Friday, 15 March 2019

UK: England and Wales: unfair prejudice, directors' duties and absence of a dividend policy

Judgment was given earlier this week in Routledge v Skerritt & Ors [2019] EWHC 573 (Ch). A first instance decision involving a petition for unfair prejudice, brought by a shareholder under Part 30 of the Companies Act 2006, would not - now at least - attract much attention. There have been many of them and the core principles are well settled, not least since O'Neill v Phillips [1999] 1 WLR 1092, which celebrates its twentieth anniversary later this year.

This particular judgment is, however, noteworthy for several reasons. Perhaps the most important of these is that it provides an example of directors found to have breached their duty to promote the success of the company under section 172 of the Companies Act 2006. Such cases do not abound. Specifically, the directors' failure to adopt a valid dividend policy was seen as a failure on their part to have regard to "the need to act fairly as between members of the company" as required under section 172(1)(f). A second reason is that the judgment provides an illustration of the consequences for shareholder rights - and how these are determined - where the board failed, as required, to adopt the dividend policy.

UK: the corporate criminal offences of the failure to prevent the facilitation of tax evasion - awareness and impact

HMRC has published research undertaken by Ipsos MORI regarding the new corporate criminal offences relating to the failure to prevent the facilitation of tax evasion (as found in Part 3 of the Criminal Finances Act 2017): see here (pdf).

Given that these offences were, according to the report, designed to "drive a cultural and behavioural shift among companies and partnerships to take an active and increased responsibility for preventing the facilitation of tax evasion" it seems disappointing that over two-thirds of those interviewed - 72% in fact - were unaware of the new offences. Only 12% of respondents - and there were 1,002 in the survey - were aware of the new offences and the implication of them for their business.

Note:

The Government has provided information and guidance about the offences here.

Thursday, 14 March 2019

UK: The Companies Act 2006 (Extension of Takeover Panel Provisions) (Isle of Man) Order 2019

The Companies Act 2006 (Extension of Takeover Panel Provisions) (Isle of Man) Order 2019 was made yesterday by Her Majesty in Council and comes into force on exit day: see here or here (pdf).

The Order is being made, the explanatory note accompanying it explains, in response to the UK's withdrawal from the EU and changes in responsibility for company registration on the Isle of Man. Article 2 of the Order extends Chapter 1 ("The Takeover Panel") of Part 28 ("Takeovers etc") of the Companies Act 2006 to the Isle of Man subject to the modification contained in the Schedule. Article 3 revokes the Companies Act 2006 (Extension of Takeover Panel Provisions) (Isle of Man) Order 2008 and the Companies Act 2006 (Extension of Takeover Panel Provisions) (Isle of Man) Order 2009.

Wednesday, 13 March 2019

UK: administrators must deduct income tax when paying rule 14.23(7) interest

The Supreme Court gave judgment today in Revenue and Customs v Joint Administrators of Lehman Brothers International (Europe) [2019] UKSC 12 (on appeal from [2017] EWCA Civ 2124): see here or here (pdf). A summary of the decision is available here (pdf).

The court unanimously held that interest payable under rule 14.23(7) of the Insolvency Rules 2016 was "yearly interest" under section 874 of the Income Tax Act 2007. As such, the administrators were required to deduct income tax before paying the interest to the creditors.

Tuesday, 12 March 2019

UK: replacing the FRC with the new Audit, Reporting and Governance Authority

The Government, through the Department for Business, Energy and Industrial Strategy, has published a consultation paper in respect of the recommendations made by the Kingman Review of the Financial Reporting Council: see here (pdf).

The Government has, amongst other things, accepted the Review's recommendation that the FRC should be replaced by a new regulator to be called the Audit, Reporting and Governance Authority. The new Authority's powers, purpose and objectives will be contained in legislation and complemented by a remit letter from the Government. Ahead of the new Authority's creation through legislation, the paper explains that the FRC has voluntarily agreed to become bound by a remit letter from the Government and that such a letter has been issued.

Whilst primary legislation will also be required in respect of the new Authority's board, the Government has decided to make some changes to the current board of the FRC, including the appointment of a new chair and deputy chair; those appointed will, in due course, hold these positions with the new Authority.

The Government also states that it will work with the FRC as part of the current consultation on updating the UK Stewardship Code to ensure that the revised Code addresses the concerns raised in the Kingman Review. According to the Government, the UK Stewardship Code must be "demonstrably improved".

Monday, 11 March 2019

UK: The Local Audit (England and Wales) (Amendment) (EU Exit) Regulations 2019

The Local Audit (England and Wales) (Amendment) (EU Exit) Regulations 2019 were made last week: see here or here (pdf). The Regulations come into force on exit day, subject to a couple of exceptions: regulation 2 and regulation 6(1)(a)(i)(bb) and (ii) come into force on 1st January 2021. The purpose of the Regulations is explained in the accompanying explanatory memorandum (here, pdf) as follows (paras. 2.4 and 2.5):

This instrument ensures that upon the UK’s exit from the EU, the local audit regime will align as necessary with the approach being taken for the statutory audit regime (as amended by the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019).

It will set out transitional arrangements enabling EEA auditors currently working in the local audit regime to apply to have their qualifications recognised in the UK until 1st January 2021 but will allow them to continue to practise in the UK until then, whilst ensuring that, longer term, they meet new UK requirements.  It also ensures that the future recognition of third country auditors wishing to work in the UK audit market is fair and equal".

