Lewin, R (On the Application Of) v The Financial Reporting Council Ltd & Ors

The duty has to be considered in the context of the proceedings, namely what does fairness require? In Re Pergamon Press (above) Sachs LJ at 403 stated:

“In the application of the concept of fair play, there must be real flexibility, so that very different situations may be met without producing procedures unsuitable to the object in hand. That need for flexibility has been emphasised in a number of authoritative passages in the judgments cited to this court. ...

It is only too easy to frame a precise set of rules which may appear impeccable on paper and which may yet unduly hamper, lengthen and indeed, perhaps even frustrate… the activities of those engaged in investigating or otherwise dealing with matters that fall within their proper sphere. In each case careful regard must be had to the scope of proceeding, the source of its jurisdiction … the way in which it normally falls to be conducted and its objective.”

The context of the proceedings was as follows:

There is no power under the Scheme to join the claimant as a party to the proceedings nor to invite representations from him. The process pursuant to the Scheme was adversarial. The parties provided written pleaded cases, they called evidence and made submissions. The Tribunal had to resolve factual issues regarding the claimant’s conduct in the context of the disputed cases of the FRC and interested parties. The Report of the Tribunal was produced for the limited purpose of resolving that dispute.

The most any duty of fairness could have required of the Tribunal is that notice of the proceedings and hearings be given to the public, paragraph 7(15) of the Scheme and Regulation 23(a) of the Accountancy Regulations. It is what happened in this case. The announcement of a settlement between the FRC and a co-director of the claimant provided information about the allegations that had been made against his co-director, such as to permit the claimant to understand that his involvement and conduct in relation to the Garuda transaction would, or was very likely to, be put in issue at the hearing of the allegations against the interested parties. The claimant would have been well aware of many of the facts and matters referred to in the Amended Formal Complaint, he was the author or recipient of key documents, present during key conversations and meetings relied upon as establishing the existence of the company’s fraud.

The claimant was a senior officer of a public company, listed on the Alternative Investment Market. It had collapsed amidst reports of accounting irregularities, he knew that the company’s audit procedures were being investigated in a public hearing by the independent regulator. The public notices gave the claimant a fair opportunity to make enquiries as to the nature of the misconduct or to attend the public hearing should he wish to do so. If the claimant contends he did not know what was happening it was because he took no steps to find out. A test of what is fair is objective, it does not permit the claimant to place his head in the sand.

It was the case of the interested parties in the proceedings before the Tribunal that the nature and the extent of the collusive fraud of the company and its directors excused their failure to uncover irregularities in the audit. The FRC accepted that in certain respects the claimant had acted dishonestly but did not accept that the nature and extent of the fraud excused the acts or omissions of the interested parties. It is clear from the detail of the Report and the extent of the fraud identified that, not only was the fraud the central issue in the case, it was an issue which the Tribunal considered in detail, in evidence, in submissions and in its findings. The interested parties contended that this was a collusive fraud difficult to discover, particularly when credible senior management promulgate misleading material. Whether the interested parties had performed to the requisite standard required a detailed evaluation by the Tribunal of what was going on during the course of the audit.

No duty of fairness required the Tribunal to identify for the claimant the allegations that had been made about him or to invite the claimant to intervene or participate in the proceedings in the circumstances where: the claimant is not subject to the Scheme; there is no power under the Scheme for the Tribunal to join him as a party; the impact of the Report on him, if any, would be at most indirect and incidental.

As to the authorities in which the courts have recognised duties of fairness to non-parties, no case lays down a rule of general application and the facts of each are very different to the present case. Neither Re W (above) nor MHL Solicitors (above) concerned: findings in relation to non-parties that were essential for the resolution of the proceedings between the parties; professional disciplinary proceedings brought by a regulator in the public interest within the framework of a detailed regulatory scheme; allegations or findings which had been discussed at length at public hearings.

The authority of LAUTRO (above) is still further removed from the present case. LAUTRO carried out an investigation into the activities of a company (“W”) which was the appointed representative for an insurance company pursuant to the Financial Services Act 1986. LAUTRO exercised its statutory powers of intervention to prohibit the insurance company from accepting any new business through W until its investigation had been completed. As a result the insurance company terminated its agency agreement with W. The key reasons for the Court’s conclusion that W was entitled to make representations were that: (a) LAUTRO was obliged under its own rules to serve a copy of the relevant notice on W; and (b) LAUTRO’s decision had the immediate effect of ending W’s commercial relationship with the insurance company. The object of its investigation was the third party, there was an express duty under its own rules to serve a copy of the relevant notice on the third party.

