Tougher antitrust penalties for company directors considered in U.K.

The Office of Fair Trading ("OFT") has announced (here) that it is considering widening its use of competition disqualification orders ("CDO").

Directors of all companies should take note of this proposed tougher stance.  At present (and as set out in the OFT's 2003 Guidance) company directors are in practice only likely to face disqualification for breach of competition law if they are found to have personal responsibility for their companies' contravention of the competition rules. 

The OFT wants to change this.  Note that no changes in the law are required for the OFT to pursue directors with increased rigor.  The court's powers already exist.  The OFT is simply looking at ways of enhancing company and board competition compliance and explaining how it intends to go about this.

CDOs were introduced by the Enterprise Act 2002, to incentivize compliance with antitrust law by providing sanctions for the individuals responsible.  On the application of the OFT or a sector regulator the court can disqualify a company director from acting as a director for up to 15 years if that director's company has breached competition law (for example by price fixing or other cartel offenses), and the court considers the director unfit to be involved in the management of a company as a result.  It is also possible for a director to give an undertaking to similar effect to prevent his having to appear in court and have an order made against him.

The OFT thinks that the way in which it has used its powers to seek CDOs so far has not had the desired deterrent effect.  It believes that research which it commissioned in 2007 indicates that greater use of CDOs is called for.

The OFT therefore proposes a new approach to maximize the deterrent effect of CDOs.  In particular, the OFT would be likely to seek a disqualification order where a director "ought to have known of" or "should have taken steps to prevent" a breach of antitrust law, even if he or she was not personally involved in the breach.  

The OFT is also considering extending its discretion to apply for disqualification orders to cases where a company has benefited from the lower levels of leniency.  At present the OFT will not apply for the disqualification of a current director of a company which has benefited from any form of leniency, on the basis that to do so might inhibit applications for leniency. The OFT still wants to encourage the early offering of information on cartels, so would not seek disqualification orders against first whistle-blowers or in other cases where a company has qualified for the highest levels of leniency.

The OFT could even in exceptional circumstances seek disqualification orders where no breach of competition law has been proven or where no financial penalty has been imposed.

The OFT asks for comments on its proposals by 20 November 2009.

If any were needed, this certainly provides an extra incentive for directors to get to grips with their companies' antitrust compliance activities.

Piracy in Northern Seas: A New Trend?

From Business Week Online

These are unpleasant days for the worldwide shipping trade. The global recession and tighter credit markets have sent the Baltic Dry Index, a measure of worldwide shipping prices for dry cargo, plummeting more than 430% from its May 2008 record, to a current level of 2,704. And U.S. ports are expected to see 17% less imported container traffic volume in the second half of 2009 compared with the prior year, according to IHS Global Insight's Port Tracker. Through June, acts of piracy had more than doubled from the same period last year -- and pirates may no longer be confining their traditional zones to East Africa and the South China Sea, based on the experience of the Arctic Sea, the Russian freight vessel allegedly hijacked last month en route to Algeria.

There has been no shortage of intrigue surrounding the disappearance and subsequent retaking of the ship, which had a crew of 15 Russians, and was seized, along with eight hijackers, on Aug. 17 by the Russian Navy hundreds of miles off the coast of Senegal, the Associated Press reported. From piracy to a super-secret state cargo, mutinies, and even an Al Qaeda terror plot, theories abounded on the ship's mysterious experience during what was to be a routine journey. The answer appears to be a much more mundane hijacking and ransom demand. On Aug. 3 the hijackers threatened to sink the boat unless they were paid $1.5 million, CNN Europe reported, quoting a security official with the ship's insurer, Renaissance Insurance Group of Moscow.

The Arctic Sea, operated by the Finnish company Oy Solchart Management under a Maltese flag, left port in Finland on July 23 with a load of timber headed for Algeria. The next day the ship reported to Swedish authorities that masked, armed men boarded the vessel from a speedboat, and over the next 12 hours interrogated and beat crew members, smashed communications equipment, then left. Despite the alleged hijacking, Swedish authorities did not send a ship to check on the Arctic Sea, a fact that raises alarms and questions for Andrew Linington, a spokesman and 25-year veteran at Nautilus International, a London-based seafarers' union. "It's going through the world's busiest waterway, and nobody thinks to send out a naval vessel to see if it's O.K.," says Linington.

