UK: England and Wales: winding-up in the public interest

Judgment was given yesterday by HHJ Stephen Davies (sitting as a judge of the High Court) in Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation Ltd [2019] EWHC 2890 (Ch). The case concerned an application by the Secretary of State for the winding-up, on public interest grounds under section 124A of the Insolvency Act 1986, of two companies. Petitions under this ground often provide the opportunity for the court to consider the acceptable use to which the corporate form can be put. The current case is no exception.

The companies at the centre of the case operated a scheme the purpose of which was enable the owners of commercial property to avoid paying business rates on empty commercial property owned by them. This was achieved through the leasing of the property to a special purpose vehicle (SPV) that was then placed in members' voluntary liquidation and thereby relieved of liability to pay business rates. The Secretary of State argued that the companies' business model involved a misuse of insolvency legislation demonstrating a lack of commercial probity justifying winding-up. HHJ Davies rejected this argument, and observed (paras. [126], [127]):

.... it cannot be said that to devise and implement a lawful scheme to avoid business rates which involves the use of the insolvency legislation and process through the use of the MVL [members' voluntary liquidation] in a way which is consistent with the purpose of MVLs, even though that is achieved through the intended creation of a lease containing a term (the determination premium) which artificially creates an asset, is lacking in commercial probity or otherwise contrary to the public interest. In my judgment that would not be consistent with the accepted general principle that it is perfectly proper for companies as artificial constructs to be incorporated with a view to obtaining a fiscal advantage, to create or have transferred to them assets which are artificial from a commercial perspective to achieve the same purpose and/or to be placed into liquidation, again artificially from a commercial perspective to achieve the same purpose, so long as each transaction is a legally genuine and effective transaction and not a sham and so long as each step in the transaction is in accordance with, and not contrary to, the general purpose or a specific purpose of the legislation governing such transactions. In my judgment there has to be something more to justify a finding that the operators of such a scheme are not acting with commercial probity or otherwise contrary to the public interest."

UK: The FRC's annual review of corporate reporting

The Financial Reporting Council has published the results of its annual review of corporate reporting: see here (pdf). Published alongside the report is an open letter addressed to audit committee chairs and finance directors: see here (pdf). The FRC is calling for improvements in (a) companies' reporting of forwarding-looking information, (b) the potential impact of emerging risks on future strategy and (c) the carrying value of assets and the recognition of liabilities.

The report no longer contains a review of corporate governance disclosures and compliance with the UK Corporate Governance Code because a separate report covering these matters will be published later this year.

FRC: Key Facts and Trends in the Accountancy Profession

The Financial Reporting Council has published the latest edition of its report Key Facts and Trends in the Accountancy Profession: see here (pdf). This reports, amongst many other things, that in the year ending 31 December 2018, all companies in the FTSE100 were audited by the Big Four accountancy firms.

UK: The Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019

The Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019 were made last week. This statutory instrument - to quote directly from the accompanying explanatory memorandum (here, pdf) - "... continues the process of addressing failures of retained EU law to operate effectively and other deficiencies arising from the withdrawal of the United Kingdom (UK) from the European Union (EU). This is intended to ensure that the frameworks for the application of international accounting standards under UK law, and for regulatory oversight and professional recognition of statutory auditors and third country auditors in the UK, work effectively following the UK’s withdrawal from the EU" (para. 2.1).

UK: England and Wales: issuer liability and dematerialised shares

Judgment was given yesterday by Mr Justice Hildyard in SL Claimants v Tesco Plc [2019] EWHC 2858 (Ch) in a first instance decision that will nevertheless be regarded as a leading authority on issuer liability towards those holding shares in dematerialised form. The case concerned claims against Tesco under section 90A ("Liability of issuers in connection with published information") and schedule 10A of the Financial Services and Markets Act 2000. The claimants had never directly acquired, held or disposed of a legal interest in the shares: the shares were, instead, held in dematerialised form through CREST using custodians and sub-custodians. Tesco sought to strike-out the claims, arguing that it could not be liable to the claimants under section 90A because (to put matters very generally) of their position in the custody chain. Tesco's arguments were rejected.

UK: The Stewardship Code 2020

The Financial Reporting Council has today published a revised edition of the UK Stewardship Code: see here (pdf). This new Code - titled the Stewardship Code 2020 - is effective from 1 January 2020 and is accompanied by a feedback statement: see here (pdf). The Code contains Principles for asset managers and asset owners and a separate set of Principles for service providers. It operates on the basis of "apply and explain".

UK: FRC Reporting Lab report - climate related corporate reporting

The FRC's Financial Reporting Lab has published a report on climate-related corporate reporting: see here (pdf). The report provides guidance for companies on how their reporting can be improved. It is recommends that companies use the Task Force on Climate-related Financial Disclosures (TCFD) framework to report on climate-related issues; it is noted that the UK Government expects all listed companies and large asset owners to disclose in line with TCFD recommendations by 2022.

UK: BEIS research paper - perceptions of non-financial reporting

The Department for Business, Energy and Industrial Strategy has published a research paper on stakeholder perceptions of non-financial reporting: see here (pdf).

