UK: England and Wales: auditor liability and trading losses

In 2017 the Financial Reporting Council sanctioned Grant Thornton UK LLP and one of its retired partners for misconduct in relation to the audits of AssetCo plc: see here. A negligence claim against Grant Thornton was brought, in which judgment was delivered by the High Court today: see Assetco Plc v Grant Thornton UK LLP [2019] EWHC 150 (Comm).

Damages of approximately £21 million have been awarded and Grant Thornton's claim that it should be relieved from liability under section 1157 of the Companies Act 2006 was strongly rejected, the trial judge (Bryan J.) stating (at para. [1268]): "The breaches consisted of a catalogue of failures over two audit years that were of the utmost gravity and that went to the very heart of an auditor's duties and the 'very thing' GT admits it was responsible for but failed to do".

One of the more controversial issues in the case was the extent to which Grant Thornton should be liable for trading losses.  It is worth, in this regard, quoting directly from the judgment (paras. [961] to [964],[966] emphasis in the original): 

In the present case GT's negligence deprived the decision-makers within AssetCo of the opportunity to "exercise their powers in general meeting to call the directors to book" for the dishonest way in which the business was being run, to "influence future policy and management" in that regard "and to ensure that errors in management" – i.e., that dishonesty – "were corrected". Thus, GT's (admitted) audit failures deprived AssetCo not only of the opportunity to call the directors to book but also to ensure that errors in management were corrected, and the company did not continue to trade, and be run in a "fundamentally dishonest" way. The losses that were suffered were not suffered simply because the company remained in existence and carried on trading, but rather as a result of AssetCo continuing to trade in a particular fashion in reliance on the (negligent) audit.

I therefore conclude and find that the trading losses fell within the scope of GT's duty on the basis that they were sustained through AssetCo's (continued) trading in a fundamentally dishonest manner, in reliance on the negligent audit, in circumstances where if GT had acted in accordance with its duties it would have uncovered most if not all of the instances of Mr Shannon's and Mr Flynn's dishonesty, and AssetCo would (as I have found on the Counterfactuals) have entered into a Scheme of Arrangement, carried out a refinancing, placed the LFEPA and Lincoln Contracts on a sustainable footing, whilst allowing other subsidiaries to "sink or swim" and would have focussed on securing business in Abu Dhabi.

GT's general points about how Caparo [[1990] 2 AC 605] shows that the auditor's duty is not to create financial statements but to review them, and that its duties in terms of any investigation into the company are somewhat limited as compared to the duties on directors themselves, are not in point in circumstances where it is common ground that GT's duty was sufficiently broad that GT should, in the proper exercise of that duty, have uncovered many, if not all, of the instances of management deceit carried out by Messrs Shannon and Flynn, consequent upon which AssetCo would have called the directors to book and ensured that the company did not continue to trade (given that the company was "ostensibly sustainable only on the basis of dishonest representations or unreasonable decisions made or taken by management – Revised List of Issues para 6(1)).

I am also unpersuaded by GT's submission that the effect of the conclusion that I have reached would be that an auditor that fails to identify a particular fraud effectively becomes an insurer of the company for any dishonesty or fraud within the company and trading losses suffered as a result. That is not the effect of my conclusion.

I also reject the suggestion that the consequences of my conclusion are either draconian or unfair to the auditor. On the contrary, I consider it entirely appropriate that GT assumed a responsibility to protect AssetCo against losses suffered as a result of fraudulent trading conducted by the AssetCo management in circumstances where it is agreed that GT should have detected that the business was being conducted fraudulently, and in circumstances where such fraudulent trading would not have continued had GT complied with its auditing duties".

UK: England and Wales: unfair prejudice and excessive remuneration

Judgment was given earlier this week in McCallum-Toppin & Anor v McCallum-Toppin & Ors [2019] EWHC 46 (Ch). The case concerned a successful petition under section 994 of the Companies Act 2006. This first instance judgment deserves a note here because it provides a very good illustration of the difficulties inherent in determining whether remuneration can be regarded as excessive in the context of a section 994 claim, including the appropriateness of benchmarking and comparators for a private company.

UK: encouraging effective stewardship

Under the banner of 'encouraging effective stewardship', there are several developments to report today. First, the Financial Reporting Council has published a consultation paper setting out proposed revisions to the UK Stewardship Code: see here. Second, and connected with the FRC's consultation, the Financial Conduct Authority has published two documents: (1) a consultation paper on regulatory measures to implement the provisions of the amended Shareholder Rights Directive for FCA-regulated life insurers and asset managers; and (2) a discussion paper, with the FRC, on the importance of effective stewardship, considering, for example, what should be the minimum expectations for financial services firms investing for clients and beneficiaries.

UK: England and Wales: a proper instrument of transfer?

Judgment was given yesterday in Yusuf v Yusuf & Anor [2019] EWHC 90 (Ch) by Mrs Justice Falk. The trial judge found that a company's affairs had been conducted in an unfairly prejudicial manner for the purposes of section 994 of the Companies Act 2006. I note the decision here not because of the discussion of section 994 but because the trial judge considered the requirement, under section 770(1)(a) of the 2006 Act, for there to be a "proper instrument of transfer" where a share transfer is registered.  According to the trial judge, such an instrument was "a document that is capable of being stamped" and she held that the document at issue in the case before her - a letter - was only an instruction to transfer which contemplated the execution of a further document.  It was not, as such, a proper instrument of transfer.

