UK: FRC consultation - Guidance for Directors of Listed Companies on Going Concern and Financial Reporting

Listing Rule 9.8.6 requires listed companies incorporated in the UK to provide in their annual report "a statement made by the directors that the business is a going concern, together with supporting assumptions or qualifications as necessary, that has been prepared in accordance with Going Concern and Financial Reporting: Guidance for Directors of listed companies registered in the United Kingdom, published in November 1994".

The 1994 Guidance is now the subject of review: the Financial Reporting Council has published a consultation paper in which it states:

The Guidance for Directors was written by a Working Group formed under the auspices of the Cadbury Committee that reported on the Financial Aspects of Corporate Governance. The formation of the Working Group arose out of concerns that there had been several high‐profile company failures where there had been no apparent indication of the imminent problems in the previous year’s report and accounts.

The objective of the Guidance for Directors is to support good corporate reporting and, in particular, the requirements of the Listing Rules and Accounting Standards. When a company is not a going concern this does not necessarily mean that it is, or is likely to become, insolvent. The Guidance for Directors is not intended to address aspects of insolvency and, in particular, is not intended to support the requirements of the Insolvency Act 1986.

In the period since 1994 there have been substantial changes to the accounting standards applied by directors of listed companies. This is particularly the case for directors preparing consolidated accounts required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU.

The FRC observes that current economic conditions are creating particular challenges for companies. Recent developments in global debt markets have led banks to be cautious of lending to one another (the so‐called “credit crunch”). This has severely restricted liquidity which has created unexpected financial difficulties for banks and entities that depend on the availability of loans as a key source of capital. Many market commentators are now forecasting a period of reduced growth and in some cases recession, with the result that going concern questions are likely to need to be considered in more detail by Boards of Directors.

In view of these deteriorating economic conditions the FRC has concluded that this is an appropriate time to consider whether the existing Guidance for Directors is necessary and remains appropriate, or whether it can be improved.

Note: The UK's Combined Code on Corporate Governance (June 2008) provides in Section C ("Accountability and Audit") the following provision (C.1.2): "The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary".

Postscript (2 Sep 2008): For further comment see this short article in the Financial Times newspaper. 

UK: England and Wales: auditors' liability and the ex turpi causa principle [a belated posting]

Several months ago the Court of Appeal gave judgment in Moore Stephens (a firm) v Stone & Rolls Ltd [2008] EWCA Civ 644 and it would appear from recent reports in the legal press that an appeal to the House of Lords will be made. The case required the Court of Appeal to consider the operation of the ex turpi causa non oritur actio principle (no cause of action may be founded on an illegal act) in the context of a negligence claim brought by the liquidators of a company (Stone & Rolls) against a company's auditors (Moore Stephens). 

The liquidators argued that the auditors had failed, during the course of several audits, to identify the fraud of Mr. Stojevic (the directing mind and will of the company). Mr. Stojevic fraudulently obtained, through the company, money from various banks. One of these banks sued the company and Mr. Stojevic and was awarded damages against Mr. Stojevic and the company. The company was unable to pay and entered liquidation. The auditors denied negligence and applied for the action to be struck out on the basis that the claim was barred by the ex turpi causa principle. The first instance judge declined to strike out the claim (see [2007] EWHC 1826 (Comm)). 

The Court of Appeal held that the liquidators' claim was barred by the ex turpi causa principle and struck out the claim. The court rejected the argument that the company was the victim of fraud and attributed Mr. Stojevic's actions to the company. There was not, the court unanimously agreed, any room for discretion in the application of the ex turpi causa principle because, as Lord Goff observed in Tinsley v Milligan [1994] AC 340 at 355B: "...the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other".  The court also rejected the argument that the ex turpi causa principle did not apply where the claim was based on the commission of a fraud where the prevention of that fraud was "the very thing" that the defendants had undertaken to do. In this regard, Rimer LJ observed (at para. [109]):

There is ... no support in the authorities that we were shown for the proposition that if "the very thing" from which the defendant owed a duty to save the claimant harmless is, or includes, the commission of a criminal offence, the public policy defence based on the ex turpi causa principle will be overridden so as to enable the bringing of the claim that relies on the claimant's illegality".

Note: The case has been reported here in the Law Society Gazette.

Postscript (2 Sep 2008): The House of Lords Judicial Office informs me: "[the] petition for leave was presented on 18 July 2008 ... and we would hope to get a decision on leave before the end of November this year". 

UK: England and Wales: members of the company?