Friday, 8 March 2019

UK: England and Wales: the avoidance of floating charges under section 245 of the Insolvency Act 1986

Judgment was given earlier today in Crumpler & Anor (Liquidators of Peak Hotels And Resorts Ltd) v Candey Ltd [2019] EWCA Civ 345, on appeal from [2017] EWHC 3388 (Ch). The case is an important one on the operation of section 245 ("Avoidance of certain floating charges") of the Insolvency Act 1986.

In broad outline, section 245 invalidates floating charges (but not the underlying debt) where created in a relevant period prior to the onset of insolvency; but the charge (or part thereof) remains valid in several circumstances, including (under section 245(2)(a)) in respect of "the value of so much of the consideration for the creation of the charge as consists of money paid, or goods or services supplied, to the company at the same time as, or after, the creation of the charge". The value of goods or services so supplied is fixed by section 245(6) as "the amount in money which at the time they were supplied could reasonably have been expected to be obtained for supplying the goods or services in the ordinary course of business and on the same terms (apart from the consideration) as those on which they were supplied to the company" (emphasis added).

In the case before the court, a fixed fee agreement was agreed whereby Candey would supply legal services to PHRL. Candey received a floating charge as security; the charge had been created at a time when PHRL was unable to pay its debts (within the meaning found in section 123 of the 1986 Act). PHRL later entered liquidation. Amongst the issues to arise was the extent of the floating charge's validity and how to value the services.

Lord Justice Henderson (with whom Underhill and Moylan LJJ agreed) held that for the purposes of section 245, the question was not what sum was contractually due between the parties but what was the value of the services actually supplied as calculated in accordance with section 245(6). This was, Hendersen LJ stated, "...the measure laid down by Parliament to ensure a fair balance between the interests of Candey as the holder of a floating charge, on the one hand, and the interests of the general body of unsecured creditors (including Candey, to the extent that the charge is invalid) on the other hand. It has nothing whatever to do with the commercial fairness, as between Candey and PHRL, of the contractual terms of the Fixed Fee Agreement" (para. 36).

This valuation process in section 245(6) required, Henderson LJ stated, the obligation to pay the fixed fee to be ignored because this was a term relating to "the consideration" (para. 38). Indeed, his Lordship added that "the whole concept of the provision of the services in return for a fixed fee has to be disregarded, because such a concept is incompatible with the exercise which section 245(6) requires to be performed ... the exercise required by section 245 ... is retrospective, and requires a valuation with the benefit of hindsight of the work which has actually been done. Only to that extent may Candey be regarded as a validly secured creditor" (para. 39).

UK: Treasury Committee report - economic crime, anti-money laundering supervision and sanctions

The Treasury Committee today published its report Economic Crime - Anti-money laundering supervision and sanctions implementations: see here or here (pdf). The accompanying press release is available here. The report's conclusions and recommendations can be read here. The Committee notes that the scale of economic crime is uncertain and that it is difficult to measure. It nevertheless recommends that the Government undertakes more analysis and research concerning the scale and size of economic crime and individual sectors' exposure to it.

There is much in the report, but what can be noted here is what is said about company formation and the weaknesses associated with current procedures at the companies registry, Companies House. To quote directly from the report (at para. 63):
The UK cannot extol the virtue of a public register of beneficial ownership and yet not carry out the necessary rigorous checks of the information on that register. The Government must urgently consider reform of Companies House to ensure it has the statutory duties and powers to ensure it plays no role in helping those undertaking economic crime, whether here or abroad. It is welcome that the Economic Secretary has noted that BEIS is considering reform in this area, but the Government should move quickly and now publish detail of this reform by summer 2019".

Thursday, 7 March 2019

UK: Takeover Panel response statements - asset valuations and the UK withdrawal from the EU

The Takeover Panel Code Committee yesterday published two response statements in respect of proposed changes to the City Code on Takeovers and Mergers that have been the subject of consultation.

The first, RS 2018/1: Asset Valuations (pdf), explains that the Committee had adopted its proposed amendments (pdf) but with certain modifications. These changes will come into force on 1 April and the Instrument making them is available here (pdf).

The second, RS 2018/2: The UK's withdrawal from the EU (pdf), explains that the Committee will adopt its proposed amendments (pdf) and will make an Instrument bringing them into effect when more is known about the date and manner in which the UK will leave the EU. The amendments will come into effect at 11pm on 29 March 2019 at the earliest - but only if the UK leaves the EU on this date without a withdrawal agreement including a transition period.

Note:
 
The Prime Minister stated last month that Parliament would vote on the withdrawal agreement by March 12.

Wednesday, 6 March 2019

Belgium: a new Companies and Associations Code

A new companies code was approved at the end of February and will bring about dramatic changes, including (in due course) the abolition of some of the current corporate forms. A copy of the new Code, in Dutch and French, is available here (pdf).

Tuesday, 5 March 2019

UK: FRC position paper for the revision of Auditing and Ethical Standards

The Financial Reporting Council has today published a position paper explaining its proposed timetable for the revision of its Auditing and Ethical Standards: see here (pdf). This follows a consultation that concluded last month (about which see here, pdf).

The FRC states that a public consultation on the revised text of the standards will start in July 2019, in order that the revised standards can apply to financial periods beginning on or after 15 December 2019. The FRC also explains how it will address some of the issues raised by the Kingman Review and the on-going Competition and Markets Authority review of the UK statutory audit market.

The position paper also explains the implications for certain independence requirements in the current standards should the UK leave the European Union without a withdrawal agreement or transition period (see further the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2018). These implications are also covered in the letters the FRC has sent to Heads of Audit and CEOs: see, respectively, here (pdf) and here (pdf).

