Friday 29 July 2016

UK: new code of practice for defined contribution pension schemes

A new code of practice for defined contribution pension schemes, published by the Pensions Regulator and setting out the standards that pension trustees should meet to comply with legislation, came into force yesterday: see here (pdf). The code applies to all schemes offering money purchase benefits and has sections dealing with the trustee board, scheme management skills, investment governance and value for members.

Thursday 28 July 2016

UK: FRC publishes revised edition of the UK Audit Firm Governance Code

A revised edition of the UK Audit Firm Governance Code was published today by the Financial Reporting Council: see here (pdf). Further information about the changes and additions made to the Code (including a very useful table summarising the differences) is available in the accompanying feedback statement: see here (pdf). One change proved particularly controversial on consultation: the requirement to have at least three non-executive directors. The revised Code suggests that there should be three such directors but recognises that two may be appropriate for some firms (provision C.1.1).

Wednesday 27 July 2016

UK: Supreme Court decision on agency, constructive trusts and insolvency

The Supreme Court gave judgment earlier today in Bailey v Angove's PTY Ltd [2016] UKSC 47, on appeal from [2015] EWCA Civ 215. The court's opinion was delivered by Lord Sumption, with whom the other four justices agreed. A summary of the opinion is available here (pdf).

There were two issues before the court: when will the law regard the authority of an agent as irrevocable; and, does liability to account as a constructive trustee arise where money is received at a time when the recipient knows that imminent insolvency will prevent the performance of the corresponding obligation? With regard to the latter question, Lord Sumption held that no trust arose and declined to follow the authorities suggesting otherwise including Neste Oy v Lloyd’s Bank Plc [1983] 2 Lloyds Rep 658 and In re Japan Leasing Europe Plc [1999] BPIR 911. Lord Sumption stated (at paras. [26] and [28]):

It is inherent in the statutory scheme of distribution in an insolvency that apparently arbitrary results may follow from the adventitious timing of the commencement of the liquidation, especially in the case of deferred obligations. In principle, an advance payment to a company made before the commencement of the liquidation for an obligation performable afterwards will form part of the company’s estate, notwithstanding that its supervening insolvency means that the obligation will not be performed, at any rate in specie. The payer must prove in the liquidation for damages for the breach of contract. Likewise, a contractor providing goods or services on credit will have to prove in the liquidation for the price if the other party becomes insolvent before paying. The rule is the same for money received for his principal’s account by an agent who becomes insolvent before accounting for it, unless (contrary to the unchallenged finding of the judge in this case) the relations between the parties were such as to make the agent an express trustee of money in his hands. The money will form part of the agent’s insolvent estate, and the principal must prove in the liquidation. In the nature of things, these consequences involve a detriment for the payer, attributable to the timing of the company’s insolvency; and a windfall for the general creditors, since the estate available for distribution will be increased by the payment without being reduced by the cost of performance.

Bingham J’s point of departure in Neste Oy was that the recipient of money may be liable to account for it as a constructive trustee if he cannot in good conscience assert his own beneficial interest in the money as against some other person of whose rights he is aware. As a general proposition this is plainly right. But it is not a sufficient statement of the test, because it begs the question what good conscience requires. Property rights are fixed and ascertainable rights. Whether they exist in a given case depends on settled principles, even in equity. Good conscience therefore involves more than a judgment of the relative moral merits of the parties. For that reason it seems to me, with respect, that Bingham J’s observation in Neste Oy that any reasonable and honest director would have returned the sixth payment upon its receipt begs the essential question whether he should have returned it. It cannot be a sufficient answer to that question to say that it would be “contrary to any ordinary notion of fairness” for the general creditors to benefit by the payment. Reasoning of this kind might be relevant to the existence of a remedial constructive trust, but not an institutional one. The observation of the editors of Bowstead and Reynolds and of Nicholas Warren QC in Japan Leasing that a proprietary claim should be recognised whenever the claim is “sufficiently strong and differentiable from other claims” to warrant giving it priority over other claims in an insolvency, seems to me to be open to the same objection."

A video recording of Lord Sumption, delivering the court's opinion, is available below (and also here should the embedded video not work):

Pakistan: company law reform - publication of Companies Bill 2016 (final draft) and concept paper on several new provisions

The Securities and Exchange Commission of Pakistan (SECP) has published a final draft of the Companies Bill 2016: see here (pdf). The provisions in red are new and remain under review. Further information about these new provisions, which include those relating to the creation of a register of beneficial ownership and a duty on company officers to prevent the commission of fraud or money laundering, is available in a concept paper published alongside the Bill: see here (pdf). For earlier drafts, see (all pdf): third | second | first.

