The coronavirus pandemic has unmasked a host of corporate villains, yet so far, little—if any—action has been taken against them.
In many western European countries—which are among the hardest hit by the virus’ spread—companies of all sizes have deliberately withheld rents and payment to suppliers, as well as refunds to customers—all of which is either illegal or unethical (or both).
Hundreds of High Street businesses, including Burger King, openly said as the United Kingdom went into lockdown in mid-March that they were not going to pay their upcoming quarterly rent bills, thereby breaching contract. Richard Hodgson, chief executive of Yo! Sushi, told the Financial Times non-payment of rent was “not really a choice. It’s just a basic piece of economics.” Some leading restaurant chains, including Gordon Ramsay’s, have petitioned the government to give businesses a nine-month rent holiday, delaying payments until the first quarter of 2021. The government has said shops will not forfeit leases if they do not pay, but they will have to pay arrears in the future.
Meanwhile, many European airlines—including national carriers such as KLM and Lufthansa—are trying to avoid paying refunds and are offering customers vouchers or alternate flights. Beuc, the European consumer organization, has complained that some European Union (EU) member states have introduced measures to force consumers to accept vouchers for their cancelled travel, instead of allowing people to claim a direct reimbursement—as is their right under the EU’s Air Passenger Rights Regulations 261/2004.
Supply chain insolvency risks are also becoming increasingly evident as companies are left with goods—some with limited shelf-lives—no one wants or is able to buy. At the beginning of April, fashion retailer New Look said it was suspending payments to suppliers for existing stock “indefinitely,” telling them in a letter signed by chief executive Nigel Oddy the stock could be collected by its owners. The retailer also cancelled orders for its spring and summer clothing lines and said it wouldn’t pay costs toward them. One supplier said the company’s behavior was “totally out of order.”
Alka Kharbanda, partner and chief operating officer at law firm Blaser Mills Law, says “most companies are simply not paying their debts when due” because “they are trying to retain their own cash headroom and will either negotiate extended terms, or just not pay.”
She adds companies need to review their payment terms and conditions and work out which companies may need extended credit terms and which ones need to be reined in. She warns that companies that have cash-flow problems might try to argue “force majeure” to cancel the debts or payments, but she adds that these clauses carry a very high burden of proof.
Alternatively, she says, companies may seek to get out of the contract by other legal arguments, “such as frustration where performance of the contract is nigh on impossible, or something so different to what the parties originally intended as to make it a different picture. These legal principles are not straightforward arguments, but we are seeing them raised as reasons not to pay or perform a contract.”
Regulators have warned they have malpractice in their sights. For example, Italy’s competition authority, AGCM, has ordered several websites to remove “misleading” coronavirus panaceas from their online stores while forcing others to shut down completely. It has also targeted online platforms for selling unsafe hand sanitizers and protective masks and is investigating Amazon and eBay for allowing sellers to price gouge and provide buyers with misleading information.
U.K. financial regulator warns on ‘fee gouging’
On April 28, the Financial Conduct Authority (FCA), the U.K.’s financial services regulator, published a “Dear CEO” letter warning firms against “fee gouging” their cash-strapped corporate clients.
The FCA said it had heard “credible reports” of banks abusing their lending relationships with clients to demand lucrative roles on equity capital raisings they would never normally be awarded.
In some cases, said the FCA, these roles may be “in name only,” with the bank doing little or no new work in exchange for a share of the fees.
The letter followed complaints from several City firms, including the independent investment bank Numis, suggesting lenders with relatively limited capability in equity raisings were appearing on lists of paid advisers. This had prompted investors to question why lenders not normally associated with large-scale U.K. share issues, such as HSBC and Santander, had been paid to facilitate them.
Any bank trying to fee gouge their clients in such a way would potentially be in breach of several of the FCA’s regulations governing standards of market conduct, prevention of conflicts of interest, and acting in clients’ best interests. Furthermore, individuals could also be sanctioned under the regulator’s Senior Managers and Certification Scheme.
The FCA wrote, “we will be looking into this further, but want any practice of this nature to cease immediately,” adding “if we find further evidence to support these concerns, we will not hesitate to take action.”
