The True and Fair View in the European Union

Abstract

This paper explores the issue of the true and fair view (TFV) and the overriding principle within the European Union (EU), via a legally based analysis of the relationship between EU and national laws. We apply the supremacy of European law to methods of incorporating the TFV into national legislation, using Austria as a detailed case study, showing that all countries – maybe against their original intention – either have an override (as does Austria, contrary to the prevailing local opinion) or have failed to honour their EU commitments. As part of our argument, we explain the importance of the Roman law teleological principle in legal application and interpretation, as is well known in Continental countries. We show that the effect of the UK TFV override is in principle exactly analogous, only arguably even more powerful, which is not at all well known in Anglo-Saxon countries. We suggest reasons why the status quo ante in particular countries may be adhered to, and generalise the implications of our arguments.

Notes

Contact Committee (1991), Alexander (1993, 1996, 1999, 2001), Ordelheide (1993, 1996), van Hulle (1993, 1995, 1997), Parker and Nobes (1994/1996), van Hulle and van der Tas (1995), Arden (1997), Colasse (1997), Cook (1997), Stacy (1997), Walton (1997), Back (1999), Zeff et al. (1999), Nobes (2000), Evans (2003), Alexander and Jermakowicz (2006), Alexander and Eierle (2007); on an international level: McGee (1991), Higson and Blake (1993).

Von Savigny, System des heutigen Römischen Rechts (1840); cf. also David and Brierley (1985, paras. 38–43) on the revival of Roman law studies and its reception, who also state on p. 60 that ‘The Roman imprint is even more obvious and indisputable in the Austrian Civil Code (ABGB) of 1811.’

Notwithstanding the fact that the borderline given by the wording is frequently hard to detect – language is often lost at defining borderlines. The detection of that borderline for legal interpretation is subject to legal interpretation itself. Cf. on linguistic questions of legal language, wording and interpretation Busse (1999, pp. 1382–1391).

Also for Austria, it must be admitted that this is a rather theoretical standpoint. Öhlinger (2007, p. 38) holds that the Austrian Constitutional Court comes to its conclusions by using a wide variety of legal interpretation methods, without systematic approach, ranging from strictest grammatical interpretation to very free creation of judge-made law.

Cf. David and Brierley (1985, p. 153); for Germany also cf. Mu¨ller (1995, pp. 192–198).

In the UK, the words ‘true and fair’ were incorporated into company law in 1947, previously, the wording was ‘true and correct’, see Walton (1997, p. 727); also the words ‘full’, ‘fair’ and ‘just’ were used (Alexander, 1993, p. 60).

This was particularly true when it came to the implementation of the Fourth EC Directive: it was implemented in Germany in 1986. Austria in its implementation in 1990 referred heavily to Germany. However, Austria did not copy the German act of implementation, it departed in several questions (not only for the true and fair view requirement as discussed here, but also, for example, for provisions for production costs). One can safely assume that each departure from the German act is wilful and on purpose.

The more general legal provision prevails only where it is of a higher rank (constitutional law).

Beisse (1996, pp. 38, 45); contrary opinion: Weber-Grellet (1995, p. 350; 1996, p. 2090) and Walz (1998, p. 94); the Tomberger case of the ECJ might have lessened support for this point of view.

GoB comprise fundamental, mandatory accounting principles such as prudence, going concern, consistency, objectivity on the one hand, on the other they also include all specific rules that concretise the fundamental principles. See, among others, Nowotny (2000, § 195 paras. 6–18) and Alexander (2006).

Rough translation of § 264 para. 2 sentence 2 German Commercial Code: ‘Fu¨hren besondere Umstände dazu, daß der Jahresabschluß ein den tatsächlichen Verhältnissen entsprechendes Bild im Sinne des Satzes 1 nicht vermittelt, so sind im Anhang zusätzliche Angaben zu machen.’

Business persons only when big enough to be obliged to draw up accounts.

Titled: ‘Erster Abschnitt: Allgemeine Vorschriften’, translated: first part: general regulations, comprising §§ 189–216 Austrian Commercial Code.

