Presentation on theme: "Joint Ventures: Partnerships of the Future? Conflicts of Interest and Directors’ Duties Bethan Evans Partner: Bevan Brittan."— Presentation transcript:
Joint Ventures: Partnerships of the Future? Conflicts of Interest and Directors’ Duties Bethan Evans Partner: Bevan Brittan
Purpose of Session To consider the issues for public sector participants involved in managing a Joint Venture To identify potential areas of risk including Conflicts of interest/competing duties Declarations/registration of interests Risks of liability To consider practical solutions
Managing Public Sector interests in the Joint Venture Chapter 10 of the draft guidance Need to draw a distinction between roles of the board members (or equivalents) and the participants/owners of the JV Corporate governance Managing ongoing activity of JV once established Business plans and budgets
Examples of the challenge A Director of Childrens Services on the board of a training and skills JV which is largely dependent on council grant An elected member on the board of a regeneration JV company seeking planning permission for a project A BSF project lead on the board of the LEP which is seeking exclusivity on the next project
Appointment of representative – why? Significant JV established to deliver key services or projects will assume board representation as part of governance Role on board will have been one of drivers for a JV model Seat at table where key decisions made For other outside bodies – query rational for board representation – can be counterproductive
Appointment of representative – who? Key issue – member or officer Member Portfolio holder? Conflicts Registration and declaration of interests Officer Financial or service input? Conflicts Registration and declaration of interests For both – appropriate skills and time to fulfil duties?
Appointment of representative – how? Executive Arrangements may define whether Council or Cabinet make appointment: of an officer to any office other than an office in which he is employed by the authority appointment to any body other than the authority or a Joint Committee appointment to a Committee or Sub-Committee of such a body NB remember to appoint shareholder/member representative
Corporate v Unincorporated Corporate Separate legal personality Members and officers act on behalf of the body. It is the body, not the member or officer, which incurs direct liability Members of the body may have only Limited Liability if the body is insolvent
Corporate v Unincorporated Unincorporated No separate legal personality Members act in their personal capacity and incur direct liability Members recover costs etc. from the organisation’s resources and from other members under indemnity in membership agreement (contract) Not much use if organisation insolvent
Legal Forms of Joint Venture (Contractual) Companies limited by shares or by guarantee Community Interest Companies Industrial and Provident Societies Partnerships Limited Liability Partnerships Limited Partnerships Trusts Unincorporated associations Local authority joint committees
Capacity Association member Management Committee member Shareholder or guarantor (“member”) Director Trustee Here - assume the local authority is a member of a JV company limited by shares or guarantee and member or officer is a company director
Potential Conflicts Directors of companies must promote the success of the company, act in its best interest and avoid conflicts of interest Members of companies should not allow any personal interest to conflict with their duties to the company BUT As a Councillor or Council employee, you owe a duty to act in the best interests of the Council
Duties owed to the Solvent Body Companies Act 2008, Sections 171 to 177 – 7 statutory duties S. 171To act within the powers S. 172 To promote the success of the company S. 173To exercise independent judgement S. 174To exercise reasonable skill and care S. 175 To avoid conflicts of interest S. 176Not to accept benefits from 3 rd parties S. 177 To declare interests in transactions
Duty of Skill and Care Directors traditionally required to apply such skills as they possess Courts increasingly required a higher standard Trustee’s duty “to take such care as a prudent business person would take of their own affairs” Speight v Gaunt (1883) “Honesty and sincerity are not enough” Cowan v Scargill (1985)
Duty of Skill and Care Section 174, Companies Act 2006 (1) A director of a company must exercise reasonable care, skill and diligence. (2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has.