Tuesday 26 July 2016

UK: Executive Remuneration Working Group publishes final report and recommendations

The Executive Remuneration Working Group, formed last year by the Investment Association to "bring forward proposals for a radical simplification of executive pay", published its final report and recommendations today: see here (pdf). Ten recommendations are made - none of which explicitly refers to simplification - under the following headings: increasing flexibility; strengthening remuneration committees and their accountability; improving shareholder engagement; increasing transparency on target setting and the use of discretion; and addressing the level of executive pay.  Other recommendations are also made in the report including, for example, that remuneration committee chairs should have at least one year's experience on the remuneration committee before becoming the chair of the committee.

The Financial Reporting Council, in a statement published today, described the Group's report as "thoughtful" and said that it would consider the recommendations concerning the skills and experience of the remuneration committee. The FRC also took the opportunity - perhaps mindful of its position as an advocate for the role of codes and best practice in shaping behaviour, given that further legislation in this area would appear imminent - to say that it welcomed the Government's current focus on improving corporate conduct, pointing in this respect to its recent report on corporate culture and the role of boards.

Italy: Governance Committee meets - no update to the Code but areas for investigation identified

A meeting of the Italian Corporate Governance Committee was held earlier this month: see here or here (pdf). The Committee considered the results of the first monitoring exercise of compliance with the Assogestioni Stewardship Code as well as the updated Corporate Governance Code, and decided that the latter did not require updating in 2016/17. Several topics were, however, identified for investigation: SMEs’ corporate governance; enhancing the board of directors’ role; the procedures for the appointment of directors; and relations with shareholders.


A copy of the Stewardship Code monitoring report, in Italian, is available here (pdf). A copy of the Governance Code monitoring report, in English, is available here (pdf).

Monday 25 July 2016

UK: England and Wales: dispositions of company property after the commencement of winding-up

The Court of Appeal gave judgment several days ago in Express Electrical Distributors Ltd v Beavis [2016] EWCA Civ 765, [2016] WLR(D) 407, an important decision on the operation of section 127 of the Insolvency Act 1986. Section 127 renders void, except where court permission has been granted, any disposition of company property made after the commencement of the winding-up. With regard to the circumstances in which such permission should be granted, Lord Justice Sales (delivering the only reasoned opinion; Patten LJ and the Chancellor agreeing) stated (para. [56]):
The true position is that, save in exceptional circumstances, a validation order should only be made in relation to dispositions occurring after presentation of winding up petition if there is some special circumstance which shows that the disposition in question will be (in a prospective application case) or has been (in a retrospective application case) for the benefit of the general body of unsecured creditors, such that it is appropriate to disapply the usual pari passu principle."

Friday 22 July 2016

USA: updated CalSTRS Corporate Governance Principles

An updated edition of the CalSTRS Corporate Governance Principles was approved last week: see here. An important change has been made to A1 (Board composition) and the skills of the board: risk management, including climate risk management and cyber risk management, is now included. A copy of the new Principles is available here (pdf).

Thursday 21 July 2016

USA: 'Commonsense corporate governance principles' published

A group comprising of well known company directors, investment managers and institutional investors (including the head of the Canada Pension Plan Investment Board), has published a series of corporate governance principles - described as 'commonsense' - for public companies: see here (pdf). The principles cover the following matters: board composition and internal governance; board responsibilities; shareholder rights; public reporting; board leadership; management succession planning; compensation of management; asset managers' role in corporate governance. Further background information is available here.

Wednesday 20 July 2016

UK: FRC report - corporate culture and the role of boards

The Financial Reporting Council has today published a report titled Corporate culture and the role of boards: see here (pdf). The report contains the FRC's observations on the importance of culture, following discussions with company chairmen, chief executives, professional organisations and other stakeholders. It is designed to assist boards and to share best practice; several key observations are made: recognise the value of culture; demonstrate leadership; be open and accountable; embed and integrate; assess, measure and engage; align values and incentives; and exercise stewardship.

Tuesday 19 July 2016

UK: Amending the Takeover Code - four instruments published

Four Instruments have been published in order to make the following changes to the UK Takeover Code: the introduction of new terms of reference for the Hearings Committee and for the Code Committee; and the introduction of new procedures for amending the Code and new rules of procedure for the Hearings Committee. The introduction to the Code is also amended as a result of these changes. The Instruments - numbers 2016/1 to 2016/4 - are available here.

Monday 18 July 2016

Luxembourg: company law reform - update

Legislation to bring about the reform of Luxembourg's corporate law framework, including the introduction of a new corporate form - the société par action simplifiée - has received its first vote of approval in the Chambre des Députés: see here (pdf). Further background information, in English, is available in a news alert published by Deloitte Luxembourg: see here (pdf). Much more detailed information about the new framework, including all Parliamentary documents, is available here.

