Beyond the Bribery Act

Convictions by the Serious Fraud Office under the Bribery Act 2010 have taken time to come to fruition. This is inevitable, as the legislation is not retrospective and prosecutions for serious fraud are complex and take time. However, Gray, Petr [2015] CSOH 146, a recent decision in the Outer House of the Court of Session, has highlighted the possibility of other potentially wide-ranging implications for an individual participating in an act of bribery beyond the risk of criminal prosecution under the Act. Although the potential implications of the Act are severe, it is clear that there may also be further commercial implications – bringing about results that could catch the perpetrator by surprise.

Bad leaver?

Gray, the former chief executive of a company, Braid Group Holdings Ltd, participated in a corrupt arrangement with an employee of a customer. Following an investigation, Gray was dismissed for gross misconduct, although the dismissal was later suspended. His petition alleged unfairly prejudicial conduct on a number of related issues, including the conduct of the investigations into the corrupt arrangement, and the disciplinary proceedings against him.

Section 1 of the Bribery Act 2010 sets out the offence of bribing another person, where one person gives a financial advantage to another, intending to bring about an improper performance of a function by that other person. In this case, Gray facilitated a financial advantage for the employee of a customer through a series of complex arrangements with the intention that the employee would direct more business to a subsidiary of Braid. This violated the expectation that the customer’s business would be placed impartially by the employee and was therefore improper performance of his function.

Whether or not Gray was aware that this arrangement constituted a criminal offence under the Bribery Act was not relevant to the court’s decision; only that he was at least complicit in its approval and creation. This is not particularly surprising, given that s 1 is drafted without any mention of a requirement of knowledge that the actions of bribery constitute an offence. (While the judgment records the making of a self-report by the company to Crown Office, it is understood that no decision as to criminal proceedings has yet been taken.)

Although the court upheld three of Gray’s eight claims of unfair prejudice, a crucial issue related to a “bad leaver” clause in the company’s articles of association and the level of relief available to Mr Gray under s 996 of the Companies Act 2006, given his key role in the bribery. The clause provided that, where a shareholder’s employment with the company was terminated due to the board finding he had committed an act of gross misconduct, there would be a compulsory sale of his shares back to the company at an undervalue. The court was tasked with determining whether Gray’s shares should be compulsorily sold at an undervalue as required by the bad leaver clause, or whether the unfairly prejudicial conduct suffered by Gray should relieve him of that provision.

The court acknowledged that, although the board had not actually dismissed Gray for gross misconduct, there had clearly been a corrupt arrangement involving bribery. It also held that such bribery would amount to gross misconduct and therefore Gray’s conduct would trigger the bad leaver clause. Despite the fact that the board had not actually established gross misconduct, the court held that Gray was a bad leaver and the compulsory purchase was ordered.

Discussion

Section 996 of the Companies Act affords the court a very wide discretion to “make such order as it thinks fit” in determining the appropriate relief for unfairly prejudicial conduct. In handing down his opinion, Lord Tyre also cited a number of key principles which expand on this general power:

1. Fairness includes the avoidance of unjust enrichment (Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch)

This principle was established in a similar case to Gray’s petition concerning a claim of unfairly prejudicial conduct. In that case, the court held that the particular facts of a case must be taken into consideration to make the most suitable order.

Interestingly, in Gray’s case there was the potential for unjust enrichments from wrongdoing on both sides: the wrongdoing of Gray being involved in a corrupt arrangement and of the company being the unfairly prejudicial conduct of the board. A finding that Gray was not required to sell his shares at an undervalue to the company would place him in a better position than he would have been had the unfairly prejudicial conduct not occurred. Despite his gross misconduct, however, a finding that he was required to sell his shares at an undervalue by virtue of the bad leaver clause would mean that the remaining director-shareholders would, in effect, benefit despite participating in unfairly prejudicial conduct.

Perhaps unsurprisingly, the court found against Gray, thus demonstrating judicial determination to punish an act of bribery to the fullest extent.

2. The conduct of the petitioner may affect the relief which the court thinks fit to grant (Re London School of Electronics Ltd [1986] Ch 211)

The application of this principle in Gray’s case was probably a key factor in the court’s determination of the balance of the potential for unjust enrichment. Although the court found that there was certain unfair prejudicial conduct against Gray, it is established that the petitioner’s conduct may nevertheless affect the relief that the court thinks fit to grant. Although there is no overriding requirement that relief must be just and equitable or that the petitioner must come to the court with clean hands (Re London School of Electronics Ltd), in determining that Gray was a bad leaver and subject to the consequences of the clause, the court nevertheless displayed a certain disinclination to reward those who do not come to court with clean hands. The seriousness of bribery in the eyes of the court was enough for it to determine that relief was not appropriate.

3. The terms of a contractual agreement fairly entered into by shareholders are a relevant consideration when deciding upon relief (Re LCM Wealth Management Ltd [2013] EWHC 3957 (Ch))

It is a very well established principle that the courts will not interfere in a freely negotiated contractual agreement between parties, even where the result may be harsh or draconian. This principle also extends to the court’s consideration of appropriate relief for unfairly prejudicial conduct, where neither equity nor the discretion of the courts will necessarily override contractual agreements.

Arguably, as Gray was well aware of the implications of the bad leaver clause and still chose to participate in bribery, he surely had to bear the consequences of his actions as contractually agreed. However, the key issue for the court’s discretion was whether he could, in fact, be classified as a bad leaver given that his employment had not been officially terminated and proceedings challenging the disciplinary procedure were continuing.

In this sense, the court exercised its discretion to give effect to the bad leaver clause despite the technical absence of the requirements. This decision is curious in that it gives effect to the contractually agreed consequences of Gray’s actions, but also goes beyond the agreement on its face, to the spirit and intention of the provision.

Strong stance

This decision demonstrates the willingness of the courts to exercise their discretion to the fullest extent to give effect to what is fair given all of the circumstances of the case.

The court’s broad application of the discretion afforded to it by s 996 is a clear affirmation of its strong stance on the prohibition of bribery offences. Its refusal to grant relief to Gray from the unfairly prejudicial conduct he had suffered clearly demonstrates that the judiciary will exercise their discretion to the fullest extent to avoid the unjust enrichment of a party that has displayed such serious misconduct as bribery.

Although the criminal offences set down in the Bribery Act 2010 should act as a sufficient deterrent to individuals minded to participate in bribery, it is clear from this case that there may also be far wider commercial implications for those subject to bad leaver clauses.