Titled: ‘Zweiter Abschnitt: Ergänzende Vorschriften fu¨r Kapitalgesellschaften (Aktiengesellschaften und Gesellschaften mit beschränkter Haftung)’, translated: second part: additional rules for companies (public companies and private companies), comprising §§ 221–243 Austrian Commercial Code.

The Austrian Commercial Code (Handelsgesetzbuch) has been re-enacted and re-named with effect from 1 January 2007. The contents of the law changed in particular with regard to the definition of an ‘Unternehmer’ (‘entrepreneur’ or ‘business enterprise’, which includes business persons, partnerships, companies, etc.) who is subjected to the law. With regard to financial reporting, no changes have occurred. The contents as well as the numbers of the sections remained unchanged. The new name of the law is ‘Unternehmensgesetzbuch’, in short UGB. For reasons of simplicity, as an English translation ‘Commercial Code’ will be used for the time both before and after 2007.

Rough translation of § 195 Austrian Commercial Code: ‘Der Jahresabschluß hat den Grundsätzen ordnungsmäßiger Buchfu¨hrung zu entsprechen. Er ist klar und u¨bersichtlich aufzustellen. Er hat dem Unternehmer ein möglichst getreues Bild der Vermögens- und Ertragslage des Unternehmens zu vermitteln.’

Aktiengesellschaft (AG; public company), Gesellschaft mit beschränkter Haftung (GmbH, private company), under certain circumstances ‘GmbH & Co’ (partnership with only private companies as fully liable partners; this is a combination of two legal forms that is sometimes chosen for tax reasons; for accounting purposes it is treated as a company).

Rough translation of § 222 para. 2 Austrian Commercial Code: ‘Der Jahresabschluß hat ein möglichst getreues Bild der Vermögens-, Finanz- und Ertragslage des Unternehmens zu vermitteln. Wenn dies aus besonderen Umständen nicht gelingt, sind im Anhang die erforderlichen zusätzlichen Angaben zu machen.’

The Austrian translation of ‘true and fair view’, ‘ein möglichst getreues Bild’, differs from the translation offered in the German version of the Directive and from the wording of the German Commercial Code (‘ein den tatsächlichen Verhältnissen entsprechendes Bild’, which would re-translate as: ‘a view according to the facts’). It recognises the fact that annual accounts per se can never give a view according to the facts. However, it is generally contended that the difference in wording does not lead to different meanings, cf. van Hulle (1993, p. 100; 1995, p. 316); the several linguistic versions of the member states: Kloos (1993, pp. 134–135) and Parker and Nobes (1994/1996, pp. 70 et seq.).

VwGH 19 December 1991, 91/14/0031, 554 (VwGH, Verwaltungsgerichtshof, is the supreme court in administrative and fiscal matters), according to which one can assume that within the very same piece of legislation, one term has only one meaning.

Formats are prescribed for companies only.

The other (im)possible explanation, a different content of the two TFV requirements in § 222 and § 195, has already been rejected, for reasons see above.

In Germany, the wording of § 264 Abs. 2 Commercial Code, suggests that the required accounting principles are superior to the TFV, since the TFV shall be provided in compliance with required accounting principles (der Jahresabschluß der Kapitalgesellschaft (hat) unter Beachtung der GoB ein den tatsächlichen Verhältnissen entsprechendes Bild […] zu vermitteln). Irrespective of that wording, some scholars do consider the TFV as superior, as stated above.

Erläuterungen zur Regierungsvorlage des Rechnungslegungsgesetzes, zu § 222, speak of the TFV as being more than a mere prohibition of arbitrary accounting methods, but being a guideline for required accounting principles in the individual case (‘Maßstab fu¨r die Auslegung und die GoB sowie deren Umsetzung im jeweiligen Einzelfall’).

