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FEBRUARY 2009

With the economic situation worsening, it might well be tempting for company directors to save on employers’ and employees’ National Insurance Contributions and delay tax payments by switching from paying salaries to paying dividends on shares. If you are thinking of going down this path, do bear in mind the following:

1. You can only pay dividends out of ‘available profits’ – effectively, retained profits. If you pay more in dividends than is lawful, you can create tax problems later on and, if the company becomes insolvent, you may be liable to repay the dividends taken.
2. If the company should become insolvent, the redundancy payment you receive may well be reduced – salaries count as remuneration, dividends do not. Also, you may compromise your future entitlement to benefits – especially Jobseeker’s Allowance and state pension benefits.
3. If you reduce your salary too far, you may well be in breach of the National Minimum Wage (NMW) Regulations. This could occur if you have a contract with the company. If you do not have a contract, you will normally not qualify for Working Tax Credit. If you have a contract of employment and pay yourself the NMW, you normally will.

Never undertake changes that affect your tax position without taking professional advice.



General

Valuation Not Binding if Not All Parties Agree
In the present market, it is likely that there will be many instances of shareholders in unquoted companies, which are often owned and managed by a small group of people, selling their shares to other shareholders. The main problem in such instances is almost always the question of the valuation of the shares.

Sometimes, a company’s Articles of Association will contain a mechanism outlining the steps to take in such circumstances. Alternatively, and more commonly, a shareholders’ agreement will have been entered into. In either case, unless a valuation formula has been set out, the shares which are changing hands will have to be independently valued and this is where the problems usually start.

In a recent case heard by the Court of Appeal, a minority shareholder who had been a director of a company was required, by the Articles of Association of the company, to sell his shares as a result of leaving the company. Independent valuers, a large firm of accountants, were appointed by the company. When they delivered their valuation of the ex-director’s shares, he disagreed with it.

The circumstances were that the company had appointed the accountants and signed the letter of engagement. The ex-director maintained the stance that he was reserving his position and refused to sign the letter of engagement.

The argument turned on whether the accountants were validly appointed to value the shares. In the view of the Court, they had not been validly appointed under a tripartite agreement and the ex-director was therefore not bound by their valuation.

Lord Justice Mummery commented that the issue “would not have arisen if the Articles had contained the provision commonly included in the Articles of Association, in the context of invoking the compulsory transfer provisions, that the value of the shares is to be determined by the auditors of the company. The auditors of the company are already in office. The issue of a disputed appointment would not arise.”

As this case illustrates, buyouts of minority shareholders are often subject to dispute, even in those instances where relations between the shareholders are relatively cordial. It is sensible to think about such things early on in the life of a small company as once it becomes successful, delay normally makes things more difficult.

Misled Customer Cannot Make Client Account Claim
When a customer paid a cheque to a firm, on the assurance that the money was to be held in a separate client account, it expected that it would be safe – but the Court of Appeal has confirmed that where the money was not paid into the client account, the subsequent insolvency of the company concerned meant that the customer became an unsecured creditor, in spite of the clear breach of trust.

It is common practice in many circumstances (e.g. when buying a property) for sums to be paid into client accounts and, when this is done, the money is held on trust for the depositor. In such circumstances, if the company becomes insolvent, the client account monies are normally secure. Professional firms such as solicitors have such accounts and the security is enhanced by tight regulations governing use of client account money and insurance arrangements.

In the case in question, a firm of boat brokers received £97,500, which was to be banked in its client account on behalf of a client. Virtually the entire sum was instead paid into the firm’s general account, which meant it was mixed with other funds that were used to pay off the company’s debts.

The company went into liquidation and the customer claimed that its money should have been dealt with as part of the balance on the client account.

However, the Court of Appeal ruled that whilst there was no doubt that the money should have gone into the client account, it had not, as a matter of fact, done so. There was a clear claim against the company for breach of trust, but that did not mean that the customer had a right over monies held in the client account.

