We take a look at the legal and industry news affecting accountants and other financial professionals on a range of liability risk management issues.
Extending the boundaries - an order under Section 236 of the Insolvency Act 1986 does, in part, have extra territorial effect
The High Court decision in the recent case of Official Receiver v Tristram Michael Norriss, Re Omni Trustees Limited, has provided some welcome relief to insolvency practitioners (IPs) and lawyers alike, with the court confirming that an order under section 236 Insolvency Act 1986 (IA) does, in part, have extra-territorial effect.
There had been some concern within the industry that the ability to use section 236 IA to require the production of documents and information had been severely restricted following the decision in MF Global earlier this year, which held that section 236 did not have extra-territorial effect.
However, the court in Omni formed the view that the Judge in MF Global had not had all relevant authorities brought to his attention. The court's view in this matter was that there was no reason why the requirement to attend at court for examination could not have extra-territorial effect, while the less onerous requirement to produce documents and provide information did have such effect.
The Official Receiver's claim in Omni arose following the public interest winding up of Omni Trustees Limited, the trustee of an occupational pension scheme with assets in the region of £8.6 million. In July last year, £3.7 million was transferred from Omni to the Timoran Small Self-Administered Scheme. The Respondent, Mr Norriss, was a trustee of Timoran and effected the transfer.
Despite having made extensive enquiries, the Official Receiver was not provided with sufficient information to ascertain the whereabouts of Omni's funds. The Official Receiver therefore issued a section 236 application against Mr Norriss, for him to attend at court for examination and to provide documentation to explain the purpose of the transfer and details of where the funds were being held.
The application first came before the court in June. At this point, Mr Norriss challenged the court's ability to make the order. He did not accept that the English Court had jurisdiction to grant an order with such extra-territorial effect, he claimed that he was resident in Hong Kong, having moved there a few months before. The application was adjourned, with a substantive hearing to take place at a subsequent date.
The MF Global decision
Shortly before the adjourned substantive hearing, judgment in the MF Global (UK) Limited case was handed down. In MF Global, the administrators were seeking, in particular, orders under section 236 against a UK and a French company for production of documents and a witness statement dealing with various transactions prior to the administrations of both companies. The French Respondent company opposed the application on the ground that the court had no jurisdiction against it under section 236.
The Respondent relied primarily on the Court of Appeal judgment in Re Tucker, a decision on section 25 of the Bankruptcy Act 1914 (BA) which, as it applied to bankruptcy, was in substantially the same terms as sections 236 and 237 IA. In particular, section 25(6) re-enacted as section 237(3) provided "the Court may, if it thinks fit, order that any person who if in England would be liable to be brought before it under this section shall be examined in Scotland or Ireland, or in any other place out of England".
In Re Tucker, the Respondent, who the court agreed was capable of giving relevant information, was resident in Belgium. The Court of Appeal held that no order under section 25 of the Bankruptcy Act could be made against him, relying on the wording "any person who if in England", they formed the view that if a person is not in England he is not liable to be brought before the English Court.
The judge in MF Global, concluded that, while there was a good deal to be said for concluding that section 236 IA was intended to have extra-territorial effect, it was impossible to overlook the decision in Re Tucker. The court held that section 236 did not have extra-territorial effect.
The arguments in Omni
The MF Global decision, if followed in Omni, would have meant that the application against Mr Norriss would not have succeeded. However, it was argued by the Official Receiver that the MF Global decision was wrong as other authorities had not been drawn to the judge's attention. In particular: the case of Casterbridge Properties, where it was held that while section 236 undoubtedly had extra-territorial effect to the extent that the court may order private examination of a person based in a foreign country if the examination is to be held abroad, the question of whether an order may be made for such a person to be examined in the UK remained unresolved; and Mid East Trading, where it was held that an order could be made under section 236 in respect of documents situated abroad, irrespective of the assertion of sovereignty.
It was also drawn to the court's attention that section 25 of the BA, which was considered in Re Tucker, had similar substance and effect overall to section 236, but section 25(1) of the Bankruptcy Act which dealt with attendance at court and production of documents was a single provision, not, as under section 236, two separate provisions dealing with attendance at court and production of documents. It was submitted that there was no reason why one could have extra-territorial effect, i.e. the production of documents, but the other, i.e. physical attendance, could not.
The court formed the view that the judge in MF Global had not had his attention drawn to the structural differences between section 25 BA and section 236 IA and declined to follow the decision. The court held that it did have jurisdiction to require a person or resident outside the jurisdiction to submit to the court an account of his dealing with the company or to produce any books, papers or other records in his possession or under his control relating to the company.
We now have good authority that section 236(3) IA, in respect of the production of documents, can apply to individuals out of the jurisdiction. This will be extremely helpful going forward, in order to enable IPs to issue applications against individuals resident out of the jurisdiction. The question remains, however, as to how an order under section 236 IA could be enforced on individuals out of the jurisdiction - although obtaining such an order may be the encouragement required for respondents to provide the information sought by IPs and lawyers alike.