There is no general rule that a tribunal or a judge owes a duty of fairness to third parties in adversarial proceedings even if such proceedings could adversely affect the non-party.

The proceedings were in public. The recognition of the public interest in the public nature of the proceedings is incorporated into the Scheme at every stage of the proceedings. The Committee may, if it thinks it appropriate to do so, publish the fact of its decision to investigate (paragraph 7(4)). Paragraph 7(15) required the Committee to publish the outcome of the Executive Counsel’s investigation as soon as practicable and in such manner as it sees fit, unless this would not, in the opinion of the Committee, be in the public interest. Any settlement agreements will be published by the Committee as soon as practicable and in such manner as it thinks fit unless this would not, in the opinion of the Committee, be in the public interest (paragraph 8(6)).

The Tribunal’s report was in final form as at 3 November 2016, the Tribunal was, thus, functus officio. If there had been unfairness in the approach adopted by the Tribunal, which is not accepted, it was not open to the Committee to change the Report. The claimant had a fair opportunity to make representations to the Committee concerning publication of the Report, the considerations were properly considered alongside the representations received from others by the Committee. The decision to publish the Report in full unredacted form with the Explanatory Memorandum was procedurally fair and appropriately balanced the competing interests. The Committee took full account of the fact that the claimant had not been invited to participate in the proceedings.

The claimant’s interest in protecting his reputation is adequately protected by the law of defamation. In Khuja v Times Newspapers Ltd [2017] 3 WLR 351 at [21] Lord Sumption stated “The protection of reputation is the primary function of the law of defamation.” A fair and accurate report of the findings of the Tribunal in the Report in the public interest would generally be protected by qualified privilege (section 15(1) and paragraph 14(b) of Schedule 1 of the 1996 Act). The qualified privilege defence is subject to a claimant’s right to require that “a reasonable letter or statement by way of explanation or contradiction” be published “in a suitable manner” (section 15(2) of the 1996 Act).

The claimant’s position is further protected by the Committee’s proposal to publish the Explanatory Memorandum. Prior to this hearing the offer was made to publish the Memorandum alongside the Report. During the course of the hearing the offer was made that the Memorandum would be placed in the same electronic document as the Report itself. The public would be able to understand the relevance of the fact that the claimant had not been given the opportunity to participate in the proceedings before the Tribunal, there is no particular subtlety in this which would be lost on the public. The wording of the Explanatory Memorandum reflects requests made by the claimant to the FRC in his letter of 17 November 2016. The FRC is willing to consider any drafting changes which the claimant wishes to suggest.

If the claimant is unable to establish that he is entitled to relief as against the Tribunal in relation to the Report itself it is not realistically arguable that the FRC and the Committee acted unlawfully in deciding to publish the Report in accordance with paragraph 9(13) of the Scheme and the publication policy.

The first and second defendants submit that the publication of the Report would not interfere with the claimant’s Article 8 rights. The “touchstone of private life” is whether “in respect of the disclosed facts the person in question had a reasonable expectation of privacy”: Campbell v MGN [2004] 2 AC 457 at [21]. In Khuja Lord Sumption JSC at [21] stated:

“21.

In Campbell v MGN Ltd [2004] 2 AC 457, the House of Lords expanded the scope of the equitable action for breach of confidence by absorbing into it the values underlying articles 8 and 10 of the European Convention on Human Rights, thus effectively recognising a qualified common law right of privacy. The Appellate Committee was divided on the availability of the right in the circumstances of that case, but was agreed that the right was in principle engaged if in respect of the disclosed facts the person in question had a reasonable expectation of privacy. The test was whether a reasonable person of ordinary sensibilities, if placed in the same situation as the subject of the disclosure, rather than the recipient, would find the disclosure offensive. The protection of reputation is the primary function of the law of defamation. But although the ambit of the right of privacy is wider, it provides an alternative means of protecting reputation which is available even when the matters published are true.”

The claimant did not have a reasonable expectation of privacy because the relevant parts of the Report concern his performance as a director of a public company, in particular in connection with a statutory audit of the company’s financial statements. This is a public rather than a private matter. Further the claimant has no reasonable expectation of privacy in relation to matters discussed at a public hearing: Khuja (above) [34(1)].

Article 8 may protect a person against an attack on his reputation but only if it leads to a serious interference with his private life so as to undermine his personal integrity, no sufficient evidence exists to support such a level of interference.