BCBS to publish high-level supervisory expectations concerning crypto-assets

The Basel Committee on Banking Supervision met at the end of February. A summary of what was discussed and agreed is available here. The Committee announced that it would publish, this month, high-level supervisory expectations relating to crypto-assets.

Monday, 4 March 2019

UK: FRC consults on revised going concern standard for auditors

The Financial Reporting Council has published for consultation proposed revisions to its current standard on going concern (ISA UK 570, pdf). A copy of the revised standard is available here (pdf) and the accompanying exposure draft is available here (pdf).

The FRC states, in its press release, that its proposals will "... increase the work required of auditors when assessing whether an entity is a going concern. The consultation ... follows concerns about the quality and rigour of audit and well-publicised corporate failures where the auditor’s report failed to highlight concerns about the prospects of entities which collapsed shortly after as well as findings recent FRC Enforcement cases.  In proposing these revisions, requirements on UK auditors will be significantly stronger than those required by international standards".

Friday, 1 March 2019

South Africa: the draft Conduct of Financial Institutions Bill

The National Treasury is seeking views on the draft Conduct of Financial Institutions Bill, following the introduction, less than a year ago, of two regulators - the Prudential Authority and the Financial Sector Conduct Authority - as part of the new twin peaks regulatory framework.

A copy of the draft Bill is available here (pdf). Chapter 3 of the Bill is titled "Culture and Governance" and this sets out the principles that financial institutions should follow, as well as requiring the adoption of a governance policy to ensure adherence to these principles. Published alongside the Bill are a policy paper and impact assessment: see, respectively, here (pdf) and here (pdf). An overview of the Bill, together with further information on how to submit a consultation response ahead of the 1 April deadline, is available here (pdf).

EU: EBA publishes revised guidelines on outsourcing arrangements

The European Banking Authority has published revised guidelines on outsourcing arrangements, which have a heavy focus on governance: see here (pdf). The guidelines enter into force on 30 September 2019 and operate alongside the EBA's guidelines on internal governance.

UK: The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019

The Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 were made yesterday and come into force on exit day: see here or here (pdf). The accompanying explanatory memorandum - available here (pdf) - explains the purpose of the Regulations as follows (paras. 2.1 to 2.3):
...to address deficiencies in retained EU law in relation to the prudential regulation of the insurance sector arising from the withdrawal of the United Kingdom (UK) from the European Union (EU), ensuring the legislation continues to operate effectively once the UK leaves the EU.

The Solvency II Directive (Directive 2009/138/EC) and Delegated Regulation EU No. 2015/35 implemented a harmonised prudential framework for insurance and reinsurance firms in the EU. It is designed to provide a high level of protection for policy holders by requiring firms to provide a market-consistent valuation of their assets and liabilities, understand the risks they are exposed to, and to hold capital that is sufficient to absorb shocks. Solvency II was transposed into UK law by the Solvency II Regulations 2015 (No. 575) and through the Prudential Regulation Authority (PRA) Rulebook.

Current UK Solvency II legislation is drafted on the basis that the UK is a member of the EU, and treats countries in the EEA differently to other third countries. Once the UK has left the EU, this will no longer be appropriate. To ensure that Solvency II regulation continues to operate effectively once the UK is outside of the EU, certain deficiency fixes to the legislation are necessary". 

Thursday, 28 February 2019

UK: FCA and PRA guidance and near-final rules for no-deal Brexit

The Financial Conduct Authority and Prudential Regulation Authority have today published guidance and near-final rules that will apply should the UK leave the EU without an implementation period (as agreed within the Withdrawal Agreement) on exit day: see, respectively, here and here.

UK: The Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019

The Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 were made today (February 28): see here or here (pdf). They come into force tomorrow (February 29) and are accompanied by an explanatory memorandum and impact assessment: see, respectively, here (pdf) and here (pdf).

The explanatory memorandum explains (at para. 2.1) the purpose of the Regulations as follows:
This instrument will address deficiencies in retained EU law in relation to:
  • The European Economic Area’s (EEA) ‘financial services passport’ – which allows firms in EEA states to offer services in any other EEA state on the basis of their home state authorisation.
  • Non-UK central counterparties (CCPs) and trade repositories (TRs) that provide certain services in the UK under the European Market Infrastructure Regulation (EMIR).

Without this instrument, where these firms do not enter the UK’s temporary regimes they may not be able to meet existing contractual obligations or provide services. This could be detrimental to UK-based customers and could lead to disruption of services".

New Zealand: reckless trading and some governance lessons

The High Court gave judgment earlier this week in Mainzeal Property and Construction Limited (in liquidation) v Yan [2019] NZHC 255: see here or here (pdf). A summary is available here (pdf).

The principal claim before court, brought by a company's liquidator, was that the company's former directors had breached section 135 of the Companies Act 1993. Section 135 provides that a company director must not "(a) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or (b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors". The company in question was a wholly-owned subsidiary within a larger corporate group.

The directors - including a former prime minister of New Zealand, Dame Jenny Shipley - were held to have breached section 135, the trial judge (the Hon Justice Cooke) finding that the following three factors were relevant (and all necessary) for this finding: (a) the company had traded while balance sheet insolvent because of the unrecoverable nature of intercompany debt; (b) the absence of group support on which the directors could rely; (c) the company's generally poor trading performance.  Thus, the judge noted, trading while insolvent would not have been fatal if the trading position had been strong or there had been reliable group support. The directors had taken risks that the judge held could not be regarded as "normal business risk taking" and they had allowed the company to continue trading in "highly unorthodox circumstances" (para. [284]).