On a different, although related, note, it will no doubt be of interest to IPs that from 1 October 2015, the conduct of directors going forwards can form the basis of a compensation claim brought against a director by the Secretary of State, after a disqualification order or undertaking has been obtained, if it is concluded that that conduct has resulted in loss to the insolvent company (following implementation of the Small Business, Enterprise and Employment Act 2015).
Liquidator who acted negligently and in breach of duty cannot rely on the defence of illegality
In the recent case of Sharma v Top Brands Ltd, the Court of Appeal held that the illegality defence was not available to a negligent liquidator.
Until its liquidation in 2011, the company supplied toiletry products. On liquidation, the company's creditors contended that they had not been paid for goods delivered to the company, but that shortly before liquidation the company had sent invoices for those goods to its own purchaser and had received payment of circa £500,000. That sum was frozen.
However, as a result of fraud practised on the liquidator, the liquidator paid this sum out to various third parties, ostensibly on the authority of one of the company's main customers, who claimed to be entitled to the sum. The creditors contended that such sum had been paid out as part of a VAT fraud on the part of the company and the customer and that the liquidator had paid that sum out negligently and in breach of duty. At first instance the court held that the liquidator had acted negligently and in breach of duty under section 212 Insolvency Act 1986, and ordered that she contribute to the company's assets to make good the loss of the sum.
The liquidator appealed on the basis that the company's only business was VAT fraud, it had therefore been established for an illegal purpose and therefore the illegality defence applied.
The Court of Appeal decision
The Chancellor gave judgment on behalf of the Court of Appeal. The court held that there was not a sufficiently close connection between the alleged illegal conduct and the relief claimed by the liquidator. It found that, since the company was in liquidation and had stopped trading at the time of the payments made by the liquidator, the sum paid away could not itself have been used in a VAT fraud.
The court also held that although the case raised competing public policy considerations, the public interest in liquidators performing their duties properly trumped giving the appearance of condoning illegal conduct.
More importantly, in giving the judgment, the Chancellor added to the call from the Supreme Court in Jetivia SA v Bilta for an urgent review of the defence of illegality. The Supreme Court need to undertake a detailed review of the defence as soon as an appropriate case comes before them. For more information see the alert on this case prepared by our insolvency litigation experts.
Legal advice privilege can be claimed in respect of documents prepared by legal advisors in the context of regulatory investigations
In our July edition of Accountability we reported on the High Court decision in Property Alliance Group Limited v The Royal Bank of Scotland PLC (PAG v RBS), which confirmed that without prejudice communications with a regulator can be withheld from inspection in civil proceedings - albeit in the circumstances RBS had lost the right to withhold such documents from inspection.
Another recent decision in the PAG v RBS litigation relates to the issue of legal advice privilege and whether that privilege could be claimed in respect of documents prepared by RBS' legal advisors in relation to the various regulatory investigations against the bank. The court held that the external legal advisors were engaged in the relevant legal context and the communications were privileged. The privilege extended to communications that formed part of the ordinary flow of information and instructions
The documents in respect of which RBS were claiming privilege were prepared by their legal advisors and communicated to the RBS Executive Steering Group (ESG). The ESG was set up to oversee the regulatory investigations into alleged rigging of LIBOR rates in various jurisdictions by RBS, to oversee the related litigation and to liaise with the Bank's legal advisors and provide instructions.
At an earlier hearing the court had questioned whether the claim of legal advice privilege over the documents was correct and an order for inspection was made, requiring an 'inspecting Judge' to review the documents and decide whether they were correctly withheld from disclosure to the claimant.
In summary the Bank described the two types of high level documents in respect of which they were claiming privilege as follows;
- Confidential memoranda in the form of tables prepared by the Bank's legal advisors, which advised and updated the ESG on the progress, status and issues arising in the Regulatory Investigations. These documents formed the basis of discussions at the ESG meetings regarding the Bank's proposed strategy and the advice from its legal advisors;
- Confidential notes/summaries drafted by the Bank's legal advisors concerning the discussions between the ESG and its legal advisors at the ESG meetings. These notes reflected the legal advisors' views on the Regulatory Investigations - they also constituted summary 'minutes' of the discussions between the ESG and its legal advisors at the ESG meetings.
The court held that the Bank's legal advisors were engaged in the 'relevant legal context'. RBS were facing regulatory investigations in a number of jurisdictions that could have significant consequences. Dealing with and co-ordinating the communications and responses to those regulators was a serious and complex matter upon which RBS naturally wished to have the advice and assistance of specialist lawyers. The legal advisors were engaged to provide such advice and assistance, and that advice and assistance undoubtedly related to the rights, liabilities and obligations of RBS and the remedies that might be granted against it either under private law or under public law.
The court was also satisfied that the two types of ESG documents, in respect of which RBS were claiming privilege, formed part of a 'continuum of communication and meetings between the bank and its legal advisors, the object of which was the giving of legal advice as and when appropriate'.
