Wednesday, 31 August 2011

UK: Scotland: director's liability for company debts following reuse of company name

Lord Bannatyne, sitting in the Court of Session (Outer House), gave his opinion in Advocate General for Scotland v Reilly [2011] CSOH 141 last month. In doing so found that a director was liable under Section 217 of the Insolvency Act (1986), which provides for the personal liability of company directors in respect of a company's debts following a contravention of Section 216. Section 216 imposes criminal liability where, broadly put, a director acts in regard to a company containing a prohibited name without the leave of the court. A prohibited name in these circumstances is one identical to, or so similar as to suggest an association with, a company that has gone into insolvent liquidation with which that director was involved.

In the current case, the company names were "Aqua Seal IT Ltd" and "Aquaseal UK". Lord Bannatyne said that these names were very similar but did not contain a unique identifier such as a personal name. He noted, too, the argument that Aquaseal was a generic term used by companies providing wall and roof coverings. However, he said that the comparison should be made by looking at all of the circumstances in which the names were used or were likely to be used, including the fact that the two companies carried out very similar work and both traded from premises in Glasgow. This led him to conclude that the use of the name "Aquaseal UK Ltd" was so similar as to suggest an association with "Aqua Seal IT Ltd".

Europe: ecoDa publishes audit committee guidance

The European Confederation of Directors' Associations (ecoDa) has published Audit Committee Guidance for European Companies: see here (pdf). The guidance takes as its starting point the requirements within the Statutory Audit Directive (2006/43/EC) and provides some examples of how Member States have implemented the Directive.

Tuesday, 30 August 2011

Belgium: Committee responds to Commission's governance framework consultation

The Belgian Corporate Governance Committee has published its response to the European Commission's consultation on the EU corporate governance framework: see here (pdf). In its short response, the Committee endorses the 'comply or explain' principle and argues, amongst other things, that the quality of explanations in corporate governance statements needs to be improved.

Monday, 29 August 2011

Pakistan: revised governance code and board practices survey

Earlier this year, the Securities and Exchange Commission of Pakistan published an updated edition of its 2002 Corporate Governance Code: see here (pdf). Additionally, the Pakistan Institute of Corporate Governance has published a survey of board practices in Pakistan: see here (pdf).

Friday, 26 August 2011

Europe: ESMA publishes update on short-selling measures

The European Securities and Markets Authority yesterday published an updated summary of the measures taken by Authorities with regard to short-selling: see here (doc). This summary provides further information on the extension of the short-selling ban introduced earlier this month by several Authorities with regard to bank shares, and co-ordinated by the ESMA.

OECD updates survey of the governance of state owned enterprises

In 2005 the OECD published a survey of the corporate governance of state owned enterprises in OECD countries: see here. An update has recently been published - see here (pdf) - and this also includes information on four countries which joined the OECD after 2005 (Chile, Estonia, Israel and Slovenia).

Europe: European Company Law Experts respond to Commission's governance green paper

The response of the European Company Law Experts to the European Commission consultation on the EU corporate governance framework was published on SSRN several days ago: see here. The Experts state, amongst other things, that the Commission should not seek to develop a European corporate governance code but should instead focus on co-ordinating the activities of Member States through through, for example, Commission Recommendations.

Thursday, 25 August 2011

UK: simpler reporting for the smallest businesses - BIS/FRC consultation begins

The Department for Business, Innovation and Skills and Financial Reporting Council have today published a joint consultation paper titled Simpler Reporting for the Smallest Businesses: see here (pdf). The paper has been published to stimulate debate and gather evidence and will help the Government decide, in conjunction with the Office of Tax Simplification, whether to take further action. It sets out some interesting proposals, including requiring certain small businesses to prepare a simplified Trading Statement (in place of the current Profit and Loss Account and prepared on a cash accounting basis), a Statement of Position (to include details of shareholders' funds, fixed assets, cash etc) and a simplified Annual Return.