Friday 15 July 2016

UK: FRC report - developments in audit 2015/16

The Financial Reporting Council, as the competent authority for audit within the EU statutory audit framework, has published a report titled Developments in Audit: An Overview 2015/16. A copy of the full report is available here (pdf) and an overview is available here (pdf). The central message appears to be: confidence in audit has grown but there is more to be done in improving good practice in firms and in terms of market competition. A separate report has also been published and explains the results of research exploring stakeholder confidence in the audit: see here (pdf).

Thursday 14 July 2016

UK: Law Commission report - consumer prepayments on retailer insolvency

The Law Commission for England and Wales today published its report and recommendations on the law concerning consumer prepayments on retailer insolvency: see here (pdf). The report contains the following five key recommendations (and sets out a number of options for more fundamental reform, should the Government wish to adopt them):
  • Regulating Christmas and similar savings schemes, which the Commission believes pose a particular risk to vulnerable consumers.
  • Introducing a general power for Government to require prepayment protection in sectors which pose a particular risk to consumers.
  • Giving consumers more information about obtaining a refund through their debit or credit card issuer.
  • Making a limited change to the insolvency hierarchy, to give a preference to the most vulnerable category of prepaying consumers (their claims would rank below preferential claims from employees and above those of floating charge holders).
  • Making changes to the rules on when consumers acquire ownership of goods.

Further information about the Commission's project is available here.

Wednesday 13 July 2016

Burma: New Companies Law - post-consultation draft published

A post-consultation draft of Burma's new Companies Law has been published by the Directorate of Investment and Company Administration: see here (English, pdf).

The duties of directors will, for the first time, be set out in legislation: see sections 164 to 172. Section 166 contains the duty to act in good faith in the company's best interest and it is noteworthy that it provides guidance on how this duty operates where the director of a wholly-owned subsidiary acts in the interests of the subsidiary's parent company. An oppression remedy is provided by section 192 and section 196 provides for the bringing of derivative claims. Information about the current company law framework is available here.

Update (18 November 2016) - a fifth draft was published in October 2016: see here (pdf).

Tuesday 12 July 2016

UK: England and Wales: the interests of creditors and reductions of capital supported by a solvency statement

Judgment was given yesterday by Mrs Justice Rose in BTI 2014 LLC v Sequana S.A. & Ors [2016] EWHC 1686 (Ch). The judgment contains much interesting and important discussion, including that concerning reductions of capital supported by a solvency statement as well as the circumstances in which directors are required at common law to consider or act in the interests of the creditors

Regarding the solvency statement, one of the issues before the court was the nature of the opinion the directors are required to form under section 643 of the Companies Act 2006. Mrs Justice Rose stated (at para. [327]):
... the opinion that the directors must form is not whether, if calamity were to strike on some or all fronts, the company might be unable to pay its debts nor is it whether the court would have jurisdiction to wind up the company under section 123 of the Insolvency Act on a petition issued on the day the solvency statement was signed. The test is not a technical one but a straightforward one applying the words of the section. The directors must look at the situation of the company at the date of the statement and, taking into account contingent or prospective liabilities, form an opinion as to whether the company is able to pay its debts".

With regard to the circumstances in which directors are required at common law to consider or act in the interests of the creditors, Mrs Justice Rose stated (paras. [477] - [488]).
Having reviewed the authorities I do not accept that they establish that whenever a company is 'at risk' of becoming insolvent at some indefinite point in the future, then the creditors' interests duty arises unless that risk can be described as 'remote'. That is not what the cases say and there is no case where, on the facts, the company could not also be accurately described in much more pessimistic terms, as actually insolvent or 'on the verge of insolvency', 'precarious', 'in a parlous financial state' etc. The essence of the test is that the directors ought in their conduct of the company's business to be anticipating the insolvency of the company because when that occurs, the creditors have a greater claim to the assets of the company than the shareholders".

Monday 11 July 2016

UK: new prime minister outlines governance reforms

Not so long ago today, and not that far away from where I sit typing this post, the Rt Hon Theresa May MP - now the only remaining contender for leadership of the Conservative Party and, as such, the UK's next prime minister - delivered a speech: see here. The speech set out her priorities for office, which included governance reforms, and was delivered before it was confirmed that she would become prime minister on Wednesday this week.  Here is an extract highlighting her proposals on board membership and executive pay:
I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders. In practice, they are drawn from the same, narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So if I’m Prime Minister, we’re going to change that system – and we’re going to have not just consumers represented on company boards, but employees as well .... I want to make shareholder votes on corporate pay not just advisory but binding. I want to see more transparency, including the full disclosure of bonus targets and the publication of “pay multiple” data: that is, the ratio between the CEO’s pay and the average company worker’s pay. And I want to simplify the way bonuses are paid so that the bosses’ incentives are better aligned with the long-term interests of the company and its shareholders.