The lessons to be learned are clear. It is unwise to hand over a sum on the mere promise that it will be paid into an account held in trust for clients unless you are absolutely sure that the promise will be fulfilled and that the account is safe. In some cases, it would be advisable to pay money into a client account directly, after confirming the account details. An alternative is to set up an escrow arrangement whereby the funds are held by a trusted third party with appropriate insurance (a bank or your solicitor).



Property

A Current Tenant is a Good Tenant
A recent report by commercial property agents King Sturge (KS) may concentrate the minds of commercial landlords, who may be faced with a substantial reduction in income if they have to find new tenants in the event that existing ones terminate their leases.

KS has recently reported that commercial rents have fallen by 0.4 per cent in the last year and predicts that in 2009 rents will fall by a further 5.6 per cent, in 2010 by 4.7 per cent and in 2011 by 2.1 per cent. More worryingly, KS also predicts that there will be no upward movement in rents until 2013 and that landlords will have to resort to a variety of ‘sweeteners’ to obtain replacement tenants or to retain those they have.

In the present market, a landlord may feel that a bird in the hand (even one that is less than ideal) is worth two or more in the bush and it is to be expected that negotiations over rents and lease terms will become more difficult, particularly where the property being let is retail premises.

Failure to Reserve Rights Means Landlord’s Plans Stymied
A landlord, who wished to add an extra floor to maisonettes it owned, recently came unstuck because the drafting of the leases for the maisonettes was insufficiently precise.

The landlord’s attempt to develop the property was opposed by the top-floor tenant. Firstly, he argued that the roof space above his flat (to which he had no access) was part of the premises demised to him under the lease. Secondly, he argued that the development would result in him suffering a loss of light, because his flat had three skylights.

The court agreed that the tenant’s lease did include the roof space and roof, despite the fact that there was a landlord’s obligation to repair the roof within the terms of the lease. The lease referred to the roof and walls of the premises and, furthermore, the skylights were clearly integral to the design of the tenant’s flat.

The tenant’s first ground for objection was successful. Although this meant that his argument regarding loss of light did not need to be heard, it is likely that the tenant would have been successful on that ground also.

In this case, the original lease had clearly not been drafted with any thought of a future addition of an extra storey in mind. Had it been, the landlord would have reserved sufficient rights to enable it to undertake the works. The tenant was therefore in a position to prevent the development.

When negotiating leases or contracts it is important to think ahead to make sure that any future rights required are preserved as well as those needed presently.

When Your Tenant Goes Bust
More and more landlords are finding themselves having to deal with the administrators appointed to manage the businesses of insolvent tenants.

A recent decision of the Court of Appeal will be unwelcome to landlords. The Court concluded that mere loss of a ‘bargaining chip’ by a landlord was insufficient reason for it to be given permission to terminate a licence to occupy premises.

The case dealt with a corporate tenant that had a lease over a storage facility, which was used to store many millions of pounds worth of goods. The lease had more then 20 years to run at a rent in excess of £1 million per year. The tenant went into administration and a buyer was found for the business under a ‘pre-pack’ arrangement. The administrators gave the buyers of the business a licence to occupy the business premises in order to enable the business to continue so that the debts of the company in administration could be collected. The licence fee was the same sum as the rent but was paid to the administrators each month in arrears rather than quarterly in advance. The administrators agreed to pass on the licence fees to the landlord in satisfaction of the rent. The landlord’s loss was therefore limited to the loss of interest on the rents received and the loss of security of future rents because the lease had been replaced by a licence.

The property was the main asset of the landlord, which wished to terminate the arrangement in order to put pressure on the buyer of the business to take a formal assignment of the lease. It needed the permission of the administrators or of the court to do so, which is normal practice when a company is in administration. The decision to allow proceedings to be taken against a company in administration is at the discretion of the court and to obtain permission, the landlord had to persuade the court that it would be inequitable for permission to take proceedings not to be granted. This is a matter of balancing the loss suffered by the landlord if permission to commence proceedings is refused with the loss suffered by the other creditors if permission is granted.