UK: England and Wales: court stays disqualification order pending appeal and explains consequences of doing so

Judgment in Cathie v Secretary of State for Business, Innovation & Skills [2011] EWHC 2234 (Ch) was given in April this year but a copy of the decision has only recently been added to BAILII. This is an interesting decision in which the trial judge considered the consequences of staying a disqualification order pending an appeal.

The case concerned two directors against whom disqualification orders had been made by the District Judge in Manchester. Permission to appeal was subsequently granted and, before this hearing took place, one of the directors applied to stay his disqualification order. He did so to protect his reputation on the basis that the order might turn out to be wrongly made and argued that business connections might be lost as a result of the publicity that would follow the registration of the disqualification order. He did not, however, wish the order to be stayed so that he could act as a director because he proposed offering his services individually and not through a company.

The trial judge granted the director's application and the order was stayed. The consequences of doing so were explained by the trial judge as follows (at para. [13]):

... although certain submissions were addressed to me on the footing that a stayed order remains in force and time runs during the period of stay for the purpose of calculating the period of disqualification, I was not referred to any authority (rather than text-book commentary) which established that that was so. In my judgment, a stayed disqualification order ceases to have effect for the purpose of the [Company Directors Disqualification Act (1986)], and section 18 in particular. The fact that the stay may only be temporary is irrelevant. The order ceases to have effect for so long as the stay is in force, and the director cannot, when the stay is removed (if that eventually happens) claim the benefit of the period of the stay as counting towards the period of disqualification. If the stay is granted before the disqualification period commences, then the order does not come into effect until the stay is lifted or expires. Either way, an order which is stayed has no force and should not be on the register. As the stay order that I am now making will, it seems likely, be made before any entry on the register has got there, it seems to me that I clearly have power to give effect to the stay by directing the Registrar not to enter the disqualification order on the register because the result of the stay is that the order does not have effect pending appeal. Insofar as it may already have had effect, it ceases to have effect during the period of the stay, and should be removed on that ground".

Wednesday, 24 August 2011

UK: England and Wales: unfair prejudice, the reasonable offer and equal shareholders

In O'Neill v Phillips [1999] 1 WLR 1092, Lord Hoffmann set out, in obiter dicta, the effect of a reasonable offer for the petitioner's shares in the context of petitions under what is now Section 994 of the Companies Act (2006). His Lordship observed that where a petitioning shareholder had been excluded, such exclusion would not be unfairly prejudicial where a reasonable offer had been made for his shares. In such a case, the respondent would be entitled to have the petition struck out. Lord Hoffmann also explained what would constitute a reasonable offer.

A useful reminder about the status of Lord Hoffmann's dicta has recently been provided by the High Court in Harborne Road Nominees Ltd. v Karvaski [2011] EWHC 2214 (Ch). In the view of the trial judge, HHJ David Cooke, Lord Hoffmann's guidance "does not have the status of legislation ... The question for the court is always whether in all the circumstances of the case the applicant has satisfied the conditions required to have the petition struck out, or summary judgment in his favour given on it ... The issue is highly sensitive to the facts and circumstances of each case, and consideration of the nature and terms of any offer made can only ever be an intermediate step in the process" (para. [26]).

HHJ Cooke proceeded to state that Lord Hoffmann's remarks were not intended, in the context of a dispute between equal shareholders, to establish a mechanism for seizure and exclusion by one of those shareholders. Indeed, he stated that there would be the clear potential for injustice if an equal shareholder was able to seize de facto control and effectively force the other shareholder to accept his offer or be forever excluded from participating in the affairs of the company. He further considered the significance of alleged breaches of directors' duties for deciding whether a petition should be struck out where an offer had been made.

Denmark: revised corporate governance recommendations published

Denmark's Committee on Corporate Governance has published a revised edition, dated August 2011, of its corporate governance recommendations: see here (pdf). The revised edition contains new recommendations regarding board diversity, including the desirability of setting objectives for the increased representation of women.

Tuesday, 23 August 2011

Australia: what is a preference share?