The decision contains important governance lessons, particularly with regard to the way in which the company's board operated and risk was managed (against the background of the wider group operations). This makes it of interest beyond New Zealand. The court received evidence on "good corporate governance standards" in order to assist it in assessing the questions arising under section 135. In this regard, the judge accepted evidence that the directors had failed to address risk appropriately; there was no risk register and the board was too small to have committees with audit or risk responsibilities (para. [271]). The judge also accepted the evidence that the board was "too operationally focused ... [it] operated more as a management committee, and failed to properly address the governance issues and the systemic risks to the overall operation" (para. [272]).

The trial judge also rejected the argument - in what he regarded as the exceptional circumstances of the case (para. [285]) - that to hold the directors liable under section 135 would discourage individuals from becoming directors of major companies (para. [285]). To find that the directors had not breached section 135, he stated, would "undermine the purposes of s 135 ... [and] would also suggest that directors of companies within corporate groups do not need to consider the types of risks that would normally be very serious for a stand-alone company. That is simply not the case." (para. [286]).

Wednesday, 27 February 2019

Australia: New edition of the ASX Corporate Governance Principles and Recommendations

The Corporate Governance Council of the Australian Securities Exchange has today published the fourth edition of its Corporate Governance Principles and Recommendations: see here (pdf). Also published by the Council are the following: communique (pdf) | consultation response (pdf) | a marked-up copy of the fourth edition compared with the consultation version (pdf) | a marked-up copy of the fourth edition compared with the third edition (pdf).

The Principles and Recommendations will operate on the basis of "if not, why not" - "comply or explain" in other words. In its consultation response, the Council notes that the most polarising issue (its words, not mine) was the proposed introduction of the term "social licence to operate". This term was used, the Council states, "as shorthand to convey the notion that a listed entity’s long term sustainable success is dependent on maintaining the trust and goodwill of the various social groups with which it interacts" (p. 4). This term does not appear in the fourth edition but has been replaced with references to terms the Council regards as synonymous - "reputation" and "standing in the community" - which it is believed are more likely to be better understood and more consistently applied.

Tuesday, 26 February 2019

UK: England and Wales: varying the terms of a partnership through a course of dealing

Section 19 of the Partnership Act 1890 provides that "The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing". Its operation has recently been considered by Deputy Judge Philip Marshall QC in Patel v Patel [2019] EWHC 298 (Ch), a summary of which has been published by the ICLR: see here. To quote directly from the summary:

"For a course of conduct to result in an agreed variation under section 19 of the 1890 Act, it needed objectively to be capable of clear and unambiguous interpretation as evincing an intention to vary the existing contractual terms which was then acceded to. Where only one or a small number of actions were involved it was more difficult objectively to interpret them as indicating an unambiguous intention".

UK: The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019

The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019 were made on February 19 (and published today on the UK legislation website): see here or here (pdf). Regulation 2 provides that the Regulations come into force on exit day but it is important to note the transitional provisions contained in schedule 4. The explanatory memorandum accompanying the Regulations is available here (pdf) and explains their purpose as follows (paras. 2.1 and 2.2):
This instrument is being made in order to address deficiencies in retained EU law in relation to the Companies Act 2006 and supporting secondary legislation that arise from the withdrawal of the United Kingdom from the European Union (this instrument does not directly address deficiencies in the area of accounting and audit which are being amended in separate instruments).  ..... It will ensure that the UK’s company law framework will be able to function effectively, providing clarity and a smooth transition for business on and after exit day."

Monday, 25 February 2019

UK: Brexit - BEIS/FRC 'no deal' letters for auditors and accountants

The Department for Business, Energy and Industrial Strategy and Financial Reporting Council have published advice letters for auditors and accountants explaining the regulatory consequences of the UK's department from the European Union without a withdrawal agreement: see, respectively, here (pdf) and here (pdf). Brief information has also been published regarding the way in which International Accounting Standards will be endorsed within the UK following the UK's exit from the UK: see here.

UK: What is the principal role of the board?

An answer can be found, alongside further reflections on governance including the role of non-executive directors, in a speech delivered by Martin Taylor (an external member of the Financial Policy Committee) earlier this month: see here (pdf). Here is an extract:
At the heart of the private sector board is a contradiction which amounts to a glaring structural weakness.  The directors are supposed both to contribute to the formation of the company’s strategy and to judge those who execute it. As a result, their relation to executive management is at once collaborative and adversarial.  Most of what goes wrong on boards arises from a failure to balance these opposing requirements – often an understandable failure, since they do not sit easily side by side.  Boards have the power of appointing and removing the business leadership, a power which they seem to exercise very frequently, as if afraid it might be taken from them, rather as ramblers zealously hack their way through brambles to preserve Rights of Way.  My own view formed over many decades is that the corporate board should principally play a defensive role; it exists above all to prevent catastrophic outcomes. Good governance, and there is plenty of it, passes largely unnoticed, while a board in the wake of a company failure looks like a collection of idiots. In the financial sector, with which the FPC is principally concerned, it is inescapably clear that most boards in the early part of this century did an absolutely shocking job".