It was argued that had the short-term licence not been allowed to continue, the tenant company would have had to have been put into liquidation, with the result that the creditors’ interests generally would have been prejudiced and the landlord might not have received some of the rent due.

The Court rejected the landlord’s application and ruled that the landlord did not have an absolute legal entitlement to be paid contractual rent and interest as an administration expense.

This decision will not be welcome to landlords, who may well find their position undermined after a ‘pre-pack’ administration has been completed. Where the landlord’s borrowings against their let property are substantial, the loss of a secure lease, even if replaced by a similar income on licence, could cause a breach of their borrowing covenants, which could have very unhappy ramifications. It has been reported that the landlord in this case has now followed its tenant into administration.



Tax

Employee Health Screening Not Taxable
HM Revenue and Customs (HMRC) have at long last agreed that medical checks provided by employers for employees can be exempt from tax and National Insurance Contributions if screening is made available on similar terms to all employees. The Finance Bill 2009 will contain the necessary legislation. At present, HMRC are operating a concession with regard to this expenditure for tax years 2007/2008 and 2008/2009, which means that these expenses will not give rise to a chargeable benefit in kind.

The problem arose because such expenditure became taxable after the introduction in 2007 of new tax laws relating to benefits in kind. Following a howl of protest by employers and the professions, HMRC have relented.

HMRC Make Tax Returns Easier for Partnerships
There are hundreds of thousands of business partnerships in the UK and, as any tax specialist will tell you, partnership tax presents many complications. Fortunately, HM Revenue and Customs have acted to consolidate their advice pages on partnership tax returns, making the key information on partnership tax available in one place.

The areas on which advice is given are:

• Registering a new partnership;
• Partners' individual tax returns;
• Partnership Self Assessment tax returns;
• Record keeping;
• Self Assessment return deadlines; and
• What to do if you are no longer part of a partnership.

See http://www.hmrc.gov.uk/sa/parts-partners.htm#1#1.

Communal and Inaccessible Areas Not Dwellings
HM Revenue and Customs (HMRC) have now issued tax guidance that will come as a disappointment, but not a surprise, to developers of student residences for universities. The approach taken is said by HMRC to apply to all other forms of multiple-occupancy dwellings.

Whilst HMRC are now willing to recognize that student residences constitute ‘dwelling houses’, any areas to which the residents do not have access will not constitute a dwelling house and neither will any communal areas. Accordingly, shared kitchens, lounges and bathrooms will not constitute part of the dwelling and neither will staircases nor landings.



Company Law

Late Filing Fees Hike for Companies
Companies filing their accounts after the due date will pay a bigger late filing penalty from 1 February 2009. The increases in the charges are substantial and are intended to reflect the increase in inflation between 1992 and 2007.

Private companies are required to file their accounts within 10 months of the end of the accounting period (9 months for accounting periods starting on or after 6 April 2008). Those that file late, but within a month of the due date, will be fined £150. There is an ascending scale of charges if the filing is further delayed. Missing the deadline by more than 6 months will lead to a fine of £1,500.

Public companies must file their accounts within 7 months of the end of the accounting period (6 months for accounting periods starting on or after 6 April 2008). Failure to file by the due date will lead to a fine of £750. Again, an ascending scale applies. Missing the deadline by more than 6 months will lead to a fine of £7,500.

Intellectual Property

Breach of Patent – What to Do
When you discover that a business has breached your patent, what should you do?

The answer to this question has two elements. The first is based on what you can do in law and the second is based on business strategy.

Firstly, before picking a fight with anyone over such a matter, it is important to make sure that you are on firm ground, so do your research carefully. Make sure there is a real infringement and that the infringement is in a market in which your patent applies.