In Southall Court v Buy your freehold Ltd & Ors [2008] EWLands LRX_124_2007 (available in PDF here), the England and Wales Land Tribunal considered a company law question: whether individuals had become members of a company in accordance with Section 22(2) of the Companies Act (1985). Section 22 - titled "definition of a member" - provides:

(1) The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members.

(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company".

The individuals in question had agreed to become members but their names had not been entered in the register of members because no such register existed. The Tribunal held that they had not become members of the company and with reference to several cases - Nicol’s case (1885) 29 Ch D 421, Re a Company [1986] BCLC 391 and National Westminster Bank v IRC [1995] 1AC 119 at 127B - stated that the requirements of Section 22(2) are cumulative. As a result, a claim notice under Section 79(5) of the Commonhold and Leasehold Reform Act (2002) was invalid.

Note: The equivalent provision of the Companies Act (2006) - Section 112 - is due to come into force on October 1, 2009.

UK: financial regulation reform - consultation paper

HM Treasury today published a consultation paper - titled A new approach to financial regulation: judgement, focus and stability - setting out in more detail its proposals for reform of the UK financial regulatory structure and explaining the proposed transitional arrangements: see here (pdf).

USA: Restoring American Financial Stability Act of 2010

The most significant financial regulatory changes for 80 years have moved closer. The Bill that will become the Restoring American Financial Stability Act of 2010 has passed its final hurdle in Senate, gaining a majority of votes cast. The Bill now awaits signing into law by the President.

Correction (21 July 2010): the Act will, in fact, be known as the Wall Street Reform and Consumer Protection Act.

UK: bank remuneration and the role of Government

The Financial Secretary to HM Treasury, Mark Hoban MP, delivered a speech last night at the British Banker's Association annual industry dinner. With regard to remuneration, the Financial Secretary stated:

The fate of banks in terms of public trust and respect rests also in your hands. A key way of regaining public trust will be by reforming the system of remuneration. We have the opportunity to send a clear message to the public that the banking system now operates in a way that is fair and stable and no longer rewards employees based on short-term performance whilst leaving investors and taxpayers exposed to the long-term risks. It is better for the industry to lead these changes.

But there is a role for the Government too. We will explore the costs and benefits of a Financial Activities Tax on profits and remuneration, and we will ask the FSA to examine further options in the forthcoming review of its remuneration code. And we will be encouraging all G20 members to implement the FSB principles on remuneration rigorously".

UK: the bank levy - HM Treasury consultation published

HM Treasury today published a consultation paper on the design and implementation of the proposed bank levy: see here (pdf).

Europe: bankers' bonuses and remuneration at listed companies

Yesterday's vote by the European Parliament on new rules governing bankers' bonuses - about which see here and here - has attracted a great deal of coverage in the media. Less attention has focussed on another resolution supported by MEPs yesterday regarding remuneration in listed companies, described in the relevant press release as follows:

.... in a non-legislative resolution drafted by Saïd El Khadraoui (S&D, BE), Parliament calls for remuneration policy principles to be extended to cover all companies listed on stock exchanges. It proposes that listed companies be required to explain their remuneration policies if their directors' pay is deemed not to follow certain principles aimed at removing incentives to take excessive risk or to take decisions based on short-term considerations. The resolution also proposes that shareholders be given greater control over the directors of a listed company.

Finally, 'golden parachutes' handed to directors in cases of early termination should be limited to the equivalent of two years of the fixed component of the director's pay and severance pay should be banned in cases of non-performance or early departure, says the resolution, which was adopted by 594 votes to 24 with 35 abstentions".

Ireland: Commission of Investigation to examine corporate governance and risk management

The Government agreed, at its meeting on Tuesday, to amend the terms of reference for the Commission of Investigation into the Banking Sector: see here. The Commission will now be able to examine corporate governance and risk management matters in the banks covered by the Government’s guarantee up to the date of the Government’s decision to nationalise Anglo Irish Bank on 15 January 2009.

UK: proposed reforms to Part 7 of the Companies Act (1989)

HM Treasury has published a consultation paper titled "Modernising the insolvency protections for the operation of financial markets – proposals to reform Part 7 of the 1989 Companies Act". In the executive summary it is stated:

Part 7 of the Companies Act 1989 modifies general insolvency law to provide systemic protection for certain financial markets in the event that one of their participants defaults. Due to the rapidly evolving nature of financial markets, the Act allows for these provisions to be updated by regulations and this consultation concerns proposals for such an update. Central counterparty clearing, which is the main focus of Part 7, is increasingly recognised as a vital element of market infrastructure, helping to guarantee transactions and produce efficiencies of risk management. In November 2004 the IOSCO (International Organization of Securities Commissions) and the Group of Ten central banks produced recommendations for the operation of central counterparties. The amendments proposed here are in accord with those recommendations, and with the recent proposal by the EU Commission to update the Settlement Finality Directive in line with latest market and regulatory developments, including the increased interoperability of systems".

