The Libor Scandal and “Soft Law”

The ideal of sustainability is key to all modes of human activity and the financial sphere is no different. Following the onset of the global financial crisis, the governance of banks and business entities emerged as a burning issue. The Libor scandal has only served to intensify calls for greater accountability and transparency. Like HSBC, Barclays and UBS which have already been fined, see post here, the Royal Bank of Scotland (RBS) has jumped on to the whirligig and it has been fined £390m ($610m) by UK and US regulators for its part in the Libor rate-fixing scandal. The Financial Services Authority has fined RBS £87.5m and £300m shall be paid to US regulators and the US Department of Justice.

A large body of opinion, myself included, advocates using criminal law punishments to bring about change and force banks and businesses to behave and become better citizens in the financial world. Key academics – like Professor Bainbridge and Barry Turner – have endorsed my views. However, on proper analysis, perhaps it was I who had unknowingly subscribed to such well-established positions. Yet, equally weighty reasons exist why “soft law” options may present more advantageous alternatives to solving the problems in the financial sphere. Last month, acclaimed lawyer and academic Professor Roger McCormick – author of the celebrated banking textbook Legal Risk in the Financial Markets and Director of the LSE’s Sustainable Finance Project – took the time explain to me why options other than criminal punishments needed exploration to tame the crises emerging in the financial world. And I remain extremely grateful to him.

Directors’ remuneration: proposed amendment regulations

Lucian Bebchuck and Jesse Fried’s seminal study Pay without Performance: The Unfulfilled Promise of Executive Compensation and similar critiques have killed stone-cold the argument that arm’s-length contracting works: the argument has not been resurrected and it is widely accepted that in the corporate sector pay remains decoupled from performance. For Bebchuck and Fried – both professors of corporate law at Harvard University – management can easily manipulate directors and, rather than creating value for the company, everyone is more interested in personal gain at the cost of the company.

From this perspective “market forces are neither sufficiently finely tuned nor sufficiently powerful to compel” the conventional view of corporate governance which assumes that executives will be rewarded for performance and not failure. It is therefore not surprising that in order to win voters’ support, governments everywhere in Europe are making promises to reform the dynamics of the pay and power equation.

The Secretary of State for Business Innovation and Skills (Mr Vince Cable, “the business secretary”) is keen to be seen as a promoter change in the business world and is hence proposing reform which strengthens shareholder democracy and promote the public interest.

Shareholder Democracy, Corporate Governance and Future Reform

Writing on the corporate governance blog earlier this month, Bob Tricker observed that “serious”  interest in corporate governance is a recent phenomenon which only came to the fore following Sir Alan Cadbury’s 1992 Report. The dichotomy is that despite the existence of regulatory bodies such as the US Securities and Exchange Commission since the mid-1930s, it was not until problems such as the Enron scandal, the sub-prime crisis and more recent Libor scandal – that “corporate governance” became a buzzword in the business sphere, company law and regulation.

For Tricker, corporate governance  – to which constructs such as marketing, production, finance, operations research, and management information systems have only recently ceded ground – is quickly becoming the focus of a company’s organisational chart. Themes such as the board of directors, executive directors’ remuneration and their relationship with management are all now very much at the apex of the debate about issues such as shareholder democracy, accountability and transparency in the corporate sphere. It is often said that good corporate governance is about promises kept: Macey, Corporate Governance: Promises Kept, Promises Broken (2010). Conversely, bad corporate governance is considered “promise breaking behaviour”.

Re Globespan Airways: Administration, Liquidation and Registration

Re Globespan Airways Ltd (In Liquidation) also called Cartwright & Anor v The Registrar of Companies [2012] EWCA Civ 1159 (24 August 2012), read judgment.

The Court of Appeal (Lord Neuberger MR, Arden and Moses LJJ) has unanimously held that it was not possible for an administrator of a company to convert administration into a creditors’ voluntary liquidation (CVL) by simply giving a conversion notice to the Registrar of Companies  (“the registrar”) because conversion only occurred once the registrar had registered a notice on the company’s file at Companies House.

In taking the above approach, the Court of Appeal has reversed Briggs J’s earlier decision that where a notice of movement from administration to CVL under Schedule B1 (“administration”) paragraph 83 of the Insolvency Act 1986 (“the IA 86”) was received by the registrar before the termination of the administration, paragraph 83(4) was to be interpreted as meaning that the date of receipt of the notice was the effective date of registration, regardless of whether the administrative steps necessary for registration had been completed.