Duty to avoid conflicts of interest Section 175, Companies Act 2006 Directors must avoid situations of conflict of interest Duty will not be infringed if authorisation has been given by directors who are genuinely independent In certain “standard” JVs (e.g. LEPs) detailed provisions are included in the company’s articles to cover the inherent conflict situation of the authority’s LEP director
Insolvency Duty to the Body To avoid insolvency Duty to third parties limited liability wrongful trading Duty to Creditors
Wrongful Trading – (1) Section 214, Insolvency Act 1986 Requirements: Company in insolvent liquidation Director knew or ought to have concluded that there was no reasonable prospect of avoiding liquidation Director failed to take “every step” to minimise loss to creditors Contrast “fraudulent trading” – with intent to defraud creditors Section 993 CA 2006 Max 10 years sentence
Wrongful Trading – (2) No dishonesty required “Honest but incompetent” - no defence Standard of a reasonably diligent person having the knowledge, skill and experience appropriate to the post Onus on director to prove that he took every reasonable step A remedy for those who lose out, not a crime Personal liability for creditor’s additional loss
Registration and Declaration of Interests Different regimes and requirements for officers and members Interest as a Director in a JV to which appointed by the council will always have to be registered Will often also disbar Director from participation in Council decisions
Members General Conduct You must not conduct yourself in a manner which could reasonably be regarded as bringing your office or authority into disrepute You must not use or attempt to use your position as a member improperly to confer on or secure for yourself or any other person, an advantage or disadvantage You must not disclose confidential information
Members’ Code of Conduct - Interests “Personal interests” Require disclosure at meetings Serious personal interests are also “Prejudicial interests” Require withdrawal from meetings But a right to make representations Most personal interests require registration
Personal Interests Registerable interests Prejudicial interests At a meetingOutside a meeting
Personal / Registerable Interests (1) You have a personal interest if any business of the authority relates to or is likely to affect ………any body in which you are a member or hold a position of general management or control, and to which the authority has appointed or nominated you, which exercises functions of a public nature which is directed to charitable purposes, or one of whose principal purposes includes influencing public opinion or policy (including any political party or trade union)
You have a personal interest if any business of the authority relates to or is likely to affect – Any employment or business carried on by you Any person or body who employs or has appointed you Any person or body, other than your authority, who contributed to your election expenses or expenses in carrying out your duties as member Any person or body which has a place of business or owns land in the authority’s area and in which you hold shares worth £25,000, or 1/100 th of the share capital Any contract which you or a (related person or body) has with the authority for goods, services or works Personal / Registerable Interests (2)
Personal / Registerable Interests (3) You have a personal interest if any business of the authority relates to or is likely to affect – Any person or body which has given you a gift or hospitality with a value of at least £25 Any land in the authority’s area and in which you have a beneficial interest Any land owned by the authority of which you or a related person or body is a tenant Any land in the authority’s area which you have a licence to occupy for at least 28 days “Related person or body” means a firm in which you are a partner, a company of which you are a paid director, or in which you have a registerable shareholding
Personal/Non Registerable Interests You have a personal interest if any business of the authority might reasonably be regarded as affecting the well-being or financial standing of - Yourself a member of your family or any person with whom you have a close association any person or body who employs any of them any company in which any of them have shares worth £25,000, or any body to which you are appointed by the authority to a greater extent than the majority of other Council Tax payers, ratepayers or inhabitants of the ward or electoral division affected by the decision
Disclosure of Personal Interests If you attend a meeting of the authority at which a matter in which you have a personal interest is considered, you must disclose the existence and nature of that interest. If it is a body to which you have been appointed or which exercises functions of a public nature, you do not need to disclose the interest until you speak There is a specific exception where you are not aware of, and cannot reasonably be expected to have been aware of, the interest If you have a personal interest and make an executive decision in relation to that matter, you must record in the written statement of that decision, the existence and nature of that interest.
Prejudicial Interests You have a prejudicial interest – where you have a personal interest “which a member of the public with knowledge of the relevant facts would reasonably regard as so significant that it is likely to prejudice your judgement of the public interest”, and it either – affects the financial position of the relevant person or body (as opposed to its well-being), or relates to the determination of any approval, consent, licence, permission or registration in relation to that person or body.