In law, if a business infringes a patent, it is liable to pay damages to the patent owner, which will be based on the loss suffered by the owner. In theory, losses suffered will be compensated for but, in practice, allowing an infringement to continue while you negotiate (or sue) the infringing business is a high-risk strategy. In most cases, especially where the effect of the patent infringement is severe (for example, where its use directly affects your sales), it is likely that you should send a legal notice to the offending business requiring it to cease the infringement immediately.

This will normally produce one of the following responses:

1. The infringer will agree, cease the infringement and (hopefully) enter into discussions with you about the appropriate payment to make to you by way of compensation. Regrettably, this is not the most common response.
2. The notice will be ignored. In this case, the infringer either hopes that your letter is a bluff and you will not take legal proceedings or believes that it has not infringed your patent and would win that argument were the matter to come to court. In this case, it is doubly important to do your homework and make sure of your position as legal proceedings are likely to be necessary.
3. Your notice will be met with a denial from the infringer (and occasionally a counter-claim that one of your products infringes its patent). In this case, there is a fight there if you want it (or, sometimes, even if you don’t).

No matter what the response, in most cases the most satisfactory outcome will usually result from negotiation with the benefit of expert advice, rather than court proceedings. Commercial considerations must be kept at the forefront and it is normally advisable to leave the door open to a negotiated settlement. This is especially so as one of the common outcomes of such disputes is the creation of a licensing agreement, which will require specialist legal advice.

Disputes over intellectual property (IP) are normally complex and cases are expensive to bring to court.

Similar Company Names – New Rules and Decision
On 1 October 2008, new rules relating to the registration of company names came into force. These allow companies to object more easily to the registration of a company name which could be confused with theirs. The new rules can be found on the website of the UK Intellectual Property Office at
http://www.ipo.gov.uk/cna/cna-factsheet.htm.

Recently, a company called Coke-Cola was required to change its name following an objection from Coca-Cola. Coke-Cola was also ordered to make a contribution towards Coca-Cola’s costs and to reimburse the company for the fee for filing its objection.

Contract

Common Sense Restored in Insurance Decision
The recent decision in which the loss of a trawler tied up in port was held to be an uninsured loss, because of the breach of a warranty clause that cover applied only when there was a ‘Warranted Owner and/or Owner's experienced skipper on board and in charge at all times and one experienced crew member’, has been reversed in the Court of Appeal.

The Court considered that the purpose of the clause was to protect the ship from navigational hazards, which were not an issue in this case as the trawler was tied up in port. Also, it was clearly not possible for the owner/skipper to be on board at all times. The clause had to be construed practically, meaning that for the insurance to apply the owner/skipper had to be on board at all times when the ship was being navigated. This interpretation was supported by the presence in the policy of another warranty clause which stated that the vessel had to be manned by at least two medically fit people when being navigated.

The decision shows that whilst the Court will not rewrite a contract, it will enforce a common sense interpretation of the terms of the contract when a strict interpretation would be nonsensical.

EU – New Rules on Applicable Law
Where a dispute has a foreign element, one of the common problems is deciding under what jurisdiction legal action should be taken. This is avoided in many commercial contracts by setting out the applicable law in the contract, but in consumer contracts there is often no such clause. When the action arises because of a non-contractual issue, the problem is even more difficult.

Recently, the EU set out new regulations aimed at clarifying the issue of where action should be taken with regard to a range of non-contractual obligations in civil and commercial matters, excluding actions involving governmental bodies. These harmonise the rules for deciding jurisdiction across the EU (excluding Denmark), but also allow for the parties to elect for a specified jurisdiction to apply in certain circumstances. There is no freedom of choice in some types of action, for example those involving intellectual property and competition law.

Under the old rules, the applicable law was that of the country in which the event giving rise to the action took place. Under the new rules, the key concept is that the jurisdiction applicable will depend on the place where the damage occurs, or is likely to occur. This may well be different from the country in which the event giving rise to the action took place. There are some exceptions to this, however, the main one being that if both parties to a dispute are habitually resident in the same country, that country’s law will apply, no matter where the event took place.