This is not the first “Dear CEO” letter the FCA has sent out warning firms about their conduct since the U.K. went into lockdown. There have been another three regarding restrictive/prohibitive lending to smaller businesses, a reluctance to provide business interruption insurance to small companies, and the need for the sector to maintain support for retail investors.
Nor is it the first time financial services firms have taken advantage of their clients in a crisis. In February 2018, the FCA was forced to hand a Parliamentary select committee a damning report into the activities of RBS’ Global Restructuring Group (GRG), a specialist unit run within the bank to turn around struggling small and medium-sized enterprises affected by the 2008 financial crisis after the regulator’s continued delays to publish resulted in a threat of Contempt of Parliament.
The report found “widespread inappropriate treatment” of small businesses by GRG, resulting in “material financial distress” for thousands of customers. It found the focus on “upsides” and “opportunities” were explored to benefit the bank—not its customers. And too often the emphasis on closing deals was for the bank to regain its money rather than turnaround the business’ fortunes. In fact, 92 percent of potentially viable customers “experienced some form of inappropriate action by RBS,” with one in six customers suffering “material financial distress.”
Members of Parliament called the behavior “disgusting,” but a follow-up report by the FCA in June 2019 said it would take no action against the lender or senior staff, largely because commercial lending was (and still is) largely unregulated in the United Kingdom.
On April 30, the U.K.’s Competition and Markets Authority (CMA) announced it was investigating reports of businesses failing to respect cancellation rights during the coronavirus pandemic by refusing to give people their money back—either on time or at all. The CMA warned that if it finds evidence companies are failing to comply with the law, it will take “appropriate enforcement action,” including going to court if a firm does not address its concerns.
The regulator identified three sectors of particular concern: weddings and private events; holiday accommodation; and nurseries and childcare providers. The CMA also advised businesses not to profit by “double recovering” their money from the government and customers.
While regulators may not have engaged in investigations yet or launched many (or any) enforcement actions, lawyers warn they will do so later down the line and believe they will tackle “worst offenders” first.
“Regulators are redeploying their resources during the response to COVID-19, resulting in a reduction in the number or progress of investigations,” says Michael Ruck, partner at U.K. law firm TLT. “However, the top-level amount of fines or penalties imposed will not be relaxed.”
“Practical issues, such as lockdown, make it difficult for regulators to carry out inspections and enforcement to be carried out,” says Ed Cooke, founder of legal services firm Conexus Law, “but we should expect a slew of prosecutions once they are back up to full capacity.”
Experts agree that just because a regulator may not be in a position to clamp down on corporate misbehavior immediately, companies should be aware that the rules still apply and leniency and fine reductions should not be relied upon.
“Legal compliance standards in health and safety, environmental matters, fraud, anti-money laundering and consumer rights remain very much in place,” says Jeanette Burgess, partner and head of regulatory & compliance at law firm Walker Morris. “It is therefore imperative that companies ensure they continue to devote sufficient resource to maintain compliance functions during this period. Any attempt by a business—or those managing it—to seek to capitalize upon or profit from this global disaster by acting in a way that constitutes a breach of the regulatory framework does still risk civil action, disciplinary sanction, or criminal prosecution.”
Burgess adds that “almost all” regulatory legislation “factors in” criminal sanctions for non-compliance. A lot of the same legislation holds individuals managing the business to account where wrongdoing occurs through either their consent or neglect, too. And furthermore, warns Burgess, “there are no time limits” for the bringing of criminal proceedings for serious offenses.
“Board members must also be mindful of their collective and individual responsibilities, especially now when our backs are against the wall,” says Burgess. “A corporate governance culture which is seen to embrace and support those who speak out and challenge decisions is absolutely crucial.”
Rob Dalling, partner in the Investigations, Compliance and Defense team at law firm Jenner & Block, also thinks a strong, “top-down” ethical culture is vital if companies are going to take compliance seriously. He also thinks that companies “will be taking a serious risk if they think that regulators and enforcement agencies will simply let them get away with willfully disregarding regulations and ripping off clients, particularly consumers.”
Ultimately, however, he believes that public criticism “may well be the best weapon in the fight against corporate misbehavior” if companies seek to leverage a commercial or competitive advantage from the crisis.
“Parliamentary committees, the press, and consumers all have long memories, and each of them has the power to recall some very embarrassing details when pushed to do so,” says Dalling.