On July 28 the boat radioed Britain's Maritime & Coastguard Agency -- a communication protocol -- before heading south down the English Channel. Roughly 400 boats pass through the waterway each day, and there was nothing unusual about the 320-foot vessel's communication, agency spokeswoman Maggie Hill said.

The Arctic Sea was transporting an estimated $1.8 million worth of timber to the Algerian port of Bejaia and had been due to deliver the shipment on Aug. 4. Despite reports that the cargo belonged solely to Stora Enso, the Helsinki-based paper and package maker, company officials say that was not the case. "Out of the 6,700 cubic meters of wood on the ship, only 200 cubic meters are ours," Stora Enso

spokesman Lauri Peltola says. The cargo, he says, is a mix of lumber from UPM Timber, a Finnish competitor, and other lumber providers in the area. Ships and cargo are typically paired by brokers, and boats tend to be loaded up as fully as possible to save costs and increase efficiency.

Circumstances Still Murky

Africa has seen a significant increase in piracy off its eastern coast and in the Gulf of Aden, a high-traffic area that feeds the Red Sea and Suez Canal. In the first six months of 2009, 240 ships worldwide reported being attacked, up from 114 during the same period in 2008, according to the London-based International Maritime Bureau [IMB]. The Arctic Sea's alleged hijacking, however, happened a few thousand miles northwest, in the Baltic Sea. "I've certainly never heard of a ship being hijacked before in these waters," says Paul Gunton, managing editor of Fairplay 24, a London-based Web site that covers international shipping news.

At an Aug. 14 press conference, as the hunt for the ship was in full swing, the European Commission said that the Arctic Sea's experience had "nothing in common with traditional acts of piracy or armed robbery at sea," according to Reuters. Still, while the European hijackers may not have fit the mold of the now-common Somalian pirates, they certainly had the skills to commandeer a large vessel, says Nick Davis, chief executive of the Merchant Maritime Warfare Center, a London- and Yemen-based security firm.

Davis is skeptical that all the facts of the case will be uncovered in light of the complex international politics and diplomatic sensitivities already emerging. Despite the arrest of Estonian and Latvian citizens, Russia has not given either country information on the case, Bloomberg reported on Aug. 18. Swedish, Maltese, and Finnish authorities plan a joint formal inquiry to investigate the incident, which they called "aggravated extortion and hijacking," according to a press release on the Finnish National Bureau of Investigation Web site.

International Networks Face Tests From U.S. Courts – Third in a Series

This is the third in a series of posts that discuss the challenges now facing certain professional global networks. Specifically, we looked at an accountant's network, and two (2) cases that have affected how they operate now. Today, I conclude this series by discussing what all of this means to professional networks operating globally.

 

What lies ahead for International networks

There is nothing exceptional about many of the arrangements that were regarded in these two cases as constituting sufficient evidence to allow the "agency" claim to proceed to trial by jury. Networks will rightly object that, if the umbrella entities were to be shorn of all such functions, their ability to promote and safeguard the network brand in the interest of all members would be severely limited. Nevertheless, Parmalat suggests that claimants will be given added encouragement if an umbrella entity, rather than an external party, acts as arbiter between member firms, or gives the appearance of influencing the course or outcome of a member firm's engagement.

Of course, the umbrella entities faced a much higher evidential threshold on the motions which resulted in these two judgments than they would at trial. There they will be able to present evidence of member firms' autonomy and raise other matters which sit uneasily with the agency theory (such as the retention of profit by member firms). The ultimate evaluation of these factors will, however, now lie with the jury in those cases.

The real prize for U.S. claimants is the deep pocket of any member firm that might be attacked through the umbrella entity. It is to be expected that networks will have long sought to protect their members from the risk of being required to indemnify umbrella entities against potential vicarious liabilities. While member firms have recognized the risk of claims alleging their direct control over other firms, the claim against the U.S. firm in Parmalat demonstrates that member firms might also face claims in U.S. litigation involving (in effect) allegations of indirect control exercised through their alleged control of umbrella entities. The liability of the member firm in question is then wholly dependent on the issue of the umbrella entity's own vicarious liability. Pending the final outcome of the claims in Banco Espirito Santo and Parmalat, a member firm that is particularly influential within a network organization should be aware of the danger arising from any activity that might be capable of being presented as consistent with an allegation of control over the umbrella entity (for example through the actions of partners or executives who sit on the board of that entity). Firms may also wish to consider whether their insurance policies provide appropriate protection against claims based on their indirect control of other firms through umbrella entities.