Any interference with the claimant’s Article 8 rights by the publication of the Report would be justified. Article 8 rights are not absolute and unqualified even if the publication of the Report will interfere with the claimant’s Article 8 rights, the Article 10 rights of the public generally to receive information about the outcome of disciplinary proceedings in public and the Article 6, 8 and 10 rights of the interested parties point in favour of publication of the Report in full. In balancing the competing rights, relevant would be:

The evidence and submissions recorded by the Tribunal and its criticisms of the claimant in the Report go to a central issue in the case against the interested parties which have already been referred to in the course of public hearings. This is to be contrasted with Re W (above), upon which the claimant relies, in which the relevant hearings were in private, the allegations had not featured at all in the trial process.

In Khuja (above) the majority held that no injunction should be granted to prevent the reporting of serious allegations made against the applicant at a public hearing of a criminal trial even though he had never been charged with any criminal offence. At [34] Lord Sumption made clear that the “collateral impact” of the trial process on non-parties was “part of the price to be paid for open justice and the freedom of the press to report fairly and accurately on judicial proceedings held in public”.

The Report lists the parties to proceedings, and in paragraph 28 it lists the witnesses. It is clear from the Report that the claimant was not a party to the proceedings, he was not invited to give evidence, he did not participate in the proceedings. The significance of these facts is not difficult to understand. The Explanatory Memorandum clarifies the point that the Report was prepared without input from the claimant, that is a public statement of undisputed fact.

The interested parties accept the decision of the Committee to publish the Report, they regard the Explanatory Memorandum as sufficient, they will accept direct attachment of the Memorandum to the online link to the Report such that the Report and the Memorandum are contained in a single electronic document. They would accept the Memorandum being posted into a part of the Report.

Mr Smith QC provided a summary of the facts as found by the Tribunal concerning the collusive fraud of the company of which the claimant was a director, the financial statements which were the object of the Tribunal’s investigation. The company sold aircraft parts. If it sold them for more than it paid, it made a profit. In the mid-2000s companies including Qantas and Garuda were selling significant amounts of stocks and thereafter were subcontracting their maintenance and stock supply function. As a result the company bought vast amounts of stock at a bargain price and would then resell. The first relevant transaction related to Garuda, known as the Garuda transaction. There were two elements to the transaction, the purchase of stock in bulk from Garuda and the immediate return of parts of the stock to Garuda’s subsidiary GMF. The relevant transaction took place in 2006. As found by the Tribunal there were three elements to what were found to be the collusive fraud by the company and certain of its directors:

There were other criticisms made by the Tribunal but the collusive fraud was at the heart of the facts and of the fundamental disagreement between the Executive Counsel and the interested parties. The issue was whether any collusive fraud did or did not excuse failure by the interested parties to detect it. The first documents sent by the FRC to the interested parties identified the facts of the Draft Formal Complaint albeit they did not make allegations of dishonesty or fraud. From their first reply the position of the interested parties was that what was being alleged at the core of the proceedings was collusive fraud. Thereafter, throughout pre-hearing correspondence, pleaded statements, in evidence and submissions, the interested parties’ case was that at the heart of the case and the audit was collusive fraud on the part of the company and its directors. At the hearing, save for the agreement as to the claimant’s dishonesty in respect of the date of the Garuda transaction, everything was in dispute.

Before the court were two confidential statements from the interested parties. They detail the difficulty which has been experienced by reason of the limited reporting of the decision of the Tribunal, namely the finding of misconduct and the sanctions imposed. For the purpose of this judgment it is not necessary to elaborate on the detail contained in the statements suffice it to say that the inability on the part of the accounting firm and the individual to place in context the findings of misconduct has caused real professional difficulties and, in the case of the individual, personal difficulties.

The setting up and conduct of the Tribunal hearing was governed by the Accountancy Scheme. It was convened for one purpose, namely to investigate complaints of misconduct on the part of the interested parties in respect of statutory audits performed by them in respect of a public company of which the claimant was a director. The audits were for the years 2006, 2007 and 2008. The interested parties examined financial statements, documents and spoke to the claimant and others about what was known as the Garuda transaction and related activities.