The New South Wales Court of Appeal gave judgment last week in Weinstock v Beck [2011] NSWCA 228. The case concerned the validity of the purported issue of redeemable preference shares at a time when the company had only issued preference shares. At first instance - see [2010] NSWSC 1068 - the trial judge held the shares were not preference shares and could not be regarded as such unless at the time of their issue there were other shares that had been issued over which they had a preference.

Opinion in the Court of Appeal was divided. Young JA, in the minority, supported the position taken by the trial judge and, in his judgment, considered various definitions of preference share, referring to authorities from Delaware, England, Canada and Singapore. Young JA took the view that preference shares were those that had rights over and above other shares in the company which actually existed. The majority disagreed. Handley AJA (with whom Giles JA agreed) held that the directors' power to issue new shares, as contained in the articles of association, was exercisable at all times and was not affected by the state of the company's share register. As such, the preference shares in question were validly issued and conferred the preferential rights defined in the articles. These rights were, Handley AJA noted, potential only and would lack effective content until ordinary shares were issued. This did not, however, mean that preference shares could not be issued.

Monday, 22 August 2011

UK: Scotland: Law Commission consults on consolidation of bankruptcy legislation

The Scottish Law Commission has published a consultation paper setting out proposals to consolidate the bankruptcy legislation in Scotland: see here (pdf).

UK: new FTSE100 board appointments - 31% women

Yesterday's Observer newspaper reported - see here - that since 24 February this year, eighteen women have been appointed to the boards of FTSE100 companies, representing 31% of total appointments and a dramatic increase in the proportion appointed compared to earlier years.

Friday, 19 August 2011

Australia: section 1324 of the Corporations Act (2001)

Earlier this year the operation of Section 1324 of the Corporations Act (2001) was considered in the Queensland Supreme Court (Trial Division) by Justice Keiran Cullinane AM: see Phoenix Constructions Queensland Pty Ltd v Coastline Constructions Pty Ltd and McCracken [2011] QSC 167Section 1324 provides, in summary, the court with the power to grant an injunction where a person (including a director) has engaged, is engaging, or is proposing to engage, in conduct that would constitute a contravention of the 2001 Act. An application for an injunction can be made by ASIC or the person (including creditors) whose interests have been or would be affected by the conduct. The court has the power to order that damages are paid instead of, or in addition to, the grant of the injunction.

What makes the Phoenix case noteworthy is that the trial judge ordered that a company director should pay damages to one of the company's creditors under Section 1324 of the Corporations Act 2001 in respect of a breach of one of the statutory duties owed by the director not to the creditor but to the company: Section 182 of the 2001 Act, titled 'Use of position - civil obligations', which provides that a company director must not improperly use his position to (a) gain an advantage for himself or someone else; or (b) cause detriment to the company. The trial judge held that the director had breached Section 182 when he deprived the company of certain property under a joint venture agreement and benefited his wife.

An appeal will be heard later this year, in which one of the arguments will be that the trial judge was wrong to find that Section 1324 conferred upon the creditor a cause of action in respect of a breach of duty owed by the director to the company. The date of the appeal hearing will be published here.

Thursday, 18 August 2011

USA: enhancing auditor independence, objectivity and professional scepticism - PCAOB concept release published

The Public Company Accounting Oversight Board published a concept release earlier this week seeking views on how to enhance auditor independence, objectivity and professional scepticism: see here (pdf). The concept release returns to a question that has been asked before in the USA and in other jurisdictions: should there be mandatory audit firm rotation? Indeed, this is the principal focus of the concept release and of the interesting comments made by the PCAOB members in their statements published alongside the concept release and available here.

Wednesday, 17 August 2011

UK: Scotland: corporation tax - options for reform discussion paper published

The Scottish Government today published a discussion paper titled Corporation tax - options for reform: see here (pdf). The Scottish Government believes that it should have responsibility for corporation tax and the paper sets out, amongst other things, examples of possible options for reform.