The Banco Espirito Santo and Parmalat cases serve as a reminder that international networks, and leading member firms, continue to face vicarious liability risk in the U.S.. For so long as that remains the case, the current fashion for international integration may be unlikely to lead to true global partnerships or common ownership across the members of each of the large accounting networks. Networks will undoubtedly monitor future developments in order to gauge whether the effect of recent integrations has been to increase the opportunities for claimants to select the U.S. as a forum for litigation, and to balance this against any commercial advantage to be gained from establishing closer legal relationships between member firms in a highly globalised business environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

International Networks Face Tests From U.S. Courts – Second in Series

(In this second installment in the three-part series, we will review two (2) cases in the U.S. Courts that have shaped the discussion on how accountants' global networks work.)

The Banco Espirito Santo case

In spring last year, in Banco Espirito Santo International Ltd v BDO International BV, the Florida Court of Appeal (Third District) overturned a judgment in favor of BDO International which had been made following a successful motion at the trial of claims in tort and contract against it and its U.S. member firm. The trial judge had found that the plaintiffs had failed to present sufficient evidence to succeed in their agency claim. However, the appellate court decided that, when seen in the light most favorable to the plaintiffs (the relevant test for the application being made), the evidence was capable of establishing the three requirements of an agency relationship so as to support a verdict in favor of the plaintiffs:

1. acknowledgment by the principal that the agent will act on its behalf;
   
2. acceptance by the agent of the undertaking; and
   
3. control by the principal over the actions of the agent.
   

The necessary evidence was chiefly located by the Florida Court of Appeal in the following:

• The objects of business set out in the Articles of Association of BDO International, which included the control and management of partnerships in the international association;
  
• The testimony of BDO International's secretary that it "co-ordinated and monitored" the member firms;
  
• The Member Firm Agreement ("MFA") signed by the U.S. firm. This stipulated that BDO International owned the intellectual property in the technical manuals containing the auditing standards and procedures which the U.S. firm was required to follow and the software it had to use, under the terms of the MFA, in all of its audits (therefore, including the audit that was the subject of the claim). The court also considered that the terms of the MFA "imposed operating directives and restrictions that extend far beyond those utilized in mere licensing agreements" (for example, requiring firms to assist in product development) and bore similarities to operations manuals distributed to mere franchisees; and
  
• BDO International annual reports referred to the quality control exercised over member firms.
  

The Parmalat decision

On 27 January 2009, a New York court refused a motion for summary judgment made by Deloitte Touche Tohmatsu ("DTT"), its U.S. member firm ("Deloitte U.S.") and the individual who was CEO of both entities, in defense of the class action by investors in Re Parmalat Securities Litigation which alleges violations of U.S. securities legislation. The Parmalat plaintiffs allege that DTT is liable for the acts of its supposed agent Deloitte Italy in auditing Parmalat, and that DTT is the alter ego of Deloitte U.S. and that the CEO is liable under the securities laws as a "control person". A strike-out motion (directed at the adequacy of the pleaded case) in respect of the allegation of agency was dismissed by the same court in June 2005.

The summary judgment motion argued that DTT was merely a secondary actor and, as such, not liable for Exchange Act violations in light of the Supreme Court decision in Stoneridge Investment Partners LC v Scientific-Atlanta Inc. The court rejected the contention that Stoneridge provides a defense for parties sued under U.S. securities legislation for the acts of their agents. The court also held that summary judgment could not be ordered here because agency was capable of being established by various pieces of evidence including:

1. the objects set out in DTT's Articles;
   
2. DTT's role in setting audit methodologies and stipulating software to be used;
   
3. the provision made in member agreements for DTT to review compliance with quality standards;
   
4. DTT's control over the acceptance of engagements including referrals from other members;
   
5. the use of DTT legal staff by member firms; and
   
6. the authority conferred on DTT's CEO role, by a practice manual, to arbitrate disputes between member firms, and the role played by DTT in arbitrating such a dispute over the content of an audit opinion in respect of a Parmalat entity. In the court's view, this suggested that DTT had the power to impose its will on a firm's professional judgment
   

The court repeated its strike-out decision concerning s20(a) of the Securities Exchange Act that DTT could be held liable for parties under its control, irrespective of whether it exercised specific control over them in respect of the particular engagement.

