While those running companies may be aware of the numerous management and accounting breaches that can give rise to civil liability, there is generally less recognition of the possibility that breaches can also give rise to criminal liability leading to fines, imprisonment or both. In recent years there has been a sea-change in the legislature's approach to directors' criminal liability. Although terms of imprisonment remain broadly consistent, fines have increased to a very significant degree. Directors are now in the firing line.
One might start by looking at the provisions in the Companies Act 1981 (the “CA”), where the approach remains traditional. Under the CA, there is criminal sanction in broadly three areas: accounting/record keeping failures; the failure to cooperate with a statutory investigation; and failures arising while the company is being wound up. The potential financial penalties remain low. Under section 83(5) of the CA a company must keep records of account for five years from the date on which they were prepared and a company or officer who knowingly contravenes is liable to a fine on summary conviction of $7500. Under section 84(1) of the CA subject to waiver a company must lay financial statements and an auditor's report before the AGM and any director who fails to take reasonable steps to comply is liable to a fine on summary conviction of $1000. Default fines under section 280 of the CA are $20 a day. In the modern context these fines are derisory. By contrast offences by officers of companies in liquidation under section 243 of the CA carry sentences of between 12 months and 5 years.
The position under the CA is to be contrasted with that under the Insurance Act 1978 (the “IA”). Under section 50 of the IA any individual who for any purposes of the Act issues any document which is materially false or misleading, or who assists in its preparation or signs it, commits an offence unless he can prove that he had no knowledge of the falsity and took every reasonable precaution to ensure its accuracy1. There is no2 specific penalty. By section 54 of the IA read together with section 16(1) of the IA, a company in failing in its duty to appoint an auditor commits an offence; again there is no specific penalty. Section 55 of the IA, introduced in 2012, provides that where no penalty is specifically provided, then the penalty is: for summary conviction, a fine of $50,000 or 12 months' imprisonment or both; for conviction on indictment, 3 years or a fine of $150,000 or both.
The position under the CA is also to be contrasted with that under The Digital Asset Business Act 2018 (the “DABA”) which has introduced a licensing regime for businesses seeking to conduct “digital asset business” in Bermuda. Those holding a licence are under several ongoing obligations including client disclosure rules, cybersecurity rules, custody and protection of consumer assets and the filing of an annual prudential return. As well as being exposed to a civil penalty imposed by the Bermuda Monetary Authority (the “BMA”) of up to $10 million, individuals performing regulated activities under DABA can be the subject of prohibition orders from the BMA which, if breached, can lead to prosecution. On summary conviction the individual can fined $50,000 and on indictment can be fined $200,000; prison sentences are 2 and 4 years respectively.
These are substantive changes and indicative of a broader shift. First, the fines that might be imposed on conviction are of a different order of magnitude than existed previously. Secondly, conviction is likely to be easier; section 50 of the IA reflects this trend as once a document's falsity is established on an objective basis and without the need to prove intention, the burden of proof is shifted to the defendant who must prove that he had no knowledge of the falsity and took every reasonable precaution to ensure its accuracy.
Nor is there an escape route for directors and officers by means of indemnification arrangements: D&O insurance cover will not cover criminal liability and under section 98(2) of the CA a provision in a company's bye-laws or in a contract between the company and any officer purporting to indemnify him from liability arising from fraud or dishonesty is void. At the same time while some offences do not require proof of fraud or dishonesty, companies will be in no rush to indemnify for criminal conduct and it will likely be for a director to prove that he committed an offence without fraud or dishonesty being involved making it likely that claims will need to be litigated. Does this now mean companies will find it harder to recruit to their boards? Watch this space.
Footnotes
1. The underlining is added: note the reversal of the burden of proof.
2. Offences by officers of companies in liquidation under section 243 CA carry sentences of between 12 months and 5 years.
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