UK: The Surprise "Knock On The Door"

Originally published in BLG's Directors' and Officers' Liability Review, Summer 2007

Most company directors do not live in fear of investigations by the Companies Investigation Branch ("CIB") of the DTI. Nor should they. That said, the investigative powers of the CIB have recently been strengthened.

The statistics

According to the DTI Annual Report for the year ended 31 March 2006, 148 formal investigations were commenced, out of 3,702 complaints received. The vast majority were carried out under section 447 of the Companies Act 1985¹. Under this provision, the Secretary of State for Industry has discretion to pursue investigations into a company once grounds for suspicion of wrongdoing, misconduct or general reasons for concern have been established.

The process

Investigations are carried out by the CIB, which is the regulatory and prosecuting branch of the DTI. The CIB performs an initial, behind the scenes, non-statutory assessment ("vetting") of a complaint (typically from the public) to decide if it is in the "public interest" to investigate a company, based on available information. The company will not be involved at that stage. At the end of the "vetting" process, the CIB may decide not to investigate further. However, if satisfied that there is "good reason", the Secretary of State will authorise an investigation.

The CIB investigators' powers were augmented by the Companies (Audit, Investigations and Community Enterprise) Act 2004 ("the 2004 Act"). As a result, investigators now have a broad general power not only to require documents (which includes information recorded in any form whether on paper or electronically) but a more general power to require such information "as the investigator may specify".

Moreover, third parties are required to produce any document that the CIB investigators deem to be relevant to their investigation. Auditors' files are a common target. Perhaps strangely, there is no statutory requirement that the company be informed in advance of such third party requests being made. A person who makes a disclosure to an investigator will not be liable for breach of confidence. However, this does not apply where the disclosure is in breach of: (a) statutory duties (for example, duties not to disclose information in certain circumstances under the Data Protection Act 1998); (b) banking confidentiality; or (c) legal professional privilege.

The dawn raid

Typically, investigations commence with an unannounced visit by the investigator to a company's premises - the so-called "dawn raid". Investigative powers under section 447 are coupled with the power under section 453A to enter the premises of the company as part of an investigation if the investigator "thinks that to do so will materially assist him in the exercise of his functions". "Premises" means those used wholly or partly for the purposes of the company's business so could in theory apply to a director's home as well. Directors are under a duty to cooperate so long as the investigator produces the appropriate identification and copies of the authority from the Secretary of State.

Sanctions

If a person fails to cooperate, the investigator may certify that fact in writing to the High Court. If the Court is satisfied that the offender has failed without reasonable excuse to cooperate, the person can be held to be in contempt of court. It is also an offence for a person to provide information which he knows to be false or if he is reckless as to whether such information is false. As a result of the investigation, the CIB may take various steps:

• If the company is operating contrary to the public interest, it can apply to the Court to make a winding up order and put the company into compulsory liquidation.

• Disqualification proceedings against a director of the company can be commenced.

• Information obtained can be provided to the criminal authorities with a view to prosecution of the company or the directors.

• A formal warning letter may be sent.

• In some cases, the CIB will issue an informal warning letter where they have identified concerns but have no basis for formal action.

The exercise of discretion by the Secretary of State to commence an investigation can only be attacked where there is an absence of good faith, or where it can be shown that he was 'so prejudiced against someone' that the enquiry was carried out for an ulterior purpose (R v Secretary of State for Trade, ex p Perestrello). This is a very difficult threshold to overcome. The 2004 Act removed the requirement that "good reason" be shown, although it is conceded in the DTI explanatory notes that this requirement remains implicit.

Statements made by a person in compliance with Section 447 may be used in evidence against him (section 447A(1)). However, as a matter of general principle, such statements cannot be used by the prosecution in criminal proceedings, unless the accused adduces evidence related to the statements.

Theory and practice

According to the DTI website, the approach of the CIB is: "to take a proportionate and realistic view of issues brought to our attention, and to investigate aspects of corporate behaviour which might harm both the business community and the public generally."

No-one seriously questions the need for an effective watchdog to ensure good corporate behaviour in the UK. That said, if you are unlucky enough to find yourself as a company director at the wrong end of an investigation by the CIB, you may be left with the feeling that you have been involved in an unequal contest. The powers of the CIB investigators are extremely broad. Moreover, it can in practice prove quite difficult for a company director to know and understand from an early stage what the reason behind and purpose of any particular investigation in fact is. Experience suggests that the CIB may choose to resist the provision of such detail for fear of compromising their investigation. Not only can this lack of transparency be worrying on its own account, but it may also have implications for D&O coverage if the director is unable to notify to insurers of the true subject matter under investigation.

What is worse is that the CIB may equally be reluctant to confirm that an investigation has been concluded, having taken a decision not to investigate any further. It seems the DTI has a policy of wishing to avoid being seen to have issued a clean bill of health to a company in case problems are subsequently uncovered. It may be possible to invoke rights to obtain more information as to the status of an investigation, for instance under the Freedom of Information Act 2000 and/or the Data Protection Act 1998. The application of these statutes to any particular investigation is not, however, straightforward, given that certain qualified exemptions may apply.

All in all, directors and companies may find themselves facing significant costs as a result of the need to fulfil their statutory obligations in cooperating with the CIB whilst at the same time taking legal advice about how to minimise any potential prejudice to their own respective positions. Whilst most D&O policies should respond to this type of cost, there is no industry standard in this respect. When purchasing D&O insurance, close attention to the extent of D&O cover generally available for investigations and enquiries is essential.