News Digest

FRC Report On Corporate Reporting And Audit

By The Financial Reporting Council (FRC) published a report for consultation on 7 January 2011, entitled "Effective Company Stewardship: Enhancing Corporate Reporting and Audit", which contains seven recommendations aimed at improving the dialogue between company boards and shareholders including:

Directors should take full responsibility for ensuring that an annual report, viewed as a whole, provides a fair and balanced report on their stewardship of the business. Directors should describe in more detail the steps that they take to ensure the reliability of the information on which the management of a company is based and transparency about the activities of the business and any associated risks. The growing strength of audit committees in holding management and auditors to account should be reinforced by greater transparency through fuller reports by audit committees and an expanded audit report that includes a separate new section on the completeness and reasonableness of the audit committee report. This should also identify any matters in the annual report that the auditors believe are incorrect or inconsistent with the information contained in the financial statements or obtained in the course of their audit. The consultation is now closed and details of the response awaited.

The FRC has also recently published "Guidance on Board Effectiveness" to assist companies in applying the principles of the UK Corporate Governance Code.

Representations By Directors In The Twilight Zone

In Lindsay v O'Loughnane (2010) the defendant was a director of two currency conversion companies. The claimant entered into a number of foreign currency exchange transactions with one of the companies but the claimant's money was not used to carry out the exchange and instead used to pay creditors of the company.

The claimant alleged that the defendant had made implied fraudulent misrepresentations by accepting his order, in terms that the defendant's currency exchange business was trading properly and legitimately and that by sending a trade note to the claimant, the defendant had implied that he intended to apply the claimant's monies to pay for the currency and hold them on trust in accordance with the terms and conditions that the claimant had signed.

The defendant submitted that none of these representations could be implied from the mere fact that the defendant, as a director and agent, had entered into a contract on behalf of the company. Otherwise, whenever a company became insolvent, directors and employees would be personally liable. The judge recognised the force of that argument where a director makes a contract in ignorance of the insolvent condition of the company. However, the judge held that in the present case the defendant knew the company was insolvent when it accepted the claimant's order. Therefore, the court held that the defendant had represented that the currency business was trading properly and legitimately, that this was false and therefore fraudulent. The director was held personally liable in deceit.

The case has implications for directors of companies in the "twilight zone" (nearing insolvency, somewhere between the point when the company's financial condition becomes difficult and the commencement of insolvency proceedings) who contract with third parties or continue to deal with them without letting them know of the company's difficulties. In such a case a director must be careful to ensure that there is no risk of misrepresentation, on which personal liability may attach.

In the Lindsay case the court went on to consider whether it would have allowed the corporate veil to be lifted, and the claimant to pursue a claim against the director that ought otherwise to have been pursued against the company. The court agreed that the only case where this has been...