Deloitte U.S. and the CEO were also unable to persuade the court to dismiss the Parmalat claim for lack of evidence. The court found that there was sufficient potential evidence of Deloitte U.S. control over DTT, on the basis that its executives (including the CEO) occupy key positions at DTT, it contributes a significant portion of funding for DTT, and that there was evidence of influence over DTT's decision making.

In the third and last installment of this series, we will discuss what these cases mean, and the impact they have had on theses professional global networks going forward.

International Networks Face Tests From U.S. Courts – First of Series

(In this first of a series, we will discuss the background of how some global networks of professionals operate. In this series, we will specifically review the global network of an accountant firm.)

 

Two U.S. court decisions within the last 18 months have demonstrated the perils for international networks when member practices are sued in the U.S.. These decisions coincide with a period in which closer links are being forged within some of the largest networks.

 

Background

Traditionally, most large accountancy networks have operated as relatively loose associations of national firms, with membership regulated by a non-trading "umbrella" entity which does not own any interest in the member firms. In order to protect and enhance the international brand, the umbrella entity is typically given power to lay down professional standards to be followed throughout the network, and may undertake activities such as quality review, training, arranging staff transfers and client data sharing.

Since June 2006, two of the Big 4 networks have each announced their own plans for much closer legal relationships between some or all of the European member firms within each network. In each case, rather than creating an international legal partnership to take the place of the national firms, the new arrangements involve the establishment of a new LLP as a non-trading holding entity for the national firms which are to be trading subsidiaries.

These new structures exhibit two features that merit comment here:

1. Although under common ownership for the first time, the national firms will continue to trade separately from each other.
   
2. The geographical range of these new arrangements is regional rather than worldwide.
   

The majority of accountancy networks have not followed this example, although some have indicated that there will be closer relationships between firms at a regional level. Clearly, developments such as these are driven by commercial factors, but issues concerning legal risk are an important part of the background to these changes.

A risk that is particularly associated with network structures is that a member firm may become exposed to allegations that it is vicariously liable for the acts and omissions of other member firms. Although claimants have very rarely seen fit to chance their arm before a judge in an English court on such matters, the decisions of courts in the United States have provided some of the strongest indications of the legal risks involved in closer worldwide integration of firms within accountancy networks. While that much is predictable, the outcome of U.S. litigation in this field is proving to be less so. Over the last decade, U.S. claimants have often failed in their attempts to construct a case against a "deep pocket" member firm such as the U.S. firm, where that case is entirely founded either upon that firm's actual relationship (through the network) with the principal defendant firm, or on the representations made about that relationship.

Claimants have had more success in persuading U.S. courts of the viability of their cases against umbrella organizations. They typically advance their case on one or more of the following theories of liability (which have also featured in the claims attempting to fix member firms with liability for the faults of other members):

• the "alter ego" theory, in which it is argued that the international umbrella entity is so dominated by a member firm that it primarily transacted the member firm's business rather than its own affairs;
  
• the "agency" theory, in which it is argued that the member firm is acting on behalf of the international entity and is under its control;
  
• the "partnership" theory, in which it is argued that there is a single business carried out by the member firm and the international entity together. Alternatively, it may be argued that the international entity is in effect bound by a representation made by the member firm that they are in partnership, which the claimant had relied on when engaging the services in question.
  

Umbrella entities have been relatively successful in dismissing alter ego and partnership claims. However, in the last 12 months U.S. courts have made two decisions which have highlighted the dangers presented by agency allegations. In both cases, the substantive allegations of agency are now to undergo trial by jury.

In the next installment of the series, we will discuss two (2) major cases that have impacted the global accountants' network.

Brazilian Insurance Companies Prepare to Face Market Challenges

The Brazilian insurance market continues to be the largest in Latin America followed by Mexico, Argentina and Colombia. Despite its low participation in GDP, a time of regulatory transition and deterioration in the macroeconomic environment in the short term, it still presents significant potential for greater development once a consistent recovery in economic growth is observed, according to the Fitch Ratings report published.

