Corporate law update

In this week’s update: more details on plans for reforms of governance, audit and executive pay, Companies House is ending its temporary strike-off policy, the court orders virtual meetings on a scheme of arrangement and the FRC calls for participants in a review of company disclosures.

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Government sheds more light on audit and governance reforms

The UK Government has published its response to a recent inquiry by the Business, Energy and Industrial Strategy Committee.

The response sets out the Government’s proposals and expectations in the on-going examination of corporate governance, audit reform and executive pay, following the recent Kingman and Brydon reviews and the review of the audit market by the Competition and Markets Authority.

The key points coming out of the Government’s response are set out below.

  • The Government remains committed to replacing the Financial Reporting Council with a new statutory regulator: the Audit, Reporting and Governance Authority (ARGA), which will have stronger powers to scrutinise and enforce compliance.
  • It expects to see further progress on aligning executive pension contributions with those of the workforce and notes that, following the introduction of the 2018 UK Corporate Governance Code, more than 30 FTSE 100 companies have changed their pension policies.
  • The Government will consider the Brydon review’s recommendation that performance indicators used to calculate executive pay be subject to audit and will respond in due course.
  • Although companies are free to choose whether to apply the UK Corporate Governance Code provision that directors’ remuneration policies should include malus and clawback mechanisms, the Government expects companies to act on this provision and shareholders to use their binding vote on companies’ remuneration policies to ensure companies put these mechanisms in place.
  • Finally, the Government remains committed to legislating for comprehensive reforms of company audit and intends to bring forward legislation when Parliamentary time allows.

Companies House to end temporary striking-off policy

Companies House has announced the end of its temporary policy for voluntary company strike-offs. Previously, Companies House was accepting applications for voluntary strike-offs but was suspending the dissolution process to give creditors and others time to object.

This policy of suspension will not apply to applications made from 10 July 2020 onwards.

In addition, Companies House will re-start suspended strike-off applications on 10 September 2020. Absent any objections, a company that has applied for a voluntary strike-off before 10 July 2020 can expect to be dissolved by mid-November.

Court allows scheme meetings to be held electronically

For the second time in three months, the High Court has ordered that meetings of creditors on a scheme of arrangement can be held electronically by telephone and video conference without the creditors needing to come together physically.

What happened?

In In the matter of African Minerals Ltd (in administration) [2020] EWHC 1702 (Ch), the High Court was asked to convene meetings of the creditors of a company that had recently been placed into administration. The purpose of the meeting was to approve a proposed scheme of arrangement under Part 26 of the Companies Act 2006 between the company and its creditors.

Among other things, the court had to consider whether to allow the meetings to be held virtually, by telephone and video conference, to facilitate participation during the on-going Covid-19 pandemic.

The court has previously approved virtual scheme meetings in the matter of Castle Trust Direct plc [2020] EWHC 969 (Ch) (see our previous Corporate Law Update for more information). However, the judge in that case noted it might now always be appropriate to hold meetings virtually, and that this would likely depend on the extent of the Covid-19 pandemic and any associated social-distancing restrictions at the time of the proposed meeting.

In this case, the proposed meeting would be held on 20 July 2020, at a time when the UK Government and the UK’s devolved administrations would most likely have substantially relaxed lockdown and social-distancing restrictions. It was therefore not clear whether the supervening circumstances that had applied during the Castle Trust Direct hearing were still relevant.

What did the court say?

The court allowed the meetings to be held virtually. The judge felt that it was sufficiently uncertain whether a meeting could be held with more than a very small number of attendees and whether people would be willing to attend.

The court considered the possibility of ordering “hybrid meetings” so as to allow any creditors who wanted to attend in person to do so. However, the judge felt that this would cause significant difficulties, especially if too many invitees turned up and had to be turned away, potentially leaving them unable to join the meeting at all.

What does this mean for me?

Again, this is good example of the courts showing pragmatism in responding to the difficulties created by the on-going Covid-19 pandemic. Given the decision in Castle Trust Direct, it’s not surprising that the court reached the decision it did.

But it is important to note that the court took seriously the previous “test” laid out in Castle Trust Direct, namely that the court would order the scheme meetings to be held virtually only if it were appropriate to do so in light of the circumstances at the time. In this case, having tested the boundaries of that concept, the court was satisfied that it was right to do so, but, if and as lockdown restrictions continue to be eased, the likelihood of the court ordering virtual scheme meetings will naturally diminish.

Although both judgments are set firmly within the context of Covid-19, it seems clear that the courts will now be prepared to entertain virtual meetings in any circumstance where convening a physical meeting is very difficult or impossible. The decisions provide useful flexibility should we encounter a similar public health emergency in the future.

Although both decisions relate to schemes with creditors, we see no reason why a court would not be prepared to show similar flexibility for scheme of arrangement between a company and its members (for example, its shareholders).

It also seems certain that the court would demonstrate similar flexibility for a scheme of arrangement under the new Part 26A of the Companies Act 2006, which was recently inserted by the new Corporate Insolvency and Governance Act 2020 and introduces a new restructuring plan for companies in financial difficulty.

Also this week…

  • FRC calls for views on section 172 reporting. The Financial Reporting Council’s Financial Reporting Lab is calling for participants in a new project on corporate disclosures on stakeholders. The project will consider the usefulness to investors of disclosures about stakeholders across a range of reporting formats. In particular, it will seek to identify how information about stakeholders can be reported most effectively by examining existing practice and understanding investors’ needs. Persons interested in participating should contact the Lab.