A boost for the CMA’s pursuit of director disqualifications – the High Court grants its first Competition Disqualification Order

On 3 July 2020, Insolvency and Companies Court Judge Jones handed down his judgment disqualifying Mr Michael Martin as a director for 7 years (the Judgment). The Judgment represents the first competition disqualification order (CDO) issued by the High Court under section 9A of the Company Directors Disqualification Act 1986 (CDDA) and is a significant victory for the CMA at the first attempt (see here for our previous blog on the hearing). While the Judgment will undoubtedly encourage the CMA to continue to pursue director disqualifications at pace, it also raises some interesting and potentially controversial points of law, as well as leaving many important questions unanswered.

Proportionality is not a relevant consideration when deciding whether to impose a CDO

The extent to which CDO proceedings engage a director’s rights under the European Convention of Human Rights (the Convention), namely Article 6 (right to a fair trial) and Article 8 (right to family and private life) of the Convention, is a key point discussed in the Judgment. Counsel for Mr Martin argued that his Convention rights were engaged and accordingly the Court and the CMA were obliged to consider whether disqualification was proportionate, taking into account all the circumstances of the case.

However, ICC Judge Jones ruled that it was not necessary to read a proportionality test into Section 9A CDDA, as Section 9A was subject to leave under Section 17 CDDA: “[Parliament] decided to define the mandatory disqualification order as being subject to leave and to provide a method for obtaining leave under section 17 of the CDDA when all the issues relevant to proportionality would be addressed”. 

This emphasis on Section 17 applications is novel and places even more reliance on the judgment of Deputy Chief ICC Judge Baister in Stamatis and Davies v Competition and Markets Authority [2019] EWHC 3318 (Ch), the only application for leave in the competition context under Section 17 CDDA to date (see our blog post here), which was successfully granted.

Until now, the exercise typically taken under Section 17 CDDA has been balancing (i) the need for the applicant to remain a director, and (ii) protection of the public from a repeat of the conduct in issue. This, on its face, is a distinct and narrower test than the question of whether it is necessary and proportionate (including in the light of relevant Convention considerations) to make a CDO in the circumstances of the case, as ICC Judge Jones indicated should occur in the context of a Section 17 application. There will be questions in practice as to how an application for leave in the competition context will be dealt with in order to “enable the court to carry out a fair balancing exercise between the Article 8 rights of the individual and achieving the aims of sections 6 and 8 of the CDDA for the benefit of the general public”.

The Judgment instead states that the only matters relevant to the imposition of a CDO are those set out in Section 9A CDDA. This imposed two broad conditions for the imposition of a CDO: first, that the director is a director of a company that has breached competition law; and second, that the director’s conduct makes them unfit to be concerned in the management of the company. This is likely to be received positively by the CMA, which lists in its guidance only a limited set of factors that it “may” take into account when deciding whether to pursue a disqualification, outside of the criteria set out in Section 9A CDDA.

The apparent effect of the judgment, therefore, is that the appropriate forum for arguments regarding the proportionality of disqualification is in a Section 17 CDDA application. This ruling is likely to deter directors, in such circumstances, from taking the risk of challenging a disqualification in the High Court. Instead, the CMA may see more instances of directors offering competition disqualification undertakings under Section 9B CDDA and making subsequent applications under Section 17 CDDA to continue to act as a director, as was the approach of the applicants in Stamatis and Davies v Competition and Markets Authority.

Directors can expect a strict approach from the High Court with respect to disqualification terms in the competition context

Whereas three other directors involved in the same infringement gave undertakings for 3, 3.5 and 5 years, ICC Judge Jones ordered a period of 7 years for Mr Martin.

Counsel for Mr Martin pointed to the periods accepted by the CMA for these other participants (including those “seriously involved with the cartel”), as well as the offers the CMA had put forward to Mr Martin during the CMA’s proceedings (2.5 years), in arguing for a disqualification period in the lower bracket of the Sevenoaks criteria.

Taking into account all the circumstances, in particular the court’s finding of actual knowledge on the part of Mr Martin (touched on further below) and the seriousness of the findings of misconduct in the CMA’s estate agents investigation more generally, ICC Judge Jones considered that nothing less than a middle bracket period would be appropriate.

The approach of ICC Judge Jones suggests that the High Court will take a hard line on assessing the seriousness of the conduct in the competition law context. In a number of its disqualification proceedings to date, the CMA has accepted voluntary undertakings for periods that fall in the lower bracket of the Sevenoaks criteria. This approach was critical to the judgment of Deputy Chief ICC Judge Baister in Stamatis and Davies v Competition and Markets Authority, who placed significant weight on the lower bracket terms in question when deciding to grant leave to act to the applicants in that case.

The judgment of ICC Judge Jones however may encourage the CMA to try and seek more significant disqualification periods when agreeing to undertakings under Section 9B of the CDDA. The case makes clear however that individuals should consider carefully any offer made by the CMA during its disqualification proceedings and weigh this against the risks associated with challenging the CMA in court, which could result in a significantly higher disqualification period.

The ‘reasonable grounds to suspect’ / ‘ought to have known’ tests are left open

As noted in our previous blog post (see here), it was hoped that the Judgment would provide much needed guidance on a presently untested aspect of Section 9A CDDA, which is the circumstances where a director has reasonable grounds to suspect a breach of competition law and took no steps to prevent it, or ought to have known that the conduct constituted a breach, making him or her unfit to be concerned in the management of a company.

On the facts however, Mr Martin was found by ICC Judge Jones to have had actual knowledge of the conduct constituting the infringement of competition law. ICC Judge Jones found that the contemporaneous documentary evidence put forward by the CMA, largely consisting of emails Mr Martin received and responded to, proved that on the balance of probabilities Mr Martin knew of the conduct. ICC Judge Jones dismissed Mr Martin’s claims to the contrary, finding his justifications to be contradictory and unconvincing.

The Judgment therefore contains no further guidance on the standard required for the CMA to prove these more indirect levels of knowledge and involvement. Directors will, therefore, need to continue to take a prudent approach while awaiting much-needed judicial clarity on this.

Takeaways

As the first judicial guidance on the parameters for imposing a CDO, important practice points can be taken from the Judgment.

• Credibility is key – directors must be mindful of their behaviour during and after the infringement period (note that ICC Judge Jones found that Mr Martin’s conduct during the disciplinary proceedings after the cartel was uncovered “cast a shadow” on Mr Martin’s defence) and must be able to credibly disavow actual knowledge (or indirect levels of knowledge) in order to successfully defend against findings of misconduct.
• Risk of increased disqualification term – CMA practice to date has been to offer discounted disqualification terms if directors offer a disqualification undertaking early in the proceedings. The Judgment shows that there is a material risk of a substantially higher disqualification term being imposed by the Court if disqualification is challenged by the director.
• Consider the merits of an application under Section 17 CDDA early in the process – given the risks of adverse findings by the court, an increased disqualification term, and the inability to put forward arguments about the proportionality of disqualification, directors should seriously consider whether their interests would be best served by offering a disqualification undertaking and subsequently applying for leave under Section 17 CDDA.

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For further information on this topic, please also see our recent article in the Competition Law Journal in which we look at some of the key considerations for the CMA’s CDO regime, having successfully secured permission to act under Section 17 CDDA for directors in the first High Court case to hear an application of this nature in the competition context: By your leave – the English High Court gives guidance on when directors subject to competition disqualification orders may obtain limited permission to act.

Competition and Markets Authority v Martin [2020] EWHC 1751 (Ch) (03 July 2020)

See here for the CMA’s statement on the Judgment published 3 July 2020