Another exception will be where the event giving rise to the action is inextricably linked with a particular country, in which case the law of that country will apply.

Licencing

Licensees Beware
The Penalties for Disorderly Behaviour (Amount of Penalty) (Amendment) Order 2008 has recently come into effect and allows penalty notices to be issued by a variety of officials, such as trading standards officers and community support officers, as well as the police.

Among the offences for which an £80 penalty notice can be issued are:

• the sale of tobacco to under-18s;
• failing to display in retail premises and on vending machines warning notices that it is illegal to sell tobacco products to under-18s;
• contravening the conditions of a licence;
• allowing disorderly conduct on licensed premises;
• the sale of alcohol to a person already drunk;
• allowing unaccompanied children under 16 on certain premises; and
• the sale of alcohol to under-18s.

Failure to pay or to attend any resultant court proceedings results in an automatic fine of 150 per cent of the penalty notice. Paying the fine on time means that no criminal conviction is recorded.

Managing Violence in Licensed and Retail Premises
Employers have a duty under the Health and Safety at Work etc. Act 1974 to protect the health, safety and welfare of their employees. The Health and Safety Executive has worked with local authorities to develop a toolkit designed to help reduce the risk of work-related violence in licensed or retail premises. This provides practical advice on how to carry out a risk assessment and the action you can take to prevent or control work-related violence. The toolkit can be found at http://www.hse.gov.uk/violence/toolkit/index.htm.



Data Protection

New Data Protection Guide
For those of you with £350 burning a hole in your pocket, the British Standards Institute has published a new guide on data protection. It provides guidance on the implementation of the Data Protection Act itself and covers areas such as email policy, database management, subject access and e-commerce.

A (free) useful 25 step guide to data protection compliance can be accessed at
http://www.bsi-global.com/upload/Standards%20&%20Publications/ICT/docs/BIP0012_25Steps.pdf.



Employment Law

Insolvency and TUPE
Whilst the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) operate to protect the employment law rights of employees when there is a relevant transfer of a business or part of a business, Regulation 8(7) provides that where insolvency proceedings are analogous to bankruptcy proceedings and have been instituted with a view to liquidation of the assets of the business, the transfer provisions of TUPE do not apply. In such circumstances, employees do not automatically transfer to the new owner and any dismissals are not automatically unfair.

In a case concerning a ‘pre-pack’ administration (Oakland v Wellswood (Yorkshire) Ltd.), whereby a business goes into administration with a prospective purchaser already in place, the Employment Appeal Tribunal (EAT) considered Mr Oakland’s appeal against the Employment Tribunal’s finding that he could not bring a claim of unfair dismissal because the transfer provisions of TUPE did not apply in his case and he did not have sufficient service with his new employer to bring a claim.
Mr Oakland was a director of Wellswood (Yorkshire) Ltd. (Oldco), which traded as a wholesaler in fruit and vegetables. By mid-2006, the company was in financial difficulties. It approached a major creditor, Gilbert Thompson (Leeds) Ltd. (GTL), as a potential buyer and sought the advice of an insolvency practitioner. It was agreed that administration was the most appropriate course of action. GTL was not willing to purchase Oldco as a going concern but decided to incorporate Newco, as a wholly owned subsidiary of GTL. Newco would acquire the assets of Oldco and five of its seven employees, including Mr Oakland.

On 6 December 2006, the sale of the assets to Newco was completed and administrators were appointed to Oldco.

There are three statutory objectives of administration, contained in the Insolvency Act 1986. These are:

1. Rescuing the company as a going concern; or
2. Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
3. Realising any property in order to make a distribution to one or more secured preferential creditors.

In the view of the administrators, the first objective had not been achievable in Oldco’s case. Any further period of trading, whilst a buyer was sought, would most likely have resulted in further losses, thereby further reducing the funds available to creditors.