Friday, 22 February 2019

UK: The Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019

The Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019 were made yesterday (the 21st): see here or here (pdf). They are accompanied by an explanatory memorandum and impact assessment: see, respectively, here (pdf) and here (pdf). A short explanatory note is available here. Regulation 1 and those within Part 4 ("Temporary designation regime") came into force today; the remaining Regulations come into force on exit day. The explanatory memorandum states (paras. 2.6 and 2.7):
To ensure the legal framework for settlement finality protections continues to operate effectively after the UK withdraws from the EU, deficiencies in the existing legislation, including the scope of the legislation and references to EU bodies, need to be addressed. Currently, the UK automatically recognises SFD [Settlement Finality Directive (98/26/EC)] designations made by other EU Member States and extends UK SFR protections [see The Financial Markets and Insolvency (Settlement Finality) Regulations 1999] to central banks in these Member States. When the UK leaves the EU, it will no longer automatically recognise SFD designations made by other EU Member States of their domestic systems or extend UK SFR protection to EU central banks.

The instrument gives the Bank of England powers to designate systems not governed by UK law (‘non-UK systems’) under the [The Financial Markets and Insolvency (Settlement Finality) Regulations 1999] and to extend UK SFR protection to non-UK central banks. The instrument also introduces a temporary regime ... that will enable the current treatment of EU systems and central banks to be maintained, provided that the relevant conditions are met. It will also enable this protection to be extended to non-EEA countries".

Note - last month the Bank of England published an interim list of the operators of EEA systems indicating their intention to join the temporary designation regime: see here (pdf). At this time (and before the above Regulations became law), the Bank said that it would treat such indications as the required notification and confirmed that the EEA systems would enter the temporary designation regime on exit day if the UK left the EU with no implementation period.

Philippines: revised Corporation Code becomes law

A revised Corporation Code became law earlier this week on receiving the assent of the President. An overview of the new framework - achieved by making amendments to the existing Code (the Batas Pambansa Blg. 68) - has been published by the Securities and Exchange Commission: see here (pdf). Under the amended Code, it is now possible to form single member companies and companies will enjoy, unless the articles provide otherwise, perpetual existence (the old Code, in section 11, set a limit of 50 years). A copy of the revised Code is available here (pdf).

UK: The Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2019

The Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2019 were made on Wednesday (the 20th) and come into force on exit day: see here (pdf). At the time of making this post, the Regulations were only available in pdf and an explanatory memorandum had not been published; the accompanying impact assessment was, however, available: see here (pdf).

The purpose of the Regulations, to quote directly from the short explanatory note accompanying them, is "...to address failures of retained EU law to operate effectively and other deficiencies arising from the withdrawal of the United Kingdom from the European Union ... They amend Regulation (EU) No. 346/2013 of the European Parliament and of the Council on European social entrepreneurship funds".

Update (22 February 2019) - the explanatory memorandum has been published: see here (pdf).

UK: The Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019

The Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019 were made on Wednesday (the 20th): see here (pdf). Parts 1 and 2 are now in force (Part 2 amends the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018). Part 3 comes into force on exit day. The Regulations are accompanied by an explanatory memorandum - see here (pdf) - from which this description of their purpose is taken (paras. 2.1 and 2.2):
This instrument is being made in order to address the deficiencies in retained EU law in relation to European Long-term Investment Funds (ELTIFs), arising from the withdrawal of the United Kingdom (UK) from the European Union (EU), ensuring the legislation continues to operate effectively at the point at which the UK leaves the EU.

This instrument relates to the ELTIF Regulation (Regulation (EU) 2015/760), which covers a sub-category of Alternative Investment Funds (AIFs) that direct investment towards long term investments, such as small and medium sized businesses and the development and operation of infrastructure, public buildings, social infrastructure, transport, sustainable energy and communications".

UK: The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019

The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 were made on Wednesday (the 20th) and come into force on exit day: see here or here (pdf). The Regulations are accompanied by an explanatory memorandum (here, pdf) and a shorter explanatory note: see here. The purpose of the Regulations, to quote directly from the explanatory memorandum, is as follows (paras. 2.1 and 2.2):
This instrument is being made in order to address deficiencies in retained European Union (EU) legislation, in particular the European Market Infrastructure Regulation (“EMIR”) - Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, arising from the withdrawal of the United Kingdom (UK) from the EU, ensuring the legislation continues to operate effectively when the UK leaves the EU.
Other aspects of EMIR are being dealt with in separate instruments. Powers to make equivalence and recognition decisions that enable non-UK central counterparties (CCPs) to continue to provide services in the UK after EU exit are provided in the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184) (the “CCP Regulations”). The Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1318) transfers powers from the European Securities and Markets Authority (ESMA) to the Financial Conduct Authority (FCA) in relation to UK and non-UK trade repositories (TRs)."

Note - by chance I notice that an amendment to the Regulations is already planned: see regulation 21 in the draft Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019.

UK: The Venture Capital Funds (Amendment) (EU Exit) Regulations 2019

The Venture Capital Funds (Amendment) (EU Exit) Regulations 2019 were made on Wednesday (the 20th) and come into force on exit day: see here or here (pdf). They are accompanied by an explanatory memorandum and impact assessment: see, respectively, here (pdf) and here (pdf). A shorter explanatory note is available here. The purpose of the instrument is, to quote directly from the explanatory memorandum (paras. 2.2 and 2.3):
....to address the deficiencies in retained EU law in relation to European Venture Capital Funds (EuVECAs), arising from the withdrawal of the United Kingdom (UK) from the European Union (EU), ensuring the legislation continues to operate effectively at the point at which the UK leaves the EU.

This instrument relates to the EuVECA Regulation (Regulation (EU) No 345/2013 of the European Parliament and of the Council on European venture capital funds), which covers a sub-category of an Alternative Investment Fund (AIF) that focus on start-ups and early stage companies".