UK: England and Wales: leave to act as a director whilst disqualified to act as such

Judgment was given today in Rwamba v The Secretary of State for Business Energy And Industrial Strategy [2019] EWHC 2669 (Ch). The unusual facts of the case make it noteworthy: an application for permission to act as a director, under section 17 of the Company Directors Disqualification Act 1986, by a director previously disqualified for breaches of an order under section 17. ICC Judge Prentis stated (para. [31]):

Permission given to one who has already been disqualified twice, and the second time for breach of an earlier permission, carries with it the unavoidable additional risk that the disqualification regime is perceived as lax and permissive, a perception which would lead to a lowering of corporate standards contrary to a purpose of the Act. So, the reasons in favour of permission are going to have to be that the more cogent if it is to be granted".

Permission to act as a director was not granted: while the reasons advanced for permission were regarded as legitimate, ICC Judge Prentis found the evidence "simply too fragile to ascribe them much cogency" (para. [72]). The required full explanation for why permission was sought, with relevant corroborative evidence, was not provided. To grant permission in such circumstances, the judge stated, would be "an undermining of the public protection policy within the Act" (para. [72]).

UK: FCA feedback statement - climate change and green finance

The Financial Conduct Authority has published a feedback statement in respect of the discussion paper on climate change and green finance it published a year ago: see here (pdf). The FCA has confirmed that it will, in early 2020, publish a consultation paper in which new disclosure rules are proposed, operating on a 'comply or explain' basis for some issuers, and aligned with TCFD recommendations. The FCA has also stated that it will, in the next few weeks, publish a feedback statement concerning its joint discussion paper with the Financial Reporting Council on effective stewardship.

UK: England and Wales: health and safety fines, subsidiary companies and parent company turnover

Judgment was given last week by the Court of Appeal in Bupa Care Homes (BNH) Ltd, R v [2019] EWCA Crim 1691. The court heard an appeal by a company against a fine of imposed by Her Honour Judge Peters at the Crown Court in Ipswich, where the company had pleaded guilty to an office contrary to section 3(1) of the Health and Safety at Work Act 1974.

The fine had been increased by HHJ Peters with reference to the turnover of the company's parent company (at Step Three under the Sentencing Guideline). The Court of Appeal unanimously held that HHJ Peters was wrong to have done this because it did not "properly reflect the economic realities of the situation" (para. [82]). The Court continued (paras. [83] and [84]):

... the Guideline has to be applied in a way which does not infringe ordinary and well-understood principles of company law. Thus, the mere fact that one company may be the wholly owned subsidiary of a larger parent (with larger financial resources) does not mean that the resources of the parent can be treated as available to, or as part of the turnover of, the subsidiary company, because they are not. The Guideline phrase 'economic realities' cannot be extended to mean that the parent's resources belong to the subsidiary simply in order to justify a large increase in fine at Step Three, any more than they can be taken into account to increase the size of the subsidiary's turnover for the purposes of the tables in Step Two .... if it is generally wrong to take into account the parent's turnover so as to increase the subsidiary's turnover at Step Two (which it is) then it is wrong to take it into account to increase the fine at Step Three absent some special factor of the type identified in Tata Steel Ltd [2017] EWCA Crim 704 or NPS London [2019] EWCA Crim 228 (although, as we have observed, these were cases where fines were not reduced because of the parental turnover; they were not cases where fines were increased because of it). We decline to speculate on what such special factors might be; the question will have to be determined as and when it arises".

Australia: financial assistance and pre-emption rights

The High Court gave judgment yesterday in Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33. The decision is an important and interesting one on the interaction between pre-emption provisions and the prohibition, within section 260A(1) of the Corporations Act 2001, against a company providing, in certain circumstances, financial assistance to a person in respect of that person's purchase of the company's shares. The court stated (at para. [39]):

Section 260A(1) does not abrogate the power of a company to enforce its constitution. However, together with s 1324(1B), it has the effect that if a company wishes to bring proceedings to enforce pre-emptive rights in its constitution, for the benefit of some of its shareholders but at the company's expense, then the company is liable to be enjoined from doing so unless the assistance is approved by shareholders under s 260B, or unless the company can satisfy the court that bringing the proceedings at its own expense does not materially prejudice the interests of the company or its shareholders or the company's ability to pay its creditors".

UK: England and Wales: just and equitable winding-up

Judgment was given yesterday by the Court of Appeal in Badyal v Badyal [2019] EWCA Civ 1644. At first instance the trial judge had rejected the argument that in order to secure the winding-up of a company under the just and equitable ground - section 122(1)(g) of the Insolvency Act 1986 - it was necessary only to show that mutual trust and confidence between the shareholders had broken down. The Court of Appeal agreed with the trial judge.

Australia: ASIC Corporate Governance Taskforce report - director and officer oversight of non-financial risk

The Corporate Governance Taskforce established by the Australian Securities and Investments Commission has published its first report. The report, on the subject of director and officer oversight of non-financial risk, is available here (pdf). The report found, amongst other things, that there was scope to improve the effectiveness of board risk committees: they ought to meet more regularly and be actively engaged in overseeing material risks in a timely and effective manner.

Canada: the gender diversity of boards

The Canadian Securities Administrators have published data on boards' gender diversity, based on the disclosures under National Instrument 58-101 Disclosure of Corporate Governance Practices, provided by 641 issuers with year ends between 31 December 2018 and 31 March 2019: see here. It is reported that the number of board positions occupied by women has increased to 17%, up from 11% in 2015.