Newco subsequently dismissed Mr Oakland, who brought a claim of unfair dismissal. In considering his appeal, the EAT held that the administration had been instituted with a view to the eventual liquidation of Oldco’s assets and Regulation 8(7) of TUPE therefore applied. As a result, Mr Oakland did not transfer to Newco and his continuity of employment was not preserved under TUPE.

In the EAT’s view, its decision was in accordance with Regulation 8(7), which seeks to bring about the rescue of a failing business when the alternative would be any prospective purchaser being deterred because of the effects of the protection afforded by TUPE. Each case will be determined on the individual facts and, if the EAT’s view is the correct one, will depend on the intention of the administrator regarding the transfer of an insolvent business. However, we would urge caution. This decision conflicts with guidance produced by the Department for Business, Enterprise and Regulatory Reform and may well be challenged.

Health and Safety

Employers Guilty in Fatal Accident Case
A recent decision of the House of Lords may have far-reaching consequences for employers, especially those tempted to cut corners regarding health and safety. The Lords ruled that employers may be prosecuted over an accidental death at work, even in cases where no specific breach of health and safety legislation can be identified as having caused it.
The case concerned Mr Shaun Riley and was brought against Chargot Ltd., Ruttle Contracting Ltd. and Mr George Ruttle – a director of both companies.

Ruttle Contracting was engaged to undertake extensive earth works on a Lancashire farm belonging to Chargot. Mr Riley was employed to drive a dumper truck, moving spoils from the excavation to another part of the site. While he was doing this, the truck overturned, burying Mr Riley, who later died in hospital.

Investigations revealed that there were various health and safety failings. However, there being no witness to the accident, the exact cause could not be established. The defendants argued that since the precise cause of the accident could not be shown, they were not liable for Mr Riley’s death.

The prosecution argued that it was not necessary to show exactly how the defendants had failed in their health and safety obligations, merely that the general state of affairs at the place of work led to a risk of injury. The Lords accepted this argument. In its view, the failure on the part of the three defendants breached sections 2 and 3 of the Health and Safety at Work etc. Act 1974. Fines and costs orders of more than £450,000 made against the defendants were confirmed.

In such cases it seems that the burden of proof is on the employer to show that proper health and safety standards are applied and that legislation is complied with. Employers must ensure that their health and safety arrangements fully comply with the law or risk prosecution over any resulting accidents at work.

The Safety of Gas Appliances – Landlady Prosecuted
The Health and Safety Executive (HSE) has issued a warning to landlords to make sure that gas appliances are maintained in a safe condition.

The call came following the successful prosecution of a landlady who had failed to ensure the safety of gas appliances in one of her properties. Aruna Pravin Kukadia pleaded guilty to a breach of Regulation 36(3) of the Gas Safety (Installation and Use) Regulations 1998. The Regulations set out the requirements for landlords to inspect and service gas installations on an annual basis. Mrs Kukadia was fined £5,000 with costs of £3,719.

Regulation 36(3) imposes a duty to ensure that each gas appliance and flue is checked for safety within twelve months of being installed and at intervals of not more than twelve months since the last safety check was carried out.

In addition, landlords must keep a record to show that the inspection has been made and retain this for a period of two years. There are specific requirements laid down in the Regulations regarding the information that must be provided in this written record. This includes the registration number of the individual carrying out the inspection or of that person’s employer. Registration must be with a body approved by the HSE for the purposes of the Regulations.

Health and Safety inspector, Andrew Verrall-Withers, said, “I hope this case sends a clear message to landlords who may be tempted to cut back on safety checks thinking that nothing will be done unless someone is harmed.”

Further information can be found in the HSE guidance booklet, ‘A Guide to Landlords’ Duties: Gas Safety (Installation and Use) Regulations 1998’ at http://www.hse.gov.uk/pubns/indg285.pdf.



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