Sports Direct International Plc v The Financial Reporting Council

Hearing dates: 29 th and 30 th January 2020

Approved Judgment

The Appellant (‘Sports Direct’) appeals against the order of Mr Justice Arnold dated 11 September 2018 by which he ordered it to disclose certain documents to the Respondent, the Financial Reporting Council (‘the FRC’). The FRC is the body which is responsible for amongst other things regulating statutory auditors and audit work. Its powers to take action when auditors are suspected of misconduct are set out in the Statutory Auditors and Third Country Auditors Regulations 2016 (SI 2016/649) (‘SATCAR’). SATCAR confers on the FRC a power to require certain persons to provide it with information relating to the audit of the accounts of “any public interest entity”, a term which includes Sports Direct. The FRC has also adopted an Audit Enforcement Procedure (‘AEP’) which provides in more detail for how the FRC carries out investigations, takes decisions, imposes sanctions and determines appeals.

The FRC is currently conducting an investigation into the conduct of Sports Direct's former auditors, Grant Thornton UK LLP and of an individual at that firm referred to as Subject A. The investigation concerns the audit of the financial statements of Sports Direct and its subsidiaries for the year ending 24 April 2016 and in particular the engagement by a subsidiary of Sports Direct called Sports Direct Retail of an entity called Barlin Delivery Ltd to provide delivery services to that subsidiary's customers. The concern is that a relationship between the owners of Barlin and Sports Direct was not disclosed in the group's accounts.

Although the subjects of this investigation are Grant Thornton and Subject A and not Sports Direct, it is accepted that Sports Direct is one of the persons to whom a request for documents and information may be issued by the FRC. During April and May 2017, the FRC issued notices to Sports Direct under para. 1 Schedule 2 of SATCAR and rule 10(b) of the AEP seeking certain categories of documents. The relevant notice for our purposes was issued on 20 April 2017 (‘the Notice’). It stated that for the purposes of the investigation being carried out by the FRC, Sports Direct was required to provide in electronic format all emails and attachments to emails in the possession and control of Sports Direct which (i) relate to the audit; (ii) are held by one or more of five identified custodians; (iii) are dated within certain specified date ranges; and (iv) are responsive to one or more of 27 different specified search terms. The documents requested by the Notice were required to be produced on or before 18 May 2017 and the Notice set out the penalties that could be imposed on Sports Direct if it failed to comply.

About 2000 documents were provided by Sports Direct to the FRC in response to the Notice but 40 documents have been withheld on the grounds that they are covered by legal professional privilege (‘LPP’). They comprise emails and attachments to emails sent to or by Sports Direct's legal advisers, either internal or external. The legal advice that Sports Direct sought related to various matters but included, for example, a challenge by the French, Irish and Finnish tax authorities to the arrangements devised by Sports Direct and its adviser Deloitte in respect of VAT on the international sales of Sports Direct Retail. Sports Direct has declined to say exactly what the attachments to the withheld emails are but have stated that they include for example contracts between a subsidiary and a third party. Arnold J was invited to determine the issues before him as a matter of principle without regard to the particular nature of the documents. We were invited to take the same approach in this appeal.

The FRC does not accept that Sports Direct is entitled to withhold the 40 documents. The FRC argues that although the emails do contain material that would ordinarily be regarded as protected by LPP, they fall within a narrow exception recognised in the case law which means that in the particular circumstances of this request there would be no infringement of Sports Direct's privilege if the emails were handed over. Alternatively, the FRC argues that any infringement would be a technical infringement only and would be authorised by the SATCAR regime. That issue is the first issue arising in this appeal and has been referred to as the “Infringement Issue”. The judge accepted the FRC's argument on the Infringement Issue and ordered that the emails and their attachments be disclosed. The FRC argued in the alternative that even if the emails themselves were protected by LPP, some of the attachments to those emails were pre-existing documents and were not protected by LPP simply by being attached to privileged emails. The judge accepted that argument as well. That issue has been referred to as the “Communication Issue”. Sports Direct appeals against the judge's decision on both the Infringement and the Communication Issues. Mr Lissack QC leading Mr Sher appeared before us on behalf of Sports Direct and Mr Simpson QC leading Ms Loveridge appeared on behalf of the FRC.

SATCAR and the FRC's information gathering powers

SATCAR implements the United Kingdom's obligations under Regulation (EU) 537/2014 on specific requirements regarding statutory audit of public interest entities (OJ L 158/77 27 May 2014). Regulation 3 of SATCAR sets out the responsibilities of the FRC, including the public oversight of statutory auditors; the determination of technical standards and other standards of professional ethics and internal quality control; the determination of eligibility criteria for appointing people to be statutory auditors and their registration; the monitoring of statutory auditors and audit work by means of inspection; the investigation of statutory auditors and audit work; and the imposition and enforcement of sanctions.

Regulation 10 of SATCAR provides for Schedule 2 to have effect with regard to the FRC's investigation powers. Schedule 2 provides as follows:

i) Paragraph 1(3) provides that the FRC may give notice to any person mentioned in sub-paragraph (4) requiring that person to provide information relating to the statutory audit of the annual accounts or the consolidated accounts of any public interest entity.

ii) The persons mentioned in paragraph 1(4) include any person involved in the activities of a statutory auditor, any public interest entity and any subsidiary or parent of a public interest entity. A “public interest entity” is defined in regulation 2 as including “an issuer whose transferable securities are admitted to trading on a regulated market”.

iii) Paragraph 1(6) provides that a notice may require the creation or provision of documents specified in the notice.

iv) Paragraph 1(8), which is key to this appeal, provides that a notice under sub-paragraph (3) does not require a person to provide any information or create any documents which the person would be entitled to refuse to provide or produce in proceedings in the High Court on the grounds of LPP.

v) Paragraph 2(1) provides that if a person fails to comply with a notice under paragraph 1, the FRC may apply to the court, which is defined by paragraph 4(4) so as to include the High Court.

vi) Paragraph 2(2) provides for what happens on such an application:

“If it appears to the court that the person has failed to comply with the notice, it may make an order requiring the person to do anything that the court thinks it is reasonable for the person to do, for any of the purposes for which the notice was given, to ensure that the notice is complied with.”

The AEP, adopted on 17 June 2016, describes the various stages of the procedure to be followed when an auditor is alleged to have contravened the rules. The initial stages are conducted by a Case Examiner who determines whether the matter is suitable for resolution through “constructive engagement” with the statutory auditor or audit firm. If not, the Conduct Committee then decides if there is a good reason to investigate an allegation. If there is, the Conduct Committee refers the matter to the Executive Counsel who is a legally qualified officer of the FRC. The Executive Counsel has investigatory powers under rules 9 – 15 including wide powers to request specialist advice, engage experts and enter premises on notice. The Executive Counsel can issue a decision notice which sets out any adverse findings against the auditor with reasons and proposes a sanction with reasons. If the respondent does not agree with the decision notice or fails to comply with it, the Executive Counsel refers the matter to the Enforcement Committee. The Enforcement Committee arrives at a decision whether or not the respondent is liable to enforcement action. If the respondent rejects the Enforcement Committee's decision the Enforcement Committee refers the matter for a hearing before a tribunal. A respondent may appeal a final decision notice made by that tribunal to the Appeal Tribunal which may revoke or vary the decision, remake a decision or remit the case back to the tribunal.

The case law on LPP and statutory information gathering powers

Recent decisions of this court have considered the general principles governing LPP and...