Thursday, 21 February 2019

UK: Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2019

The Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2019 were made earlier this week and, when in force, will make significant changes to the Alternative Investment Fund Managers Regulations 2013. A copy of the Regulations, as made, is available here or here (pdf).

In very general terms, and quoting from the explanatory memorandum, the Regulations are designed to "...address deficiencies in retained EU law in relation to alternative investment fund managers arising from the withdrawal of the United Kingdom (UK) from the European Union (EU), ensuring the legislation continues to operate effectively at the point at which the UK leaves the EU .... This instrument relates to the Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”), the regulatory framework in the EU for alternative investment funds managers...".

As made, the Regulations provide - in regulation 1(2) - that they come into force on exit day. However, regulation 1 has already been amended and is now in force. In amended form, regulation 1 now states that it and regulation 14 come into force on the day after the day on which the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 were made (they were made on February 19). It was regulation 58 of the latter Regulations that made this amendment to regulation 1. Regulation 14 of the AIFM (Amendment) (EU Exit) Regulations 2019 contains various transitional provisions, including temporary marketing permissions and associated powers for the Financial Conduct Authority.

For further information about the Regulations, see the accompanying explanatory memorandum (here, pdf) and impact assessment (here , pdf).

UK: The Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019

The Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 were made earlier this week: see here or here (pdf). Regulations 50(6), 58 and 61 to 71 are now in force; the remaining regulations come into force on exit day. The Regulations are accompanied by an explanatory memorandum and an impact assessment: see, respectively, here (pdf) and here (pdf). To quote directly from the explanatory memorandum (paras. 2.2 and 2.3):
A collective investment scheme is a fund that several people contribute to. It is managed by a fund manager who will invest the pooled money into one or more types of assets. This instrument will continue the standards as set out by the UCITS Directive (2009/65/EC) to maintain common standards for investor protection for UCITS. 

This instrument will also amend the commencement provisions in the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2019".

Note: the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2019 have not yet been made - as far as I can tell - but were published in draft form last year and approved last month: see here.

Update (21 February 2019) - shortly after adding the above note, the UK Legislation website was updated and now includes a copy of the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2019: see here. These Regulations were made on the same day as the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019.

Wednesday, 20 February 2019

Hong Kong: the new regulatory framework for auditors

The Financial Reporting Council (Amendment) Ordinance 2019 has been published in the Gazette: see here. The Ordinance contains the new framework for the regulation of auditors by the Financial Reporting Council. A short overview of the Ordinance has been published here and further, much more detailed, background information is available here.

Australia: Treasury publishes ICO issues paper

The Treasury has published an issues paper in which views are sought on initial coin offerings: see here (pdf). More specifically, views are sought on the following: the opportunities and risks posed by ICOs; the extent to which the regulatory framework is positioned to allow these opportunities to be taken while managing risks; and the actions that could be taken to permit Australia to exploit the new opportunities.

Tuesday, 19 February 2019

UK: The Market Abuse (Amendment) (EU Exit) Regulations 2019

The Market Abuse (Amendment) (EU Exit) Regulations 2019 were made yesterday (18 February): see here or here (pdf). Regulations 1, 2, 3 and 6 came into force today (19 February) and the remaining regulations come into force on exit day. The explanatory memorandum accompanying the Regulations is available here (pdf). The purpose of the instrument, to quote directly from the explanatory memorandum, is as follows (para. 2.1):
This instrument is being made in order to address deficiencies in retained EU law in relation to market abuse arising from the withdrawal of the United Kingdom (UK) from the European Union (EU). This instrument amends retained EU law relating to market abuse, including the EU Market Abuse Regulation No 596/2014 (MAR), the tertiary legislation made under MAR, and the UK legislation which complemented MAR, to ensure that the relevant legislation continues to operate effectively at the point at which the UK leaves the EU".

Note - the explanatory memorandum is incorrectly titled: it refers to the Regulations as "2018 No 310" instead of "2019 No 310".

Monday, 18 February 2019

UK: England and Wales: equitable considerations and the unfair prejudice remedy

Judgment was given last Friday in Waldron v Waldron [2019] EWHC 115 (Ch). Although first instance, the decision is an important one on the operation of the unfair prejudice remedy within Part 30 of the Companies Act 2006. The trial judge, HHJ Eyre QC, was required to consider the circumstances in which equitable considerations would make it unfair for those conducting the affairs of the company to rely on their strict legal rights. More specifically, was it necessary for all of the company's shareholders to be party to the relevant understandings in order for the equitable considerations to apply? No, answered HHJ Eyre QC, observing that "the presence of third-party rights is a potent factor in determining the existence of the equitable constraints on the majority rather than an absolute bar to such constraints" (para. [41]).

Friday, 15 February 2019

UK: England and Wales: "some elementary principles of corporate governance"

Judgment was given today in Stobart Group Ltd v Tinkler [2019] EWHC 258 (Comm): see here or here (pdf). The litigation concerned, to quote the trial judge, HHJ Russen QC, "some elementary principles of corporate governance" (para. [4]) in respect of a company incorporated in Guernsey and listed on the London Stock Exchange. The facts were many but included the removal from office of a director (Mr Tinkler) by the board of directors the day after his election to the board at the company's annual general meeting.

What makes the decision of particular note is the discussion of directors' duties in the context of board dissent, including what is expected of individual directors in light of the proper functioning of the board of directors. Guernsey company law applied but heavy reliance was placed on English authorities, it being recognised (with reference to Carlyle Capital Corporation Limited (In Liquidation) and others v Conway and others, Royal Court of Guernsey, 38/2017) that the duties owed by directors under Guernsey law were "fundamentally the same" as those under the English common law before the introduction of the UK's Companies Act 2006.