The 'bancassurance' process has predominated in the market, as well as the strong presence of large national financial conglomerates, with a relevant participation of the main foreign insurance and reinsurance groups active in Brazil. The growth of the Brazilian market has been favored by greater economic stability and the increase in corporate and personal incomes, which has altered the consumption and savings habits of the population.

Fitch analysts observed that advances in the regulatory framework have been cautious. In their opinion, the effective breakup of the IRB-Brasil Resseguros (IRB) monopoly in the reinsurance market in 2008 is expected to bring progressive benefits and modernization to the industry over the medium and long term. Fitch believes that sector performance will continue to be affected by the slower resumption of local economic growth, due to deterioration of the investment environment and the economy, and the impact of the global financial crisis. In addition, the effects of smaller financial gains due to the return of the declining interest rate cycle are expected to negatively affect the earnings generated by insurers, even though they have maintained high ROA and ROE, around 3% and 20% at the end of 2008, respectively.

To mitigate these effects, the main Brazilian insurers have accelerated their search for greater operational efficiency, reorganizing their main processes and supplier cost controls, as well as streamlining their underwriting models. This has led to better and lower combined and operating margins, with the average of the 10 largest insurance companies having reached 96% and 84% in 2008.

Fitch also expects competition to intensify in some segments going forward, including those that are more relevant, such as pension funds, further pressuring the insurers' generation of earnings.

D&O Insurance In Germany - The New Legislation Arrives

Unlike in many jurisdictions, directors' and officers' liability insurance is not compulsory under German law. Nevertheless, D&O coverage is expected as a matter of good practice, as set out in the German "Corporate Governance Kodex" ("the Code"). Furthermore, the Code has for some time recommended that listed companies agree in their D&O policies upon an "adequate" deductible to be borne personally by the directors protected by the policy. By imposing a personal interest on the part of the directors concerned, it was sought to motivate them to avoid claims arising, although the question of what constituted an "adequate" deductible has remained vague.

In practice, many German companies have circumvented the requirements altogether, relying upon a standard form of derogation from the Code in their annual filings, with a statement that a deductible "would not improve the consciousness of responsibility" of their directors, or otherwise motivate them to avoid damage arising.

The position has now changed for directors of German stock corporations. Following a period of debate in the Bundestag (Parliament of Germany), the new Act on the Adequacy of Managerial Salaries (Gesetz zur Angemessenheit der Vorstandsvergutung - VorstAG) was passed on 18 June 2009. The new provisions will come into force immediately following ratification by the federal house, the Bundesrat, and subsequent publication in the German Federal Law Gazette (Bundesgesetzblatt).

The Act amends section 93 II 3 of the German Stock Corporation Act (Aktiengesetz - AktG), and requires that listed companies purchasing D&O insurance for their executives must impose a personal deductible to be borne by the directors equivalent to at least 10% of the relevant loss, up to an annual maximum figure calculated by reference to the fixed remuneration of the director from time to time. Practical guidance is to be found in the accompanying Reasons (Begrundung, BT-Drs 16/13433) issued by the legislator, which states that the required personal deductible shall consist of at least 10% of each loss, subject to an absolute annual cap which must be set at not less than one and a half times the annual fixed remuneration of the director. The aggregate cap is to be reviewed annually to reflect movements in the fixed element of the director's remuneration.

The requirements are to be applicable to all stock corporations, whether in fact listed or privately owned, although, under Germany's two tier system of corporate governance for such companies, only members of the board of directors (Vorstandsmitglied) are affected, and not supervisory board members (Aufsichtsratsmitglied).

The provisions will apply with immediate effect to all newly concluded D&O insurance contracts, while those already in existence are to be amended with effect from 1 July 2010 at the latest. There is a transitional exception in the case of those companies already obliged under an existing service contract to provide D&O insurance cover to the director without deductible. In those cases, the policy terms may remain unchanged until the appointment of the director, and the underlying service agreement, expire. The statutory maximum appointment term of a board member is five years.

Interestingly, the legislation does not prohibit directors from insuring their deductible exposure separately, leading to speculation that the reforms will simply give birth to a new line of business in the form of D&O deductible insurance. While responsibility for the premiums for such a product would have to be borne privately by the directors, there is nothing to prevent them seeking a commensurate uplift in their remuneration to cover the outlay. Furthermore, any obligation to disclose such an arrangement in corporate filings would require an amendment to the Code as it stands.

