Corporate Law Update
- The Financial Conduct Authority sets out its proposed next steps in relation to climate change and sustainability reporting
- The court prevents a party from resurrecting a dissolved limited liability partnership solely to pursue an unmeritorious claim
- The UK Government has published its annual report on modern slavery
- A few other items
The Financial Conduct Authority (FCA) has published Feedback Statement FS19/6, in which it has set out its plans for the future of corporate reporting on climate change. The response follows the FCA’s Discussion Paper DP18/8 on climate change and green finance published in October 2018.
In short, the FCA is proposing the following:
- Extending climate disclosures. The FCA will consult in early 2020 on new rules to require “certain listed issuers” to make climate-related disclosures aligned with the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures.
The FCA has not said what these disclosures would be or which entities would be required to make them. However, it has said it would take a “proportionate approach” and that any changes would (initially, at least) be introduced on a “comply or explain” basis.
- Other sustainability reporting. The FCA will continue to consider whether disclosures beyond climate issues are adequate to support investors’ business, risk and investment decisions.
- Dissemination of ESG information. Finally, the FCA intends to review the nature and quality of information published by specialist data service providers on ESG disclosures by issuers and, in due course, to examine how transparent those providers’ methodologies are.
The Court of Appeal has held that a limited liability partnership (LLP) that had previously been dissolved could not be restored to the register in order to cause it to fight a claim which had no merit.
Grupo México SAB de CV v The Registrar of Companies concerned an application to rectify the register of LLPs at Companies House to show that an LLP had been (and remained) dissolved.
The LLP in question had been incorporated in 2003 by two corporate services companies on behalf of a trust whose ultimate beneficiary (“G”) was a Mexican national. By 2005, the LLP was late in filing accounts. In 2008, on the assumption that the LLP was defunct, the Registrar of Companies struck the LLP off the register, causing it to be dissolved and to cease to exist.
In 2011, G applied to the Registrar to restore the LLP so that he could, through the LLP, fight a claim in Mexico against his former employer (“GM”) and that company’s CEO (“L”). It is worth noting that G had already brought several claims against GM and L in Mexico, all of which had been thrown out by the courts. The latest claim by G had equally little prospect of success.
G made an application under section 1024 of the Companies Act 2006 (the “Act”), which allows a former member of an LLP to apply for it to be restored without obtaining a court order (a so-called “administrative restoration”). However, G had never formally been a member of the LLP, (rather, the members had been the two service companies).
Nonetheless, G made an application, declaring himself a former member and including documentation purporting to show that he had been a member since 2007. Those documents had been backdated and were false. The Registrar, taking the application at face value, restored the LLP, causing it to come back into existence and allowing G to use it to continue his claim against GM and L.
GM and L wished to reverse the restoration so that the LLP could not continue vexatious claims against them in Mexico. However, it is not possible to appeal against an administrative restoration. GM and L therefore applied to the Registrar under section 1096 of the Act, which allows the Registrar to remove information from the register if it derives from factually inaccurate or forged information.
Specifically, GM and L asked the Registrar to remove the LLP’s “Active” status with the effect of reversing the administrative restoration and causing the LLP to revert to being dissolved. Indeed, if successful, the LLP would be regarded as having been dissolved since 2008 and as never having been restored. As a result, it would not be able to pursue its claim against GM and L.
However, the Registrar cannot remove information from the register which affects the formation or dissolution of an LLP unless the presence of that information has caused, or may cause, damage to the LLP. Even then, the LLP’s interest in removing the material must outweigh the interest that any third parties might have in keeping the information on the register.
What did the court say?
In summary, the court allowed the application and reversed the restoration.
There was little doubt in the court’s mind that the material G had provided to the register was inaccurate and that he had done so dishonestly. The main questions for the court were what information (if any) affected the LLP’s dissolution and whether the LLP was likely to suffer damage if that information remained on the register.
The court said that the information G had provided it with, whilst inaccurate, did not affect the LLP’s dissolution. It was information which G needed to provide in order to get the LLP restored, but the decision whether to dissolve the LLP had been for the Registrar. This meant that the Registrar could remove it whether or not the LLP was likely to suffer any damage from it.