From the first formal contact between the FRC and the interested parties, in which the FRC set out its Draft Formal Complaint against them, it was the stated position of the interested parties that on the part of the company and senior management there had been collusive fraud in respect of the Garuda transaction and related activities. At the hearing the Executive Counsel of the FRC did not dispute that the claimant had been dishonest as to the date of the Garuda transaction. Beyond that assertion, undisputed between the parties, were different cases as between the Executive Counsel and the interested parties as to what the interested parties could or should have known of the collusive fraud. The Tribunal had to investigate the nature and extent of the fraud in order to determine whether there was any culpability on the part of either of the interested parties, the nature and extent of the same and, if there was a finding of misconduct, the appropriate sanction. The detail of the Report demonstrates that the Tribunal did precisely that, it was the only course which it could properly and fairly take. The claimant’s conduct fell squarely within the four corners of the case to be investigated and, resulting from it, the Tribunal’s findings of fact. Given the claimant’s role within the company, in particular in respect of the Garuda transaction, it was wholly foreseeable that his acts or omissions would be the subject of evidence and submissions. His conduct and its impact on any assessment of the interested parties’ conduct was an issue upon which the Tribunal was required to express a view.

The Tribunal had jurisdiction in respect of the interested parties and the finance director of the company. The claimant is not an accountant. He was not subject to the jurisdiction of the Scheme. He was not a party to the proceedings. The Scheme does not permit for notice to be given to a non-party.

The claimant was aware of the FRC proceedings. He knew that the Tribunal was investigating the 2006 to 2008 audits of the company of which he had been a director. He learnt that settlement had been achieved with his co-director. The public notice of that settlement stated:

“The Financial Reporting Council (FRC) announces the outcome of the disciplinary case in connection with Mr. Hugh Bevan, former Finance Director of Aero Inventory plc, and a member of the ICAEW.

A settlement agreed between the Executive Counsel to the FRC, Gareth Rees QC and Mr. Bevan has been approved by the FRC independent Tribunal. Mr Bevan has admitted that his conduct fell significantly short of the standards reasonably to be expected of him in that:

•

he breached the ICAEW’s Fundamental Principles of Integrity and of Performance by including, within the financial statements for the financial year ended 30 June 2006, revenue and profit from the Garuda Transaction, being reckless as to whether the Garuda Transaction had taken place in that year;

•

he breached the Fundamental Principle of Performance by failing to report to Aero Inventory’s board that if the Garuda Transaction should be included in the 2006 statements it should be reported as an exceptional item;

•

and he breached the Fundamental Principles of Performance and of Professional Competence and Due Care in that, in consequence of the application of the “straight line discount” to the stock acquired under certain bulk purchase contracts, the accounts did not show a true and fair view of the state of affairs of Aero Inventory as of 30 June 2006, 30 June 2007 and 30 June 2008.

In reaching the Settlement Agreement, the Executive Counsel took account of the fact that Mr. Bevan’s behaviour was not dishonest or deliberate, and that Mr. Bevan had cooperated with the FRC, had a good disciplinary record, and had demonstrated contrition.

The parties agreed the following terms of settlement:

•

Exclusion from the profession for 3 years

•

A sum of £170,000 to be paid by Mr. Bevan as a contribution to the Executive Counsel’s costs.”

The claimant knew that he was involved in the Garuda transaction, he was the author and recipient of many documents relating to it, he had discussed the transaction and related activities with the auditors. The claimant must have known that his role as a director of the company could not escape scrutiny when what was being investigated was the Garuda transaction, related activities and the financial statements of the company, 2006 to 2008. He chose not to make enquiries nor to attend any part of the hearing. In my judgment a person in the position of the claimant, an experienced businessman, would reasonably have known that there could be comment or criticism of an act or omission on his part given his senior role within the company and his involvement in the Garuda transaction and related activities.

Mr Vinall’s acceptance on behalf of the claimant that there is no general right to persons, the subject of allegations at a regulatory hearing, to be given rights of participation reflects the authorities and was properly made. The more nuanced issue is whether the Tribunal, consistent with its duty to act fairly, and knowing of the findings it was to make in respect of the claimant, should have permitted him the opportunity to see its draft findings and make representations in respect of them or should have entered a qualification in the Report that the claimant was not a party to the proceedings, had not given evidence and had been given no opportunity to comment on the findings.