Amongst other findings, it was held that a director, Mr Tinkler, had breached his fiduciary duties under Guernsey law where he held private discussions with shareholders in which he criticised the board's management and advocated for the removal of a fellow director. The trial judge found ample evidence for Mr Tinkler's "briefing against the board" (para. [735]). These findings were reached by the judge following earlier analysis of the law in which the "collegial function" of the board was stressed (para. [388]) and where it was stated that the director's duty to exercise independent judgment "is one that operates upon each director in the context of him operating as a member of the board of directors ... [it] exists in order to support the board's management of the company's business in an efficient and competent manner." (paras. [413] and [414], emphasis in the original).
  

UK: Brydon Review - terms of reference published

The terms of reference for Sir Donald Brydon's review of the quality and effectiveness of the UK audit market were published yesterday: see here (pdf). The review is wide ranging and will include the needs and expectations of stakeholders, the scope of the audit and assurance. Perhaps surprisingly for a review described as being independent, the terms of reference note that one of the accountancy professional bodies - the ICAEW - has agreed to provide £500,000 towards the cost of the review. It is, however, stressed that all of the organisations supporting the review have recognised the unconditional nature of their contributions.

Sir Donald recently gave evidence before the Parliamentary future of audit inquiry. A transcript of his evidence is available here. All of the evidence - whether oral or written - received by this inquiry can be found here.

UK: The Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019

The Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019 were made yesterday (February 14): see here or here (pdf). The Regulations come into force on exit day (see reg. 1). They are accompanied by an explanatory memorandum and an impact assessment: see, respectively, here (pdf) and here (pdf). To quote directly from the explanatory memorandum:
2.2 The EU Financial Conglomerates Directive (FICOD – No. 2002/87/EC) was originally adopted in 2002 and subsequently amended in 2011. It was developed to address the lack of specific prudential treatment for financial conglomerates – groups with activities in more than one of the insurance, banking, or investment services sectors. The directive therefore contributes to greater financial stability and consumer protection.

2.3 FICOD applies specifically to a group with at least one entity in the insurance sector, and at least one entity in the banking or investment services sector. One of these entities, according to the EU definition, must be located in the European Economic Area (EEA), while the other(s) may be located anywhere in the world (including the EEA). 

2.4 FICOD sets out specific requirements on solvency to prevent the same capital being used more than once as a buffer against risk in different entities in the same conglomerate. It also sets out requirements related to conglomerates’ management, risk management, and requirements for information sharing with relevant regulators. 

2.5 The UK subsequently implemented FICOD through the Financial Conglomerates and Other Financial Groups Regulations 2004 (FICOR - 2004 No. 1862). This instrument therefore identifies and amends deficiencies in the EU text to ensure that FICOR will remain operative in a UK-only context post-exit".

Thursday, 14 February 2019

UK: The Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019

The Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019 were made yesterday (February 13): see here or here (pdf). Part 1 ("General Provision") and Part 8 ("Transitional Provisions") of the Regulations come into force today (February 14) and Parts 2 to 7, 9 and 10 come into force on exit day (see reg 1(2) and (3). The Regulations are accompanied by an explanatory memorandum and an impact assessment: see, respectively, here (pdf) and here (pdf). To quote directly from the explanatory memorandum (para. 2.3):
After exit, CRAs established in the UK would not be covered by the EU regulatory regime under CRAR [Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009]. If this instrument is not in place by exit day, CRAR – which will be transferred to the UK statute book by the European Union (Withdrawal) Act 2018 (EUWA) – will not operate effectively in the UK. Amending CRAR to establish a UK regime for regulation and supervision of CRAs is therefore necessary. Furthermore, if the instrument establishing this regime is not in place by exit day, there would be a significant cliff edge risk, as credit ratings would not be able to be used for regulatory purposes in the UK and there would be no regulatory oversight of CRAs. If credit ratings in the UK were invalid, the capital requirement for the entities or assets they previously rated would increase as a greater risk weighting would be attached to them. Laying this instrument will help to ensure that firms, which can include any entity that seeks to borrow money, can continue to use credit ratings issued in the UK by CRAs as they do now."

Wednesday, 13 February 2019

UK: The Takeovers (Amendment) (EU Exit) Regulations 2019

The Takeovers (Amendment) (EU Exit) Regulations 2019 were laid before Parliament earlier this week and come into force on exit day: see here or here (pdf). Their purpose, to quote directly from the accompanying explanatory memorandum (here, pdf), is to "...amend Part 28 of the Companies Act 2006 (the Act) to enable the domestic takeovers regime to operate effectively on a freestanding basis outside the EU framework. Shareholders should continue to receive the protection of takeover regulation that ensures, so far as possible, fair treatment during a takeover bid".

Tuesday, 12 February 2019

Singapore: formation of the Corporate Governance Advisory Committee

The Monetary Authority of Singapore has announced the formation of a Corporate Governance Advisory Committee, the purpose of which is advocate good corporate governance practice. Further information about the Committee, including its terms of reference and membership, is available here.

Monday, 11 February 2019

IFIAR survey of audit regulator enforcement regimes

The International Forum of Independent Audit Regulators has published a survey of audit regulators enforcement regimes: see here (pdf). The report, based on responses from 42 IFIAR members, highlights (amongst other things) how members use their investigative and disciplinary powers.