Ireland: Code for Captive Insurance and Reinsurance published by Central Bank

Yesterday the Central Bank published its Corporate Governance Code for Captive Insurance and Captive Reinsurance Undertakings: see here (pdf). The Code sets out minimum standards with regard to the governance of captives, including the composition of the board and the experience and qualifications of the chairman and chief executive. Non compliance with the Code is subject to the sanctions at the disposal of the Central Bank. So-called 'captives' include, for the purposes of the Code, those falling within the definition provided by Article 13(2) of the Solvency II Directive (2009/138/EC).

Tuesday, 16 August 2011

IFRS disclosure requirements - working group publishes recommendations

Last year the International Accounting Standards Board asked the Institute of Chartered Accountants of Scotland and the New Zealand Institute of Chartered Accountants to review the level of disclosure requirements in International Financial Reporting Standards. The working group formed for this purpose has recently published its report, titled Losing the excess baggage - reducing disclosures in financial statements to what’s important, which is available here (pdf).

USA: SEC's new whistleblower scheme comes into effect

The SEC's new whistleblower scheme, introduced in consequence of the Dodd-Frank Wall Street Reform and Consumer Protection Act, came into force last week. Further information about the scheme is available here.

Monday, 15 August 2011

New Zealand: securities law reform - draft of the Financial Markets Conduct Bill published

An exposure draft of the Financial Markets Conduct Bill has been published for consultation by the Ministry of Economic Development (MED): see here (pdf). Explanatory notes are available here (pdf). Background information is available here.

There is much in the draft Bill including some proposed amendments to the Companies Act (1993). Whether these amendments make it into the final Bill remains to be seen because MED has stated that they may be introduced in a separate Bill amending the 1993 Act. The first of these, in clauses 550 to 551, will increase the maximum period for which a person may be prohibited by the Financial Markets Authority or Registrar of Companies from managing a company from five to ten years; the court is to be given the power to disqualify directors for an indefinite period.

The draft Bill also makes provision, in clause 548, for the introduction of a new criminal offence in respect of the acts or omissions of directors which breach Section 131 (the duty to act in good faith and in best interests of company) of the Companies Act (1993) in circumstances where the director knew that the act or omission was seriously detrimental to the interests of the company. The penalties on conviction are those set out in Section 373(4) of the 1993 Act, which will be amended to include a reference to this new offence.

Friday, 12 August 2011

Europe: regulatory action on short selling - statement from the ESMA

The European Securities and Markets Authority has published a statement with regard to recent discussions between Member State authorities concerning the short-selling of shares in credit institutions: see here (pdf). The statement notes that authorities in Belgium, France, Italy and Spain have imposed or extended existing short-selling bans (a ban was introduced in Greece earlier this month) and that these measures have been aligned in the absence of a common EU legal framework governing short-selling. In the UK, it has been reported that the Financial Services Authority has said that it has no plans to introduce a ban: see here.

China: CBRC consults on updated governance guidelines for commercial banks

The China Banking Regulatory Commission has published for consultation Guidelines on Corporate Governance of Commercial Banks: see here. These will replace existing guidelines concerning commercial banks including the Corporate Governance of State-owned Commercial Banks and Relevant Supervisory Guidelines and the Guidelines on Corporate Governance of Joint Stock Commercial Banks.

UK: Radio 4 'In Business' explores corporate governance

The Radio 4 programme In Business, broadcast last night, was on the subject of corporate governance. Listen again here. Contributors to the programme included the chairman of the Financial Reporting Council, Baroness Hogg, and Anne Simpson, the Senior Portfolio Manager for Corporate Governance at CalPERS.

Thursday, 11 August 2011

UK: reforming the scheme for the registration of charges created by companies and limited liability partnerships

The Department for Business, Innovation and Skills has published for consultation further details of the revised scheme for the registration of charges created by companies and limited liability partnerships: see here (pdf). Responses are sought by 30 September 2011. The Government's intention is to publish draft Regulations in early 2012 with the amendments to Part 25 (Company Charges) of the Companies Act (2006) coming into force on 1 October 2012.

