On 18 March 2021, the UK Government published its White Paper "Restoring trust in audit and corporate governance". The Paper proposes significant changes to director liability and responsibility in relation to reporting, payment of dividends and potential clawback of director remuneration. Responses are called for by 8 July 2021. Reforms in relation to corporate reporting are expected to be introduced first for premium listed companies and possibly two years later for certain other unlisted public interest enterprises ("PIEs"). The Government is consulting on the tests to be applied for the extension of PIE status from listed to unlisted large companies or groups, focusing on the number of employees and/or turnover or balance sheet size. Depending on the tests adopted, a further 1,000 to 2,000 companies could be brought into the expanded PIE regime.

The existing UK regulatory and legislative framework provides a number of important ways directors of distressed companies can be held to account for failures in relation to management of finances or adequate disclosure of a company's financial position. However, the Paper acknowledges that certain well-publicised corporate failures have shown that the UK's current mix of legal, listing rule and UK Corporate Governance Code (the "UKCGC") requirements applicable to companies' internal controls could work better together. As a result, a number of important additions are proposed for Boards / companies subject to the new regime, including:

  • Internal Control Statement: Boards will have to confirm annually that they have reviewed the effectiveness of the company's internal controls and how any deficiencies that have been identified are being remedied. This goes well beyond the current requirement of the UKCGC that the board simply confirms it has reviewed the effectiveness of internal controls. Interestingly, the Government is proposing that the board, rather than just the CEO and CFO as under the US Sarbanes-Oxley rules, should acknowledge its responsibility for maintaining adequate internal controls for financial reporting and, after annual review, confirm the effectiveness of those controls in a statement included in the annual report. The Government is not currently proposing requiring external auditor assurance or attestation, except in limited cases where, for example, there has been a serious and demonstrable internal controls failure, although is inviting comments on the adoption of mandatory external attestation.
  • Dividends: Government proposes that companies should be required to state in annual reports the total amount of reserves that are distributable (or at least the minimum distributable amount), both on an individual parent company basis but also for the group as a whole by way of an estimate of the potential distributable reserves across the group. Directors would also need to confirm that not only are they satisfied that a payment of a particular dividend is within distributable reserves and consistent with fiduciary duties but that they reasonably expect that it will not threaten the solvency of the company over the next two years. Government proposes that these requirements should only apply to listed or AIM-traded companies but is open to arguments that they should also apply to other PIEs (e.g. large unlisted companies). The two year solvency confirmation is significant and contrasts with the one year statements required for private company capital reductions and capital-funded share buybacks.
  • New Regulator: PIE directors will become subject to enforcement action by the new corporate reporting and audit regulator that will replace the FRC – the Audit, Reporting and Governance Authority ("ARGA"). These enforcement powers would sit alongside the existing enforcement powers available under the Companies Act and under FCA rules and the Insolvency Service. ARGA will also have the power to impose more detailed requirements in relation to duties within its regime, including possible additional behavioural standards.
  • Remuneration Clawback: Government intends to ask for the UKCGC's current requirements for clawback of director remuneration to be strengthened so that they apply to a minimum set of conditions and with a minimum period of at least two years following the award.
  • New Corporate Reporting Obligations: Two new disclosures will be required – an annual Resilience Statement and an annual (or possibly triennial) Audit and Assurance Policy. The Resilience Statement would build on and consolidate going concern and viability statements that are currently required in annual reports but would demand much more disclosure and analysis from the board. The Audit and Assurance Policy would have to describe the company's approach to seeking internal and external assurance of its corporate reporting over the next three years - a major extension and clarification of the level of external scrutiny of companies' current corporate reporting. These disclosures would apply initially to premium listed PIEs and then be rolled out to the new broader range of other PIEs two years later.