UK: the bank levy and bank remuneration

In today's budget the Government announced the introduction of a bank levy. The levy will apply to: the consolidated balance sheet of UK banking groups and building societies; the aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK; and the balance sheets of UK banks in non-banking groups. Further information is available here (pdf). The budget report is available here.

The budget report also states, in a short paragraph titled "Bank remuneration" at para. 2.79:

The Government will explore the costs and benefits of a Financial Activities Tax. The Government has asked the FSA to consider a number of factors in its forthcoming review of its Remuneration Code. Alongside this the Government will consult on a remuneration disclosure regime".

Ireland: the Central Bank's banking supervision strategy

The Central Bank, which will be given responsibility for the supervision of individual firms and the stability of the financial system generally (see the Central Bank Reform Bill 2010), has published its strategy on banking supervision in Ireland: see here (pdf). A more assertive, risk based and challenging approach to banking supervision is promised.

USA: Guidance on Sound Incentive Compensation Policies

The Federal Reserve and several other agencies have adopted final guidance on incentive compensation policies in banking organisations: see here (pdf).

UK: delayed disclosure of liquidity support - FSA consultation

The UK's Financial Services Authority has published a consultation paper in which it proposes amending the Disclosure and Transparency Rules (DTR) in order to clarify that, in a limited set of circumstances, financial institutions admitted to trading on a regulated market and in receipt of liquidity support from the Bank of England can delay disclosure of this fact.

There is unlikely to be unanimous support for this proposal, not least because of the argument that the proposal (which is clearly designed to support financial stability) undermines the transparency of the market. The FSA nevertheless states in its consultation paper that its proposal is consistent with Article 3 of the European Market Abuse Directive (2003/124/EC) which recognises certain circumstances in which delayed disclosure can be justified. These circumstances are reflected in the current version of DTR 2.5. 

For further information see:

FSA press release | FSA newsletter | FSA consultation paper | Online response form | 

UK: financial regulation reform - Parliamentary statement

The Financial Secretary to the Treasury delivered a statement to the House of Commons yesterday on the Government's proposals for financial regulation reform: see here. The statement provides further information on the new institutional structure and the responsibilities of the Bank of England, Financial Policy Committee, Prudential Regulation Authority and Consumer Protection and Markets Authority.

UK: financial regulation reform - reactions

Lord Adair Turner, the chairman of the Financial Services Authority, was interviewed this morning on Radio 4's Today programme about the changes announced yesterday: listen here. The Chancellor was also interviewed: listen here. The Governor of the Bank of England, Mervyn King, welcomed the new responsibilities being given to the Bank of England in his speech last night at the Mansion House: see here.

UK: the abolition of the FSA and the new financial regulation framework

Last night the Chancellor of the Exchequer, the Rt Hon George Osborne, delivered his first Mansion House speech - see here - and outlined, in general terms, significant changes to the structure of financial regulation in the UK. The Financial Services Authority will be abolished in its current form and a new prudential regulator, a subsidiary of the Bank of England, will be created.

Other changes are outlined in the following extract from the Chancellor's speech (further information will be provided in Parliament later today by the Financial Secretary to the Treasury, Mark Hoban MP):

... the Government will abolish the tripartite regime, and the Financial Services Authority will cease to exist in its current form. We will create a new prudential regulator, which will operate as a subsidiary of the Bank of England. It will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.

We will create an independent Financial Policy Committee at the Bank, which will have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and take effective action in response. We will also establish a powerful new Consumer Protection and Markets Authority. It will regulate the conduct of every authorised financial firm providing services to consumers. It will also be responsible for ensuring the good conduct of business in the UK’s retail and wholesale financial services, in order to preserve our reputation for transparency and efficiency as well as our position as one of the world’s leading global financial centres.

I can also confirm that we will fulfil the commitment in the coalition agreement to create a single agency to take on the work of tackling serious economic crime that is currently dispersed across a number of Government departments and agencies. We take white collar crime as seriously as other crime and we are determined to simplify the confusing and overlapping responsibilities in this area in order to improve detection and enforcement.

