

[5] The judgment notes that the lower disqualification periods the CMA had agreed with other directors involved in the infringement were consensual and will each have depended on their own individual facts. They were therefore not a precedent which should be used when determining Mr Martin’s disqualification period.

[6] Only 18% of those polled by the CMA said that their business had senior level discussions about competition law risk, trailing behind issues such as health & safety or employment law. See “Director disqualification: an increasing risk”, 22 May 2019.