UK: England and Wales: terminating membership and an implied term

Judgment was given lat week in Dymoke v Association for Dance Movement Pyschotherapy UK Ltd [2019] EWHC 94 (QB) by Mr Justice Popplewell. The case concerned a company limited by guarantee and, in the context of a decision to terminate a member's membership, an argument based on the existence of an implied term concerning the manner of the termination. The trial judge held that an implied term existed and in doing so stated (paras. [60], [61] and [65]):

.... generally an implied term must not be inconsistent with any express term. The duty to act fairly in relation to decisions to terminate membership of a company must be consistent with the articles of association and with the fiduciary duties of the directors. However, I see no difficulty in the content of the duty of fairness in any given circumstance being fashioned to ensure such consistency. It is common ground in this case that the contract included the terms of the Ethics Code and Complaints procedure which confer powers to impose sanctions ranging from reprimand through suspension to withdrawal of registration and termination of membership. In the context of an organisation such as ADMP, there is every reason to treat those decision-making powers as subject to an obligation of procedural fairness in just the same way as would apply to decisions of a public body. Indeed one would only have the now out of fashion officious bystander ask, "Can the Council act unfairly in deciding to terminate membership?" for the testy suppression "of course not" to be forthcoming.

Expressed in this way, there is no inconsistency between implying a duty of procedural fairness and the fiduciary duties of a director, which include now those now statutorily defined in s. 172 of the Companies Act 2006.

I conclude that it was an implied term of the contract between ADMP and Ms Dymoke that she would be treated fairly in relation to her termination; and in particular that she would be informed of the complaints or concerns in sufficient detail to enable her to respond to them and would be given a reasonable opportunity to respond. That applies not only to the substance of the complaints or concerns, but also to the question whether they justified the sanction of termination of membership. Such a term satisfies the test in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] AC 742, and accords with public law principles and those which govern the exercise of a contractual discretion"

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. The Regulations were relaid on 10 January (replacing those laid on 5 November 2018). The Joint Select Committee on Statutory Instruments considered the Regulations on 23 January and decided that the Regulations did not need reporting to both House of Parliament: see here. A motion to approve the Regulations has since been tabled by the Government, notwithstanding the concerns expressed by the Secondary Legislation Scrutiny Committee in its thirteenth report of the 2017/19 session: see here. To quote directly from this report (emphasis in the original):

The purpose of these draft Regulations is to ensure that the UK’s company law framework can operate effectively after a possible ‘no deal’ exit from the EU. While the Department for Business, Energy and Industrial Strategy (BEIS) says that the instrument aims to preserve the company law framework unchanged as far as possible and appropriate, the information provided in the Explanatory Memorandum (EM) suggests that some of the proposed changes appear to be more significant. A key proposal in the draft Regulations is to end the preferential treatment currently afforded in some aspects of UK company law to businesses from the European Economic Area (EEA). Amongst other changes, the instrument proposes to revoke provisions that enable the current regime for mergers between UK companies and companies in EEA countries. BEIS estimates that around 50 cross-border mergers are carried out under this regime every year. Other proposed changes would involve a loss of voting rights and a loss of the ability to make distributions for certain EEA businesses after a one-year transition period following exit. Despite the significance of these proposals, the EM provides only limited information on the expected impact of these changes on shareholders and other relevant stakeholders. The EM also says that to minimise sensitivities ahead of negotiations with the EU, only the Law Society was consulted. The Committee recommended an upgrade of these Regulations to the affirmative procedure when they were initially laid before Parliament as a proposed negative instrument, because of the significance of the changes and the lack of information provided on their expected impact. The Committee remains concerned that the Department has not provided more extensive information to assist Parliament in its scrutiny of these draft Regulations".

UK: FCA consultation on cryptoasset guidance

The Financial Conduct Authority today published a consultation document containing proposed guidance on cryptoassets and, in particular, the circumstances in which such assets fall within the FCA's regulatory remit: see here (pdf). The document notes (at para. 1.27) that HM Treasury will publish a consultation paper early this year to ask if legislative change is needed to broaden the FCA's regulatory remit in this area.

Sri Lanka: IRCSL issues Direction on Governance of Insurers

A new Direction on the governance of insurers came into force earlier this month: see here (pdf). The Direction, published by the Insurance Regulatory Commission, contains various mandatory provisions concerning the boards of insurers.

Singapore: service of garnishee order nisi did not make creditor secured

The Court of Appeal gave judgment earlier this month in SCK Serijadi Sdn Bhd v Artison Interior Pte Ltd [2019] SGCA 5. A copy of the judgment is available here (pdf) and a summary is available here. The decision is an important one in which the court explained why the service of a garnishee order nisi did not render the judgment creditor a 'secured creditor' for the purposes of sections 299(2) and 334(1) of the Companies Act, 2006 Rev Ed, Cap 50.