Ireland: Central Bank consults on Auditor Protocol

The Central Bank of Ireland has published an consultation paper regarding its proposed 'Auditor Protocol': see here (pdf). The purpose of the Protocol is to provide a framework for the exchange of information between the Central Bank and the auditing profession in order to enhance the regulatory and statutory auditing processes.

Wednesday, 10 August 2011

Europe: the Market Abuse Directive - transactions and orders giving misleading signals

The Court of Justice of the European Union gave its opinion last month in IMC Securities BV v Stichting Autoriteit Financiƫle Markten (Case C-445/09). The case concerned a reference for a preliminary ruling from the College van Beroep voor het bedrijfsleven (Netherlands) with regard to interpretation of Article 1(2)(a), second indent, of the Market Abuse Directive (2003/6/EC).

Article 1(2) provides definitions of market manipulation, including, in subsection (a), transactions or orders to trade which - to quote directly from the Directive - "give, or are likely to give, false or misleading signals as to the supply of, demand for or price of financial instruments [the first indent], or which secure, by a person, or persons acting in collaboration, the price of one or several financial instruments at an abnormal or artificial level [the second indent], unless the person who entered into the transactions or issued the orders to trade establishes that his reasons for so doing are legitimate and that these transactions or orders to trade conform to accepted market practices on the regulated market concerned".

In answer to the referred question, the Court of Justice stated that the second indent must be interpreted as not requiring, in order for the price of one or more financial instruments to be considered to have been fixed at an abnormal or artificial level, that that price must maintain an abnormal or artificial level for more than a certain duration.

Tuesday, 9 August 2011

Europe: GC100 response to Commission's corporate governance green paper

The Association of General Counsel and Company Secretaries of the FTSE 100 (the GC100) has published its reponse to the European Commission's green paper on the European corporate governance framework: see here (Word).  The GC100 endorses the UK's 'comply or explain' approach and notes, amongst other things, that the questions in the Commission's green paper do not sufficiently address the role of the chairman.

Monday, 8 August 2011

UK: monitoring the implementation of the FSA Remuneration Code

A revised edition of the Remuneration Code published by the Financial Services Authority came into force on 1 January 2011. The FSA has recently published for consultation proposed 'Dear CEO' letters which explain its plans for monitoring implementation of the Code in the next remuneration round: see here.

Friday, 5 August 2011

UK: England and Wales: party autonomy and the company's separate legal personality

Last week the Court of Appeal gave judgment in MacDonald v Costello [2011] EWCA Civ 930. A summary of this interesting decision has been provided by the ICLR: see here. The litigation arose in respect of a company, Oakwood Residential Ltd., formed by Mr and Mrs Costello, its only shareholders and directors. The Costellos obtained bank finance to build some houses. For tax reasons, these funds were routed through Oakwood and Oakwood entered into a contract with some builders. The builders were aware of the reasons for the arrangements being structured this way. A dispute arose between the parties regarding the quality of the building work and invoices went unpaid by Oakwood.

In the County Court the Recorder held that the Costellos were jointly and severally liable with Oakwood for an amount just short of £90,000, on the basis of their unjust enrichment and, in effect, permitting the builders to claim directly against the shareholders of the company with which they had contracted. This order was overturned by a unanimous Court of Appeal (Pill, Patten and Etherton LJJ). Patten LJ delivered the only reasoned opinion and observed (see paras. [21] and [23]):

The parties arranged the transaction as one in which legally enforceable promises were made only between Oakwood and the respondents [i.e, builders], even though the benefit of the contract was to be conferred on Mr and Mrs Costello. The obligation to pay for the respondents' services, and so the risk of non-payment, was contractually confined to Oakwood. If a claim was permitted directly against Mr and Mrs Costello, it would shatter that contractual containment. It would also alter the usual consequences of Oakwood's insolvency, which was one of the risks assumed by the respondents in contracting with Oakwood, since a direct claim against Mr and Mrs Costello would improve the respondents' position over Oakwood's other unsecured creditors.

