A group of top lawyers in the City of London has warned the UK government that guidance from the Institute of Chartered Accountants of England and Wales (ICAEW) has got the law wrong on dividend payments to investors.
In a lengthy comment on the Department for Business, Energy and Industrial Strategy’s (BEIS) corporate governance White Paper proposals, the City of London Law Society Company Law Committee warned:
“As has previously been noted in our correspondence with BEIS … [ICAEW guidance note] TECH 02/17 does include certain statements as to what amounts to a distribution which … do not, in our opinion, reflect the law.”
The document identified guaranteed distributions and intra-group loans as two areas where the accountants have got it wrong.
The lawyers called on the government to conduct “an expert review” into the law on distributions with a view to reducing “some of the complexity and [giving] new emphasis to the existing duty [on directors] to consider a company’s ability to pay its creditors”.
Absent a review, they continued, they urged the government to hand over responsibility for developing and maintaining guidance – not binding rules – on distributions to the planned ARGA, which replaces the Financial Reporting Council.
The Committee’s submission also noted that the “realised profit and loss” approach to distributions “is an accounting concept”, and that what constitutes a distribution and whether or not one can be made “is a question of law” for “lawyers to advise on and for the Courts to determine.”
One alternative, they argued, would be to move to a solvency-based model.
The comments look set to reignite the long-running row in the UK over the validity of corporate payments to investors in which the Local Authority Pension Fund Forum has accused the accounting profession of acting like a “state within a state”.
The ICAEW document, while praised in some quarters as helpful guidance on a complex area of law, has also faced criticism that it is overly long and complex. Critics say this is proof that the issue is ripe for reform and simplification.
The City lawyers’ intervention in the debate is not the first time that the guidance has come into question.
In response to a question in the UK Parliament from former MEP Sharon Bowles, a government minister said the guidance was prepared by the ICAEW and the Institute of Chartered Accountants of Scotland “to support their members” and not “in fulfilment of a statutory obligation, or in response to any wider regulatory initiative.”
In response to a request from IPE to clarify the status of its guidance, the ICAEW said: “We have published guidance to help people apply the law.
“The Companies Act refers to ‘profits or losses of the company as fall to be treated as realised in accordance with principles generally accepted at the time when the accounts are prepared, with respect to the determination for accounting purposes of realised profits or losses’.
“Our guidance helps people when they’re assessing what the ‘generally accepted’ principles were. We do not have a statutory obligation to provide guidance – there is a strong demand for guidance in this area and we have chosen voluntarily to provide guidance, alongside ICAS, in carrying out our public interest role as a professional body.”
Tim Bush, who leads on governance and financial analysis with Pensions & Investment Research Consultants Ltd, however, saI’d the issue potentially runs deeper than the concerns identified in the lawyers’ submission to the BEIS white paper.
He said: “MPs on the BEIS Select Committee talked about more problem areas than those mentioned in the City of London Law Society’s submission.
“In fact, they also pointed out that the ICAEW’s guidance was not consistent with the law and specifically referred to long-term contracts being overvalued.”
“I also presume that lawyers in private are telling people that it can’t be relied on.”