Hong Kong: the Companies (Amendment) (No 2) Ordinance 2018

The first external circular of 2019 published by the Companies Registry - available here (pdf) - provides an overview of the changes to the company law framework coming into force at the start of February by virtue of the Companies (Amendment) (No. 2) Ordinance 2018. Further information is available here.

IOSCO statement on issuers' disclosure of ESG matters

The International Organisation of Securities Commissions has published a statement in which it stresses the importance, for issuers, of considering the inclusion of environmental, social and governance (ESG) matters in the disclosures made to investors: see here (pdf). To quote directly from the statement: "IOSCO encourages issuers to consider the materiality of ESG matters to their business and to assess risks and opportunities in light of their business strategy and risk assessment methodology. When ESG matters are considered to be material, issuers should disclose the impact or potential impact on their financial performance and value creation".

IOSCO report: Good Practices for Audit Committees in Supporting Audit Quality

The International Organisation of Securities Commissions has today published its final report Good Practices for Audit Committees in Supporting Audit Quality: see here (pdf). The report, as its title suggests, proposes various features that an audit committee should have in order to promote and support (external) audit quality.  These include the qualities, qualifications and experience of audit committee members.

Japan: Legislative Council publishes corporate governance reforms

The Nikkei Asian Review reports that "[a] government panel [a subcommittee of the Ministry of Justice Legislative Council] released a package of corporate governance reform proposals on Wednesday, setting out such rules as requiring larger corporations - both listed and unlisted - to have outside directors. The government plans to submit relevant legislative revisions to the ordinary Diet session slated to convene soon, with 2020 set as the target year for implementation". A copy of the news report is available here.

Nigeria: launch of the national corporate governance code

The Financial Reporting Council has announced the unveiling (by His Excellency, Prof. Yemi Osinbajo, Vice President of the Federal Republic of Nigeria) of the new Nigerian Code of Corporate Governance. It is not yet clear, from the FRC's announcement and website, whether the unveiled Code is different from the version published last year for consultation (about which, see here).

Update (17 January 2019): a copy of the Code is available here.

UK: Report calls for new approach to corporate and financial regulation

The report commissioned by the Shadow Chancellor, the Rt Hon John McDonnell MP, on the UK's financial and corporate regulatory architecture, has been published: see here (pdf). The report is highly critical of the current framework and makes various recommendations including the creation of a Business Commission, an umbrella organisation that would oversee and coordinate the activities of sub-Commissions. The sub-Commissions would have responsibility for specific aspects and sectors (e.g., corporate governance; accounting; insolvency). All of the Commissions would have a Supervisory Board formed of citizens and societal stakeholders. A separate Commission would be responsible for enforcement.

UK: England and Wales: section 423 of the Insolvency Act 1986

Judgment was given last Friday in Deansgate 123 LLP v Workman & Anor [2019] EWHC 2 (Ch). The decision is of interest because of the discussion it contains about the extent to which the bringing of a claim under section 423 ("Transactions defrauding creditors") of the Insolvency Act 1986 would amount to an abuse of process. It is interesting, too, because of what the trial judge, HHJ Eyre QC, said about section 423: it "provides the the court with a discretion to set aside transactions in certain circumstances but it is not to be seen as some form of punishment of wrongdoers – if only because the recipient of a transfer which is ultimately set aside may be entirely innocent of any wrongdoing" (para. [57]).

IFC and BRVM to develop corporate governance code

The International Finance Corporation, part of the World Bank Group, has published details of its partnership with the Bourse Régionale des Valeurs Mobilières (BRVM; the West Africa Regional Stock Exchange) one of the aims of which is to help BRVM develop and introduce a corporate governance code: see here.

OECD consults on new anti-corruption and integrity guidelines for state owned enterprises

The OECD has published for comment a draft of its new Anti-Corruption and Integrity Guidelines for State-Owned Enterprises. The Guidelines, available here (pdf), are intended for the use of states in their promotion of integrity and anti-corruption and complement the OECD's Guidelines on Corporate Governance of State-Owned Enterprises.

France: AMF report on corporate governance and executive compensation

France's financial market regulator, the Autorité des Marchés Financiers (AMF), has published its 2018 report on corporate governance and executive compensation in large listed companies. A copy of the report, in English, is available here. A summary, also in English, is available here.

Ireland: Establishing the Corporate Enforcement Authority

In October 2017, the Government accepted a recommendation that the Office of the Director of Corporate Enforcement (ODCE) should no longer be an Office within the Department of Business, Enterprise and Innovation and should instead become an Agency, in the form of a Commission. The legislation that will bring about this change, including the renaming of the ODCE to the Corporate Enforcement Authority, was published last month alongside a regulatory impact assessment: see here.

UK: CIPD/HPC report on remuneration committee reform

The CIPD and High Pay Centre have published a joint report on the operation of remuneration committees: see here (pdf). Amongst the recommendations made is one calling for the replacement of the remuneration committee with a 'people and culture' committee, the membership of which to be more broadly based than is currently the case with remuneration committees.