I am clear ... that the unjust enrichment claim against Mr and Mrs Costello must fail because it would undermine the contractual arrangements between the parties, that is to say the contract between the respondents and Oakwood and the absence of any contract between the respondents and Mr and Mrs Costello. The general rule should be to uphold contractual arrangements by which parties have defined and allocated and, to that extent, restricted their mutual obligations, and, in so doing, have similarly allocated and circumscribed the consequences of non-performance. That general rule reflects a sound legal policy, which acknowledges the parties' autonomy to configure the legal relations between them and provides certainty, and so limits disputes and litigation."

Thursday, 4 August 2011

UK: England and Wales: section 38 of the Partnership Act 1890

Section 38 of the Partnership Act (1890) provides that after a partnership's dissolution, the authority of each partner to bind firm continues so far as is necessary to wind up the partnership's affairs and to complete transactions begun but unfinished at the date of the dissolution. Earlier this week, in Boghani v Nathoo [2011] EWHC 2101 (Ch), the High Court set out various propositions concerning the operation and effect of Section 38 (at para. [37]):
  • The obligations of partners to third parties continue notwithstanding the dissolution of the partnership.
  • In England, if not in Scotland, the satisfaction of those obligations by performance, release or novation or the payment of damages will not usually involve reliance on the terms of s.38.
  • S.38 does not entitle the surviving partners to engage in new bargains or contracts so as to bind a deceased or former partner.
  • Even in relation to transactions, not being new bargains or contracts, begun but unfinished at the time of dissolution s.38 applies only if and to the extent that the completion of such transactions is necessary to wind up the affairs of the partnership.
  • S.38, if applicable, confers a power; it does not impose any additional duty.

Isle of Man: the duties and responsibilities of directors

The Financial Supervision Commission has updated its guidance on the responsibilities and duties of directors under the laws of the Isle of Man: see here (pdf). Elsewhere it has been reported that a review of company legislation is being undertaken by the Treasury with the support of the Department of Economic Development: see here.

Wednesday, 3 August 2011

UK: IMF publishes UK Financial System Stability Assessment

The International Monetary Fund published its assessment of the stability of the UK's financial system earlier this week: see here (pdf). The IMF's report recommends, amongst other things, that the oversight of investment banking activities needs to be improved in the new regulatory structure.

India: Guidelines on the Social, Environmental and Economic Responsibilities of Business

The Ministry of Corporate Affairs has published an updated edition of its Voluntary Guidelines on Corporate Social Responsibility (2009), now titled the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business: see here (pdf). The Guidelines contain nine principles with supporting 'core elements'. For example, principle one provides that "Businesses should conduct and govern themselves with Ethics, Transparency and Accountability", and its first core element explains that "Businesses should develop governance structures, procedures and practices that ensure ethical conduct at all levels; and promote the adoption of this principle across its value chain".

Tuesday, 2 August 2011

UK: women on FTSE350 boards

The Home Secretary, the Rt. Hon. Theresa May MP, and the Business Secretary, the Rt. Hon. Vince Cable MP, have written a joint letter to FTSE350 companies setting out the case for increasing the proportion of women on boards to at least 25% by 2015: see here.

Isle of Man: FSC consults on changes to financial services legislation

The Financial Supervision Commission is seeking views on proposed changes to financial services legislation: see here.

Monday, 1 August 2011

UK: corporate manslaughter - custody and detention

The Corporate Manslaughter and Corporate Homicide Act 2007 (Commencement No. 3) Order 2011 was made on July 25: see here or here (pdf). On the same day The Corporate Manslaughter and Corporate Homicide Act 2007 (Amendment) Order 2011 was made: see here or here (pdf). An explanatory memorandum relating to both Orders is available here (pdf).

The purpose of the first Order is to bring into force, on September 1, section 2(1)(d) of the Corporate Manslaughter and Corporate Homicide Act (2007), which contains the duty of care that certain organisations owe to persons who are held in detention or custody. The second Order amends section 2(2) of the 2007 Act to include two categories of persons not covered by the Act: persons detained in service custody premises which are the responsibility of the Ministry of Defence and persons detained for customs purposes in custody areas of UK Border Agency offices.