I have thought longer and harder and spoken to more people about all these issues than almost any other issue to have crossed my desk. We do not undertake these reforms lightly, and we do so only because we believe they are absolutely necessary. We will handle the transition carefully, consult widely and get this right. The process will be completed in 2012".

UK: Conservatives propose Chapter 11 style insolvency regime

In a wide-ranging speech delivered today, the leader of the Conservative Party suggests that it may be appropriate to adopt elements of the American Chapter 11 regime. The Rt Hon David Cameron MP stated:

Just as we took action for banks - so too should we take the appropriate action to help all businesses in these difficult times. We want to make sure sound companies don't go into liquidation unnecessarily. Because we all know what liquidation normally means - closure. This isn't good for the companies, many of which are actually fundamentally sound. This isn't good for the banks, who lend these companies money. And it's not good for employees - who face being laid off. So what can we do? I can announce today that we will consult on taking the best aspects of the American Chapter 11 system and give good companies breathing space to allow them to rescue or restructure the business in the face of the credit crunch. This change will ensure that fewer good companies end up in liquidation - and fewer people lose their jobs through no fault of their own. But of course, we cannot - and should not save all companies that fail".

The Liberal Democrats' Treasury Spokesman, Vince Cable MP, has already offered criticism; in his view (published here):

Chapter 11 allows people who have mismanaged their companies to continue to run them free from their debt and pensions obligations. Chapter 11 not only rewards failure, but as the debacle of the US airline industry showed, it distorts the market and can be used as a cynical ploy for executives to weasel their way out of paying the pensions owed to their employees"

These comments do, of course, assume a great deal about the eventual form of any proposals developed by the Conservatives. The Financial Times newspaper reports that the Conservative Party's advisors

...have focused on three areas: an "automatic stay of enforcement" of debt by creditors, granted for a renewable period of a few months, while management stays and tries to negotiate a restructuring; priority funding for distressed companies, to whom lenders could give money in exchange for "super priority" over other unsecured creditors; and binding measures agreed by court and a majority of creditors to stop "unscrupulous" creditors from vetoing desirable restructurings".

UK: Government reviews - raising equity and rights issues

The Government has today announced the formation of a working party to review the efficiency of the UK's capital raising process. The party will be chaired by the FSA chief executive Hector Sants and Economic Secretary to HM Treasury Kitty Ussher and will be considering whether changes are need to UK company law, market practices or regulatory requirements in order to make the raising of equity capital more efficient and orderly. The relationship between this new working party and the recently formed Rights Issue Review Group is not entirely clear, although both groups are chaired by Sants and Ussher. 

We have been here before (albeit under different market conditions). In 2005, Paul Myners CBE produced a report for the Government in which he considered the impact of pre-emption rights on companies' ability to raise new capital and proposed changes to the current regime.  It is not clear whether Myners' proposals were seriously considered by the Government.  Mr. Myners has, however, commented on the current debate in a recent article in the UK's Daily Telegraph newspaper - see here - which begins: 

The principle of pre-emption has been a cornerstone of capital raising under UK company law for nearly 200 years. Shareholders need to know that they are protected from any unwelcome dilution in value or control of their investments. But public companies also need to be able to raise new equity cheaply and efficiently when it is required. Are the two now in conflict?

The UK's concept of pre-emption is one of the things which differentiates the UK equity market from many other jurisdictions, including the US. It is a source of strength, not weakness. But the outdated, complex, and lengthy processes of rights issues are seeing this approach to capital raising placed under attack, particularly from US investment banks".

For further information see:

HM Treasury press release | Paul Myners' article | Paul Myners' 2005 report |

UK: culture and corporate governance - recommendations from the Future of Banking Commission

The Future of Banking Commission published its report yesterday: see here (pdf). This sets out wide ranging recommendations concerning the regulation of banks. Chapter 4 - titled "Culture and Corporate Governance" - contains recommendations under the following headings: boards and directors, remuneration, accounting and auditing, shareholder oversight, credit rating agencies and the adoption of a code of conduct for banking. Some of the specific recommendations include:

• The duties of directors under the Companies Act (2006) should require them to consider the effect of the company's activities on the stability of the financial system as a whole.
• Fundamental questions should be asked about the purpose of the audit.
• Auditors should be asked to attest that banks' accounts represent a "true, fair and comprehensive statement" of the affairs of the company.
• The Stewardship Code for Institutional Investors should be mandatory for those fund managers which own bank shares.
• Non-executive directors should be charged with particular tasks and particular areas where their "challenge" is expected.