Withdrawal from the meeting for a prejudicial interest If you attend a meeting of the authority at which a matter in which you have a prejudicial interest is considered, you must withdraw from the room or chamber where the matter is being considered – either as soon as it is apparent that the matter is being considered, or If permitted to make representations as a member of the public, immediately after making representations not exercise executive functions in respect of the matter not seek improperly to influence a decision on the matter
Code v Validity of Decision Failure to comply with Code = sanctions against the member But inappropriate participation by member in authority’s decision can invalidate it on the basis of Bias Predetermination
Ultra Vires, Ulterior purpose, Unreasonableness, Bias, Predetermination Breach of the Code of Conduct Makes the Council’s decision unlawful Sanctions against individual Councillors
Summary - Members Appointment by the authority to a directorship of a Joint Venture Company will always be a registerable personal interest (caught by a number of provisions of the Code) If an issue comes up at a meeting which relates to or is likely to affect the JV the member must declare the interest (but only if and when they speak on the item) The interest will be prejudicial if the matter affects finances or a formal application e.g. planning
Summary – Members (cont) If it is a prejudicial interest, the member must declare and leave the meeting but Can address the meeting as a “member of the public” if there is public access time Must always be wary of influencing council decisions (even outside meetings) = breach of the code and may make decision susceptible to judicial review challenge
Officers Section 117, Local Government Act 1972 Where any officer is aware that he/she has a pecuniary interest, direct or indirect, in any contract or proposed contract with the authority, they must declare that interest in writing to the authority No officer shall, under colour of their office or employment, accept any fee or reward whatsoever other than their proper remuneration Criminal offence to breach this
Officers (cont) JNC terms and conditions of employment – officers must not put themselves in a position where duty as an employee conflicts with their private interest Draft Employees’ Code of Conduct (England) Registration of interests Incorporated into conditions of employment Not yet in force Local codes of conduct?
Risks of Liability What can go wrong? How best can the risks be avoided or mitigated?
Burgoine and Cooke v Waltham Forest London Borough Council 1996 Council set up Waltham Forest Water Park Company 50:50 Joint venture company with private sector Asked Assistant Chief Executive and Assistant Director of Finance to act as directors Loan from Credit Suisse Company became insolvent - £6m owing Directors pursued for wrongful trading
Burgoine and Cooke v Waltham Forest London Borough Council 1996 (2) Council had given indemnity to officers Formation of company held to be ultra vires Therefore indemnity invalid Statutory indemnity also did not cover them “It would be wrong to end this judgment without expressing sympathy for the Plaintiffs for the predicament in which they now find themselves”
Practical Solutions Preventing a potential liability arising Alleviating the consequences of liability Insurance Indemnity
Statutory Immunity Section 265, Public Health Act 1875 No matter or thing done, and no contract entered into by any local authority, and no matter or thing done by any member of any such authority or by any officer of such authority acting at the direction of the authority shall, if the matter or thing were done or the contract were entered into bona fide for the purpose of executing this Act, subject them or any of them personally to any action liability claim or demand whatsoever
Can the authority buy insurance? Officers Yes: Section 112 LGA 1972 CouncillorsSometimes:Section 101 Regs
Indemnities and insurance Section 101, Local Government Act 2000 The Secretary of State may make regulations to enable local authorities to grant indemnities to, and provide insurance for, officers and members The Local Authorities (Indemnities for Members and Officers) Order 2004 - Scope of the indemnity or insurance is to cover any action or failure to act: “authorised by the authority; or whichforms part of or arises from any powers conferred on or duties placed upon that member or officer as a consequence of any function being carried on by that member or officer"
Indemnity Regulations The capacity in which the function is exercised is irrelevant e.g. as a company director or charity trustee Also potentially covers other outside appointments such as school governors, NHS trust appointments But Must be at the request of or with the approval of the authority; or For the purposes of the authority Therefore does not include outside appointments made by a third party
Indemnity Regulations Applicable to any member or officer May provide insurance in addition to or instead of an indemnity Cannot include Acts or omissions which constitute a criminal offence e.g. matters which may give rise to a civil claim and criminal prosecution e.g. health and safety Fraud, deliberate wrongdoing or recklessness
An indemnity resolution “The Council indemnifies all employees and members appointed by the Council as members of outside bodies”
Practical actions Review the council’s representation on any outside bodies (particularly significant Joint Ventures) Ensure appointments have been correctly made Review appropriateness of appointee Pervasive conflicts? Appropriate skills and capacity? Provide training and advice on roles and responsibilities Check the council’s indemnity resolution Check the insurance position
Practical actions (cont) Members Check registration of code of conduct interests Check appropriate interests declared at meetings Officers Check registration of interest in any contract Check permission to act recorded on HR file Check job descriptions of senior staff include work for outside bodies and authorise any agreed payment as remuneration (subject to appropriate consents)