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• Chapter 10 of the draft guidance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. 171 To act within the powersS. 172 To promote the success of the companyS. 173 To exercise independent judgementS. 174 To exercise reasonable skill and careS. 175 To avoid conflicts of interestS. 176 Not to accept benefits from 3rd partiesS. 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 meeting Outside 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 1/100th 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

• Councillors Sometimes: 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 which forms 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 irrelevante.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)