The findings made in respect of the claimant were serious. There is nothing in the Scheme which appears to permit the sending of a draft Report, or a part of it, to a non-party in order to invite comments. This was the course taken by Munby J in Re M but, in my view, the Scheme does not allow for this. Given the constraints of the Scheme and the gravity of the findings as against the claimant I am of the view that fairness required that consideration should have been given by the Tribunal to including in the Report a disclaimer such as was done by Tugendhat J in Rothschild v Associated Newspapers (above). I do not know whether such consideration was given to this issue but no such disclaimer was contained in the Report. I accept that the Report identifies the parties and the witnesses. Consistent with its duty of fairness, I believe the Tribunal should have set out at the commencement or the conclusion of the Report a disclaimer stating that: (a) the claimant (and any other relevant person) was not a party to the proceedings and was not invited to provide evidence; (b) it would not be fair to treat any part of the Tribunal’s findings as findings made against him/them as he/they were not represented at the Tribunal hearing and had made no representations about the matters in question.

On 24 October 2016 the Committee received the Report. It decided to publish the full Report. I regard it as significant that on 3 November 2016 the Committee sent a copy of the Report to the claimant, described as a “courtesy”. In my view this indicates a sensitivity on the part of the Committee as to the nature and seriousness of the Report’s findings made against the claimant and the effect which the same could have upon him. The claimant immediately responded through solicitors. What then followed was an attempt by the Chair of the Tribunal to solve the issue by means of redactions within the Report. This was unlikely to be satisfactory to any party because the actions of the claimant and documentation which related to him, or of which he had knowledge, was an integral part of the evidence and was woven through the findings of the Committee.

The Committee was in a difficult position. The Report was in a final form, the Tribunal was functus officio. The Committee could not rewrite the Report nor change any parts of it. In reaching a decision to publish the Report the Committee had to consider the public interest, the interests of the claimant and those of the interested parties. For the reasons set out in paragraph 8 above it decided to publish the full Report.

Did the claimant have a reasonable expectation of privacy in respect of the facts and findings contained in the Report? The proceedings had been in public, no reporting restrictions were imposed. As identified in paragraph 40 above the public interest in the public nature of proceedings was recognised and built into the Scheme at every stage of those proceedings. During the course of this public hearing the claimant’s conduct as a director of a public company, in particular with regard to a specific transaction and related activities, had been examined as it related to the statutory audit of the company’s financial statements. Given the public nature of the scrutiny of this regulatory body as required by the Scheme I do not accept that the claimant, as a director of a public company, could have a reasonable expectation of privacy arising from these proceedings and the resultant Report.

Article 8 may protect a person against an attack on his reputation but only if it leads to a serious interference with his private life. The criticism of this claimant related to his professional role in a public company. In my view it did not represent the serious interference with his private life which is envisaged in Axel (above) such as to invoke the protection of Article 8.

The claimant’s Article 8 rights are neither absolute nor unqualified. A balance had to be struck between his rights, the rights of the public generally and the interests of the interested parties. There is a strong public interest in the Report being published in full in a case of serious misconduct pursued by an independent regulatory body. The decision of the Tribunal could not properly be understood without reference to the role of the claimant. The findings of misconduct and the sanctions imposed upon the interested parties had been published by the FRC. The impact of that statement is likely to have been exacerbated by the unnecessary public comments of the Executive Counsel upon the level of fine imposed. I accept that these findings and the sanctions could not be fairly or properly understood in the absence of detail of the evidence and the factual findings of the Tribunal. I also accept that the absence of detail which would place in context the finding of misconduct has caused harm, professionally and on a personal level, to the interested parties.

I accept that publication of the full Report could cause reputational damage to the claimant. Following publication of the Report it will be open to the claimant to explain or justify his conduct so as to refute any criticisms made by the Tribunal. He can avail himself of the provisions of section 15 of the 1996 Act in respect of any reporting of the findings which provide him with a right to require the publication of a reasonable letter or statement. Further, an Explanatory Memorandum as part of the electronic document containing the Report should be provided by the Committee. It should include the qualifications referred to in paragraph 62 above which should have been contained in the original Report. I allow the parties to agree the full terms of such a Memorandum failing which I will set them.

Paragraph 68 was included in the draft and embargoed copy of the judgement sent to the parties prior to hand down. The terms of the Explanatory Memorandum were agreed and are now set out in the Explanatory Memorandum contained in the Schedule to the Order of the Court in these proceedings.

In my judgment, any interference with the claimant’s Article 8 rights would be justified by: (a) the public interest in publishing the full Report of an independent regulatory tribunal; and (b) the need to address the prejudice suffered by the interested parties as a result of the reporting only of the findings of misconduct and sanction. It follows that I do not find that publication of the full Report would be unfair or unlawful. Accordingly I dismiss the claimant’s claim for judicial review.