At this stage of the discussion, one also has to mention Art. 31 of the Fourth EC Directive, which has been fully implemented by § 201 Commercial Code, according to which departure from certain general accounting principles is admissible in exceptional cases, accompanied by extensive disclosure. In connection with Art. 2 para. 5 of the Fourth EC Directive, one can postulate that the exceptional cases allowing departure from the general principles of Art. 31 are the same exceptional cases allowing departure from provisions in the Directive in order to give a TFV. In other words, the failure to give a TFV by complying with a general principle and giving additional information in the notes is an exceptional case that permits departure from that principle. This is certainly true according to the Directive, but this must also be agreed to under Austrian law, even when one does not support the TFV override in Austria, since Austria has fully and explicitly transformed Art. 31 to national law, independent from the fact that a TFV override has not been explicitly implemented.

E.g. § 203 para. 4 Austrian Commercial Code allows (under certain circumstances) the capitalisation of interest cost as part of historical production cost. It does not allow the capitalisation of interest cost as part of historical acquisition cost. Given the assumption that the capitalisation of interest cost gives a truer and fairer view of the company's assets (the validity of that assumption shall not be discussed here), the capitalisation in case of acquisition of an asset, nevertheless, is not possible, because (a) § 203 para. 4 is a lex specialis, and (b) an override of the explicit wording cannot be justified by reference to the telos, the telos being expressed by the TFV requirement.

E.g. ECJ, Case C-91/92 Faccini Dori v. Recreb (1994) ECR I-3325; ECJ, Case C-106/89 Marleasing (1990) ECR I-4135, para. 8; ECJ, Case 14/83 Colson and Kamann (1984) ECR 1909, paras. 26, 28; ECJ, Case 157/86 Murphy (1988) ECR 690, para. 11; see, for example, Ahmann (1993, p. 271f.), Rodriguez Iglesias and Riechenberg (1995), Schmidt (1997, Art. 189 para. 40); the obligation of harmonious interpretation applies not only to national law implementing a Directive, but also to national law without specific connection with the Directives, cf. Craig and de Búrca (2008) with reference to ECJ, Case C-106/89 Marleasing and recently ECJ, Case C-397-403/01 Pfeiffer v. Deutsches Rotes Kreuz (2004) ECR I-8835, para. 115.

The highest Austrian courts have accepted the validity of the ‘interpretation in the light of the wording and purpose of the Directive’: Constitutional Court VfGH, VfSlg 14391/1995; Administrative Court VwGH 23 October 1995, Zl 95/10/0081; Civil Court OGH 29 February 1996, 8 Ob A 211/96.

The national courts have to follow the Directive (without asking for a preliminary ruling) and establish a TFV override – the courts have not been in the situation to judge on the matter yet.

At least this is the case in Austria, given full personal liability for business persons and partners.

ECJ, Case C-306/99 BIAO (2003) ECR I-1.

The (German) disconnection theory (Abkoppelungsthese, reduced role for the notes and for questions of presentation only) cannot be supported, due to the dual implementation of the TFV.

Gru¨nwald (1994, p. 55) rejects the lex specialis derogat legi generali rule in the case of accounting law. To his understanding, the lex specialis rule only applies in the case of conflict of norms. A specific accounting provision however can never be in conflict with the TFV. On the contrary, it must always be supplementary to the TFV. A lex specialis can therefore not override the TFV.

ECJ, Case C-234/94 Tomberger v. Gebru¨der von der Wettern GmbH (1996) ECR I-3133.

Caution would be wise: the question was put to a different end. For an unbiased result on practitioners' opinion on the (non-)existence of a TFO in Austria, the question would have had to be put differently.

Free translation from Erläuterungen zur Regierungsvorlage, Rechnungslegungsgesetz, Allgemeiner Teil: ‘u¨ber das Verhältnis dieses Entwurfs zu den Regelungen der EG ist zusammenfassend zu sagen, daß er grundsätzlich den EG-Richtlinien entspricht. Soweit der Entwurf von den Richtlinien im einzelnen abweicht, ist dies durch die Besonderheiten der österreichischen Rechtsordnung bedingt und wird bei den einzelnen Bestimmungen darauf hingewiesen.’