At the same time, the new Act on the Adequacy of Managerial Salaries also brings about an amendment to section 87 I AktG, which will now oblige the supervisory board members to ensure that the total remuneration of members of the board of directors is a suitable reflection of their tasks and performance, and of the performance of the relevant company. It requires that the usual ("ublich") remuneration of a director is not to be exceeded without specific reasons. Furthermore, in the case of listed stock corporations, the directors' remuneration has to be consistent with the sustained ("nachhaltig") development of the company, and the performance elements of directors' remuneration are to be assessed on the basis of several years, up to the entire term of appointment. Short-term performance measures are no longer acceptable. The new provisions also stipulate that the responsibilities of the supervisory board with respect to directors' remuneration may not be delegated to the general meeting.

The new remuneration and D&O provisions expressly do not apply to a private Limited Liability Company (GmbH).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Lloyd's Report Suggests Global Businesses Worry About Wrong Risks

(This post was written by colleague Robert O'Connor, London editor with A.M. Best. He can contacted via eMail at Robert.OConnor@ambest.com)

Business executives around the world may be more worried about risks that don't pose a threat to them than those that do, according to Lloyd's.

High among the concerns of businesses are external risks such as lost orders and foreign exchange movements, Lloyd's said in a report. Lower on the list are such internal issues as corporate liability and damaged reputations.

The report, "Risk Priorities and Preparedness," was released jointly with the Economist Intelligence Unit. Lloyd's described it as one of the largest surveys ever conducted on risk. It sought the views of 570 board level-executives around the world on 20 risks. Broad risk categories included the environment and health, business and strategy, natural hazards and political risk, crime and security.

"Since late 2007, the contraction of credit in financial markets and the subsequent economic downturn has had a dramatic impact on corporate confidence," the report said. "Across the full range of regions and industries, companies are postponing investment, cutting costs and retrenching into core markets."

Business executives should be aware of the actual risks they face, Lloyd's Chairman Peter Levene said. "While good risk management will help to minimize internal factors, they should recognize that they need to extend their thinking outwards to their suppliers, customers and other stakeholders to ascertain how their behavior will resonate with the company itself," Levene said in a statement.

Levene recalled last year's Lloyds 360 Risk Insight report, which he said warned of the international spread of "a U.S.-style compensation culture."

He said businesses should not ignore such long-term perils as climate change. The current report "will form the basis" of a new interactive global risk map that will be released next year, according to Lloyd's.

The document pointed to what it said is the growing role within organizations of risks managers. The importance of someone who can keep a companys reaction to risk sensible and accurate is essential," Levene said. "Risk is not a dirty word . We just need to understand it to manage it properly.

Businesses in China and Southeast Asia are likely to place particular emphasis on environmental and health risks, the report said. Political risk and crime were given more priority in the Middle East, North Africa and Latin America.

Lloyd's has a current Best's Financial Strength Rating of A (Excellent).

Directors’ Conflicts Of Interest - Getting It Wrong Can Cost Millions

The Companies Act in the United Kingdom has codified the duties directors owe to a company, one of which is to avoid situations where the director has or can have a direct or indirect interest which conflicts or may conflict with the company's interest. Directors are obliged to declare their interest in any transactions or arrangements with the company and failure to comply with these duties can cost directors dearly. The Courts have recently ordered a director guilty of a serious conflict of interest to repay over £2 million to the Company.

In this case, the two parties were equal owners of Palmier plc and were directors of the business which imported women's clothing. Director A also owned another company which acted as agent for Palmier organizing and paying for shipping of goods to Palmier and being paid a commission for its services (the "Agent"). Palmier found itself in financial difficulties and following negotiations with a large creditor agreed to use funds it expected to receive as the result of a Value Added Tax ("VAT") rebate amounting to approximately £1.6m to pay the sums due. On the day the VAT rebate arrived in Palmier's account it was immediately transferred to another account and the company then went into liquidation. Director B brought an action under Section 212 of the Insolvency Act 1986 against Director A on the grounds that he had misapplied company money and breached his duties to the company.

It was argued that Director A had breached his duties to Palmier by causing the VAT rebate to be transferred from the company's account to the Agent's account and it was also argued that Director A had secretly paid excessive commissions to the Agent for his own benefit.