Friday, 8 February 2019

UK: Companies, Limited Liability Partnerships and Partnerships (Amendment etc) (EU Exit) Regulations 2019

An update on the Companies, Limited Liability Partnerships and Partnerships (Amendment etc) (EU Exit) Regulations 2019. Approval was given in the House of Commons earlier this week (see here) and a debate in the House of Lords has been scheduled for next Monday: see here. The full journey taken by the Regulations can be seen here and the accompanying (draft) explanatory memorandum is available here.

Update (12 February 2019) - the Regulations were approved in the Lords yesterday: see here.

UK: England and Wales: the creditors' interests duty

A couple of days ago the the Court of Appeal gave judgment in BTI 2014 LLC v Sequana S.A. & Ors [2019] EWCA Civ 112. The judgment, a summary of which has been provided here by the ICLR, is one of the leading authorities on directors' duties (in particular section 172 of the Companies Act 2006 and the common law duty requiring directors to consider, in certain circumstances, the interests of creditors (sometimes called the creditors' interests duty). Lord Justice David Richards stated (at paras. [195], [215] and [216]):
There is no decision in any English authority which is clearly based on the proposition that the creditors' interests duty is triggered by anything short of actual insolvency. In all the cases, the company was insolvent, as the directors knew or ought to have known, and in few (if any) cases does this seem to have been the subject of argument. Nonetheless, the number of times that judges, many of them with considerable experience in this field, have assumed that something less than actual insolvency will trigger the duty carries weight.

... the test of a real, as opposed to a remote, risk of insolvency is not part of the present law as regards the creditors' interests duty, and it would not be appropriate, in the light of the policy considerations and other provisions of the Companies Act to which I have referred, for the courts to introduce such a test as a development of the common law.

I have, however, concluded that the duty may be triggered when a company's circumstances fall short of actual, established insolvency. This is certainly the view taken by many judges in the cases to which I have referred. However, for good reason, not least because it has rarely been necessary, judges have shied away from a single form of words, preferring instead a variety of expressions...".

Thursday, 7 February 2019

UK: The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019

The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 were made on 1 February: see here or here (pdf). They come into force on exit day (except for Part 5 which comes into force later this month). The accompanying explanatory memorandum is available here (pdf). To quote from the memorandum (paras. 2.4 to 2.6):
As a result of the UK’s withdrawal from the EU, references to arrangements with the EU, its institutions and those of Member States, to EU institutions, EU law and concepts under EU law are no longer workable in legislation implementing the Audit Directive. The Audit Regulation forms part of retained EU law under the European Union (Withdrawal) Act 2018 and will therefore continue to apply in the UK as a domestic instrument ... This instrument makes amendments to the legislation that implements the Audit Directive and to the retained UK version of the Audit Regulation. It also grants powers previously held by the European Commission, to the Secretary of State and to the FRC ... This instrument amends references to non-retained EU law, EU institutions and functions exercised by EU institutions contained in UK law ... so that those references instead refer to legislation, institutions and functions that are provided for in UK law".

Tuesday, 5 February 2019

UK: Brydon Review | The Future of Audit Inquiry

Sir Donald Brydon, the chair of the recently established review of the quality and effectiveness of the UK audit market, gave evidence yesterday before the Parliamentary future of audit inquiry. Sir Donald said that the final terms of reference for his inquiry would be published "very, very soon"; he also stated that he did not start from the position that "the whole thing is rotten" but "clearly significant improvements must be possible". A video recording of his evidence session is available below (and also here). The chief executive of the Financial Reporting Council, Andrew Haddrill, will give evidence today: see here.

Monday, 4 February 2019

Australia: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry - final report and recommendations

The final report and recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, led by the Hon Kenneth Hayne AC QC, was published today: see here. The Australian Government's response, highlighting the actions it will take in respect of all of the recommendations, is available here (pdf).

The report (and the preceding interim report) found widespread misconduct (and misconduct that often went unpunished or which had consequences not reflecting its seriousness) and its recommendations are similarly wide in scope. Primarily responsibility for this misconduct was found to be with boards and senior management.

The report argues for the retention of the 'twin peaks' model of financial regulation but calls for a new oversight authority, independent of Government, for the APRA and ASIC. It also makes recommendations concerning the culture, governance and remuneration of regulated entities (see, in particular, chapter 6).

Australia: ASIC report - the 2018 AGM season

The Australian Securities and Investments Commission has published an overview of the 2018 annual general meeting season for S&P/ASX 200 listed companies: see here (pdf). Most companies held their AGM between 1 October and 30 November. ASIC reports: votes on remuneration have been used to signal discontent with boards more generally and not just with remuneration; the most frequently raised ESG issue was climate change risk and sustainability; and 29% of ASX200 board members are women (three ASX200 boards contained no women).

Friday, 1 February 2019

Canada: insolvency and the common law anti-deprivation rule

Earlier this week the Court of Appeal of Alberta gave judgment in Capital Steel Inc v Chandos Construction Ltd, 2019 ABCA 32. The case provided the court with the opportunity to consider the existence and application of important principles of insolvency law.

At issue was a provision in a construction contract under which Capital Steel agreed to forfeit, on its insolvency, a sum of money to Chandos. The majority (Rowbotham and Veldhuis JJA) held that the provision was unenforceable because it offended the anti-deprivation rule that formed part of the common law of Canada. The rule was, the majority held, effects based. The minority, Wakeling JA, held that if such a rule existed at common law (which his honour doubted) a purpose-based approach ought to be adopted (as in the UK Supreme Court decision Belmont Park Investments PTY Ltd v BNY Corporate Trustee Services Ltd & Anor [2011] UKSC 38, the application of which the majority had explicitly rejected).