Lloyd's Maritime and Commercial Law Quarterly
TRUE AND FAIR REVISITED
By Hugh Evans*
The auditors of a company are required to report to the members whether, in their opinion, a true and fair view is given in the accounts of the state of the company’s affairs at the end of the financial year, and of the company’s profit or loss for that period.1 The meaning and application of the crucial term “true and fair” has never been directly considered by the courts, although it has been the subject of continuing dispute by lawyers and accountants ever since the wording was introduced by the 1948 Companies Act.2 The true and fair requirement is topical because it is the only effective barrier against creative accounting in general and unjustified off-balance sheet financing in particular.
Sense and reference
There are two principal legal meanings associated with the phrase “true and fair”. In the technical definition, the expression means that the accounts have been prepared in accordance with a system of accounting in general use. That system will now be the authoritative Statements of Standard Accounting Practice (“SSAPs”) issued by the Accounting Standards Committee.3 By contrast, the ordinary language definition requires that the phrase should be given its ordinary meaning conveyed by the three common English words used.4
I shall argue that this dispute, if it still exists, must clearly be resolved in favour of the ordinary meaning. In my view, the real dispute is between two views of what the words “true and fair”, given their ordinary meaning, actually refer to; what sort of accounts satisfy the requirement? The conservative position is that the phrase generally refers to accepted accounting practice, which will now be the SSAPs; compliance with accepted accounting principles is prima facie evidence that a set of
*Barrister. I would like to thank George Bompas and Jalil Asif for their helpful comments on this article. In the footnotes, “Companies Act” is abbreviated to “C.A”.
1. C.A. 1985, s. 235, as inserted by C.A. 1989, s. 2. See also C.A. 1985, S. 226, which requires the directors to prepare accounts giving a true and fair view.
2. The main legal articles include: Baxt, “True and Fair Accounts—A Legal Anachronism” (1970) 44 A.L.J. 541 (hereafter “Baxt”); Bird, “What is a ‘True and Fair View’?” (1984) J.B.L. 480 (hereafter “Bird”); Chambers, “Accounting Principles and the Law” (1973) A.B.L.R. 112 (hereafter “Chambers”); Hoffmann and Arden, “Legal Opinion on True and Fair”, reprinted in Palmer on Company Law, 24th edn., F–900 (hereafter “Hoffmann & Arden”); Lasok and Grace, “The True and Fair View” (1989) 10 Co. Law. 13 (hereafter “Lasok & Grace”); Mannix, Professional Negligence, 3rd edn., Chap. 3 (hereafter “Mannix”).
3. Bird, 481; “Legal Implications of the Introduction of Current Cost Accounting–I”, (1977) 127 N.L.J. 95, col. 1; Dixon, “The Disclosure of Corporate Financial Standing—Can the Companies Act Protect the Community from Corporate Insolvency?” (1979) A.B.L.R. 199, 207.
4. Hoffmann & Arden; Chambers.
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