The court ruled against Director A finding that he had been guilty of a conflict of interest and had acted dishonestly. The Judge declared that Director A was well aware that his duties as a director of Palmier and of the Agent placed him in a conflicting position and that he had fixed commission rates for the Agent which had not been properly declared to Palmier resulting it suffering significant losses. In addition, it was found that he had instructed the transfer of the rebate payment to the Agent and that the transfer was not made for purposes connected with Palmier's business. In essence he was attempting to "milk" Palmier to look after his other business interests and concealing from Palmier his true relationship with the Agent and the profits the Agent had been making.

On that basis Director A was ordered to have the Agent repay £927,000 in relation to overpayment of commission and to ensure that the sum of £1.6 million the VAT rebate was also restored.

This case should emphasize to directors the need to make sure they are open and transparent in all of their dealings with their Company and that any potential conflicts have been properly notified to the board and approved prior to any action being taken.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Directors and Officers Liability insurance develops in India

Directors and Officers liability insurance (D&O) has become the fastest evolving and most dynamic insurance policy in India. Though the policy was drafted by Lloyds Insurers in the 1930s for an American company, its importance was virtually unknown in Asia and particularly in India for a long time. Only in the last two decades, when overseas investments started flowing into the country, had this product become quite visible and corporations took note of it.

Pharmaceuticals, airlines, IT software and banking were the most crisis prone sectors in the last four years. D&O policy does not belong to a company, even though the insurance is generally bought by the company for the benefit of directors and officers. It is a personal policy belonging to each and every director and officer of the corporation and its subsidiaries.

In commercial crime, internal fraud is on the rise in every country, which is a common development when economic conditions are poor. An increasing problem is the white collar crime involving enormous cost for a company. Company directors believe that absence of any reported fraudulent activity means there is no fraud within and fail to consider the indirect and incidental costs. The most common problem is misappropriation of assets through fraudulent disbursements.

Of crime losses seen by insurers, about 80 per cent came from employee theft and the balance mostly from premises and forgery coverage. The Commercial Crime policy offers a more comprehensive coverage than the traditional fidelity guarantee policy and covered loss caused by unidentifiable employees and loss caused by an employee acting in collusion with a third party.

First charges brought under the UK’s Corporate Manslaughter and Corporate Homicide Act 2007

This story has been reported in many news sources, and should be of particular interest to those companies with operations in United Kingdom. The first ever charge of corporate manslaughter brought under the Corporate Manslaughter and Corporate Homicide Act 2007 (the 2007 Act) was due to be heard yesterday in Stroud Magistrates Court. The case got off to a bit of a false start, however, as no pleas were entered and the case was referred to Bristol Crown Court. The preliminary hearing was due to begin on Tuesday 23 June where the court will set the timetable for the case. The judge will direct the date on which the prosecution case is to be served, when the defense statement is to be served and when the Plea and Case Management hearing will take place.

Cotswold Geotechnical Holdings Limited is the company being prosecuted, in relation to the death of one of their employees, Mr Alexander Wright. Mr Wright died on 5 September 2008 while taking soil samples from inside a pit which had been excavated as part of a site survey. The sides of the pit collapsed, crushing him to death. Mr Peter Eaton, a director of the company, has been also charged with the common law offence of gross negligence manslaughter, and with a breach of Section 37 of the Health and Safety at Work Act 1974 (HWSA). Aside from the corporate offence, the company has also been charged with a failure to discharge its general duties under section 2 of the HWSA, which requires employers to ensure, so far as is reasonably practicable, the health, safety and welfare at work of employees.

As the first ever prosecution for corporate manslaughter, this will undoubtedly be a landmark case. The company being prosecuted in this instance is however a small, family company where the directors are closely involved with the day-to-day running of the organization. It is therefore doubtful that this case will provide much in the way of significant insight or understanding on how fines under the 2007 Act will be applied to larger corporations. The reputational damage associated with a conviction for corporate manslaughter is arguably the greatest deterrent to companies, and perhaps the most important aspect of this case will be whether, if convicted, the company is made subject to the "publicity order" provided for in the 2007 Act. A publicity order will require a company to advertise their conviction and the penalty imposed. Of course, with or without a publicity order, there will almost always be a great deal of publicity surrounding any conviction for corporate manslaughter, as can be seen from the press coverage to date of the case against Cotswold Geotechnical Holdings.