PAG argued that even if legal advice privilege attached to the documents it was unlikely privilege would attach to the documents in their entirety. References to information concerning public events or to any dealings with regulators would not be privileged. The court did not accept that argument. The could held that communication of information between a lawyer and client can be privileged, provided that it is information that is communicated in confidence for the purposes of the client seeking and the lawyer giving, legal advice.
The court went on to say that 'there is a clear public interest in regulatory investigations being conducted efficiently and in accordance with the law. That public interest will be advanced if the regulators can deal with experienced lawyers who can accurately advise their clients how to respond and co-operate. Such lawyers must be able to give their client candid factual briefings as well as legal advice, secure in the knowledge that any such communications and any record of their discussions and the decisions taken will not subsequently be disclosed without the client's consent.' The ESG documents fell within that policy.
This is a welcome decision - providing clarification on the ability to claim legal advice privilege in documents between lawyers and clients, particularly in the context of regulatory investigations - when the subject of an investigation will clearly need to take legal advice on its position.
Temporary exemption allowing recovery of success fees in insolvency proceedings to end in April 2016
The Government has announced that the temporary exemption for insolvency proceedings that allowed the recovery of conditional fee agreement (CFA) success fees and after the event (ATE) insurance premiums from losing opponents, is to end. From April 2016 the general reforms to the operation of no win no fee conditional fee agreements that came into effect in April 2013 will apply to insolvency litigation proceedings.
This is disappointing news for insolvency practitioners who very often can only engage in litigation to secure recovery for creditors if conditional fee agreements for their own costs, and after the event insurance covering their opponents' costs, are in place. If success fees and ATE premiums cannot be recovered from an opponent, and must instead be borne by the insolvency estate, the number of insolvency cases that can be pursued will no doubt reduce.
The Government will be undertaking a review of the reforms brought in by Part 2 of the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act 2012 over the next two years (i.e. 2016 to 2018). Wragge Lawrence Graham & Co's insolvency experts will keep you updated.
FRC 'Standard for audit firms on Providing Assurance on client assets to the FCA'
Following consultation earlier this year the Financial Reporting Council (FRC) has now published its standard for auditors when reporting to the Financial Conduct Authority (FCA) on regulated firms' compliance with the FCA's Client Asset (CASS) rules (the Standard).
The Standard sets out requirements for practitioners undertaking such assurance work, together with guidelines on implementation. The Standard is designed to give practitioners guidance and to ensure that the CASS regime, recently strengthened by the FCA, is supported by sound assurance work. Its stated objectives include improving the quality of CASS assurance engagements; supporting and challenging CASS auditors; supporting the objectives of the CASS regime to safeguard client assets and monies; and managing the expectations of regulated firms and third parties of CASS engagements.
The Standard establishes requirements with respect to:
- The process for forming, and the expression of, reasonable assurance or limited assurance opinions;
- the provision of reasonable assurance to the FCA with respect to a firm's proposed adoption of:
- the alternative approach to client money segregation; and
- a non-standard method of client money reconciliation; and
- CASS auditor confirmations in respect of non-statutory client money trusts.
The Standard will apply to periods starting on or after 1 January 2016, though early adoption is permitted. It is supported by a statement of feedback from the consultation process and an impact assessment.
BIS Consultation on EU audit reform
The latest consultation by the Department for Business Innovation and Skills (BIS) on the technical legislative implementation of the EU Audit Directive closed on 9 December 2015.
The consultation document set out the government's proposals for implementation of the EU Audit Directive and Regulation, and the legislative provisions required to ensure implementation happens. The government has confirmed its commitment to applying only the mandatory changes required by the EU reforms, plus other changes that would benefit the UK business environment.
The key issues covered by the Consultation include:-
- The government's intention not to include additional entities in the definition of a Public Interest Entity (PIE);
- The requirement that all PIEs put their audit out to tender at least every 10 years and change their auditor at least every 20 years;
- The underpinning legislation needed for the FRC to introduce changes in ethical and technical standards for auditors as part of the implementation of the new Directive and Regulation;
- Confirmation that the draft implementing regulations and draft amendments to the Companies Act include the measures required to allow the changes to be delivered - including measures to make ineffective any agreement with a third party that restricts an audit client's choice of auditor;
- Confirmation that further provisions will be included in the final implementing regulations to cover:-
- Removal of auditors of PIEs by application to the court by the competent authority or a sufficient minority of shareholders or members; and
- Application of the implementation of the 2006 Directive to additional entities audited under EU law;
- Cooperation between competent authorities, transferring information and confidentiality;
- The reporting by auditors of PIEs to supervisory authorities; and
- The role of competent authorities in relation to the functioning of the audit market for PIEs.
This was one of four consultations conducted by separate regulatory authorities - the other three are being carried out by the FRC, the FCA and the PRA (Prudential Regulation Authority).