In November 2016 the FRC began an investigation into the preparation, approval and audit Sports Direct’s financial statements for the year ending 24 April 2016, over concerns that an arrangement between a Sports Direct subsidiary, Sportdirect.com Retail Ltd (SDR), and Barlin Delivery Ltd had not been disclosed as a related party transaction in the company’s financial statements. 

The owner and a director of Barlin during the relevant period was John Ashley, the brother of Mike Ashley, who is Sports Direct’s chief executive.

The FRC was seeking some 40 documents and emails relating to information provided to Grant Thornton, the company’s auditors, about the arrangements with Barlin. Sports Direct argued that these were covered by legal advice privilege [The Financial Reporting Council Ltd and Sports Direct International Plc, [2018] EWHC 2284 (Ch)].

The High Court ruling stated: ‘The FRC contends that, even if all of the 40 documents in question are covered by legal advice privilege and even if SDI has not waived privilege in any of those documents by sending them to GT, production of the documents to the FRC for the purposes of the investigation would not infringe SDI’s privilege.

‘SDI disputes this. This is the most important and far-reaching issue raised by the present application, and the most difficult.’

The judge in the case observed: ‘Counsel for the FRC characterised SDI’s approach in responding to the rule 10 notices as one of obfuscation and delay verging on obstruction. In my view this criticism is entirely justified.

‘As counsel for SDI pointed out, however, the remaining issues between the parties on this application depend upon the extent of the FRC’s powers and upon the law of legal advice privilege.’

In the event, the High Court held that the production of documents to a regulator by a regulated person, solely for the purposes of a confidential investigation by the regulator into the conduct of the regulated person, is not an infringement of the legal professional privilege of a client of the regulated person in respect of those documents. 

The High Court also held that the same was true of the production of documents to the regulator by a client of the regulated person.

The judgment is the first to consider the FRC’s powers pursuant to SATCAR and is the FRC’s first application to the High Court for an order against an audit client in respect of the client’s failure to comply with a statutory notice requiring the production of documents.

Grant Thornton has made no comment.

In a statement, Sports Direct said: ‘The company would like to clarify that Sports Direct itself is not the subject of an investigation by the FRC, which has jurisdiction over accounting firms and accounting professionals.

‘Sports Direct is a witness in an FRC investigation, details of which were made public by the FRC on 28 November 2016. This court application relates to the FRC's requests for the provision of certain documents.

‘Following the handing down of a judgement today in the High Court, Sports Direct obtained leave to appeal certain aspects of the judgement from the judge, and intends to appeal additional aspects of the judgement in due course.’

Sports Direct’s annual general meeting (AGM) is to be held on 12 September 2018. Chief executive Mike Ashley will not be attending, with the agreement of the board, having notified them in August of his planned absence ‘due to overriding demands for his time’.

Ashley recently bought House of Fraser out of insolvency and is said to be considering a bid for another high street store chain, Debenhams.

In a statement, Sports Direct said: ‘The company is pleased to confirm ahead of today's AGM that trading is in line with our expectations of achieving between a 5% and 15% improvement in underlying EBITDA for the current financial year, excluding the acquisition of House of Fraser.’

Ashley said: ‘Our strategy to transform House of Fraser into the Harrods of the high street will be a game changer.’

The Financial Reporting Council Ltd and Sports Direct International plc, [2018] EWHC 2284 (Ch) is here

Report by Pat Sweet