More detailed proposals will follow over the coming months. With regard to shareholder votes on pay, the UK framework currently requires a mandatory vote on policy - held at least once every three years, or when changes to policy are proposed - in addition to an annual advisory vote. It would seem that Mrs May proposes to make the annual advisory vote binding. Would this render redundant the binding vote on policy?  With regard to simplifying bonuses (the call for which has been made repeatedly over the past few years), how will this be achieved?

With regard to the board proposals, much depends on what Mrs May means by "represented on company boards", but the general tenor of her comments suggests that she wants to see dramatic changes through legislation rather than relying on encouraging best practice guidance in the UK Corporate Governance Code, which is the responsibility of the Financial Reporting Council. In this respect it is interesting to note that last month the chairman of the FRC, Sir Win Bischoff, and several of his European counterparts met (describing themselves the 'five chairmen group') and published a statement in which they defended the role and value of governance codes and recommended "a cautious approach in making further legislative proposals on corporate governance issues": see here (pdf).

Friday 8 July 2016

UK: FCA post-implementation review of crowdfunding rules

The Financial Conduct Authority has published a 'call for input' in respect of a recently launched post-implementation review of its crowdfunding rules: see here (pdf).

Thursday 7 July 2016

UK: Female FTSE board report 2016 published

The 2016 edition of Cranfield's Female FTSE report has been published: see here (pdf) and also here (short update, pdf). The report notes that 26% of FTSE100 board positions are occupied by women, more than in March 2015 but similar to the proportion in October 2015. Women hold 31.4% of FTSE100 non-executive positions and 9.7% of executive positions. Across FTSE 100 boards, the proportion of new appointments going to women between September 2015 and March 2016 was 24.7%, the lowest proportion since September 2011. If this trend continues, the new target of 33% women on FTSE350 boards by 2020 is unlikely to be met. A review of ways to improve the proportion of women occupying executive directorships on FTSE350 boards is underway and its findings are expected at the end of the year: see here and here.

Wednesday 6 July 2016

UK: Supreme Court holds director had no civil liability for failure to obtain adequate insurance

The Supreme Court delivered its opinion today in Campbell v Gordon (Scotland) [2016] UKSC 38. The case concerned a company that failed to have in place appropriate insurance under section 1(1) of the Employer's Liability (Compulsory Insurance) Act 1969. A claim for damages was made against the company's sole director (the company had gone into liquidation in 2009) by an employee injured at work in respect of an injury not covered by the company's insurance policy. In certain cases, under section 5 of the 1969 Act, a director or officer of a company will be criminally liable for the company's failure to obtain insurance.

The Lord Ordinary - sitting in the Court of Session (Outer House) - found the director personally liable to pay damages: see [2013] CSOH 181. On appeal the Court of Session (Inner House) by a 2:1 majority held that civil liability was not imposed: see [2015] CSIH 11.

Opinion was also divided in the Supreme Court: by a majority of 3:2 the justices held that the director was not subject to civil liability. A summary is available here (pdf). A summary was also delivered this morning in person by Lord Carnwath: see the video recording below.

Tuesday 5 July 2016

UK: FPC publishes financial stability report - risks begin to crystalise

The Financial Policy Committee published its first financial stability report for 2016 today: see here (pdf). An executive summary is available here (pdf). The outlook for financial stability is challenging following the referendum on EU membership, and the FPC concludes that some risks have begun to crystalise. It has recommended to the Prudential Regulation Authority that the UK countercyclical capital buffer rate is reduced from 0.5% to 0%.

Monday 4 July 2016

Pakistan: company law reform - third draft of the Companies Bill published

The Securities and Exchange Commission of Pakistan (SECP) has published for public comment a third draft of the Companies Bill 2016: see here (pdf). Comments on the draft Bill, which will contain the core company law framework and replace the Companies Ordinance 1984, should be sent to the SECP ( by August 5. A copy of the second draft is available here (pdf) and the first draft here (pdf).

Friday 1 July 2016

UK: liquidation and the personal liability of directors - Supreme Court judgment due on July 6

The Supreme Court will hand down its judgment soon - July 6, to be precise - in Campbell v Gordon, an appeal from Scotland (see [2015] CSIH 11). The issue before the court, to quote directly from its summary of the case, was whether "on the liquidation of a company, a director who has failed to obtain and maintain insurance on behalf of the company as required by statute, incurs personal liability to an injured party for loss arising from that failure".