The key piece of information was the word “Active” on the register. It was this word that was causing the LLP to remain in existence following its restoration.
G had argued that an LLP’s existence could never be damaging to it. However, the court disagreed. It said that bringing an LLP back into existence could expose it to liabilities, including (as in this case) costs wasted on an action that was highly unlikely to succeed.
G also argued that, in deciding whether to remove the information, it was essentially deciding on the merits of the Mexican claim, which was not appropriate. The court disagreed. Effectively, it said that the likelihood of the LLP succeeding in the Mexican claim was relevant to whether the LLP was likely to be harmed by the register showing its continued existence. The judges decided that it was.
As a result, the court ordered the LLP’s “Active” status to be revoked, with the result that it reverted to its dissolved state.
What does this mean for me?
The judgment suggests that the application to restore the LLP was an opportunistic attempt to bring what ultimately would prove to be a pointless claim. G was not helped by the fact that he had submitted false information to the Registrar to get the LLP restored.
But there will be cases where someone wants to restore an LLP or company in order to pursue what they genuinely (albeit perhaps misguidedly) believe is a good claim. In this case, if G had never allowed the LLP to neglect its filings and so be struck off, the matter would never have come to court.
Although the facts of this case are peculiar, they do give rise to some practical points:
- Keep your company/LLP filings up to date. Companies House will strike off an entity that does not file its annual accounts or confirmation statement. In this case, by failing to file its accounts, the LLP left itself open to being dissolved.
- Don’t mislead Companies House. Supplying false information to the Registrar is a criminal offence. Specifically in this case, if G had not provided inaccurate information, it would have been much harder for the court to find that the LLP’s “Active” status was inaccurate.
- Be careful before striking off. Although in this case the Registrar initiated the action, many strike-offs are initiated voluntarily by the company or LLP itself. It is critical before striking off an entity to check whether it has any claims left to pursue, however likely the chance of success.
The UK Government has published its 2019 annual report on modern slavery. The report provides information on the number of offences recorded and prosecuted under the Modern Slavery Act 2015, including the number of prosecutions that resulted in convictions.
The report notes that 162 defendants were prosecuted for a total of 337 slavery and human trafficking offences in 2018, with a total of £4,656,179.69 of assets being recovered. In all cases, the figures are lower than in 2017.
Of interest to businesses are the Government’s comments on supply chain reporting under section 54 of the Act. The report states that the Government will be publishing its response to the consultation it launched in July on potential changes to the reporting regime. In that consultation, the Government asked for views on (among other things) making reporting on certain items mandatory, imposing a new reporting deadline and introducing civil penalties for non-compliance. For more information on the consultation, see our previous Corporate Law Update.
The report also repeats the Government’s intention to create a central online reporting service for statements published under the Act. This would both allow interested parties to view the statements in one place and assist the Government in monitoring compliance.
- Corporate reporting. The Financial Reporting Council (FRC) is seeking views from stakeholders on the future of corporate reporting. The consultation takes the form of an online survey with multiple choice questions to gauge whether stakeholders are interested in information on a company’s operations, governance, audit, performance and prospects, and the way in which they would like companies to present information. The survey closes on 15 November 2019.
- Corporate reporting. The European Securities and Markets Authority (ESMA) has published the common enforcement priorities that it and EU national securities regulators will pursue when examining financial reports for the 2019 season. Aside from specific accounting issues, ESMA has drawn attention to non-financial disclosures relating to environmental and climate-related matters, key performance indicators (KPIs) and alternative performance measures (APMs).
- Climate-related reporting. The FRC has published a new report on climate-related reporting by companies. The report suggests that companies are falling short of investor expectations for clear reporting on climate-related issues. It sets out the matters on which investors expect companies to report and provides practical recommendations for improvements (including using the Task Force on Climate-related Financial Disclosures (TCFD) framework for reporting).
- Non-financial reporting. The Government has published a report on stakeholder perceptions of the UK’s non-financial reporting (NFR) regime following research carried out on its behalf by PwC. Respondents said that NFR was useful, but that a lack of “common metrics” and variations in “materiality” makes it difficult to compare different companies’ reports. Stakeholders felt that NFR will become more relevant as the focus on diversity and climate change increases.