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JUNE 2009

What You Can’t Access You Can’t Repair
Sometimes, the courts are called upon to decide matters which are so obvious that the mind boggles as to how a case was brought in the first place.

A recent case involving a local council is just such a puzzle. The council was concerned that the dilapidated state of part of a building was impairing the visual amenity of the area. It therefore served a notice on the occupants requiring them to take remedial steps to repair the elevations of the upper floors of the building. The notice was served by the council on the ground floor and basement tenants (the ground floor and basement not being in disrepair) as well as the tenants of the upper floors (which were dilapidated) and the freeholder.

The council accepted that the ground floor and basement tenants had no control over the condition of the upper floors but refused to withdraw the enforcement notices issued against them, so the matter ended up in court.

The court ruled that when serving such a notice, the land in respect of which the owner and occupier might be served with a notice must be the same as the land in relation to which remedial works were needed and that the notice could only relate to the land which was having an adverse impact on the amenity of the area. The relevant land was not that occupied by the ground floor and first floor tenants and the notices served on them were therefore quashed.

In this case, the tenants could not have rectified the dilapidations even if they had wanted to, as the upper floors of the building were not within their control. Fortunately for them, the court saw sense.

Repossessions Fall
According to figures released by the Ministry of Justice, the number of property repossessions for mortgage and rent arrears has fallen sharply in the first quarter of 2009 compared with 2008. The drop is more than 40 percent and is far larger than anticipated.

It is thought that the reasons for this are reductions in interest rates, which make mortgages more affordable, and the reluctance of landlords to seek to repossess premises when rent is in arrears because of the potential difficulty of finding new tenants.



Tax

Future Discounts Are Not Present Reductions in Sales – Retailers Take Note
HM Revenue and Customs have won a case in the High Court, against high street retailer Boots, which will have implications for schemes that offer future discounts on purchases to customers. It involved the VAT status of ‘voupons’, which had been given to customers and which entitled them to a £5 discount on a future purchase.

Boots contended that this entitled them to reduce the amount on which they accounted for VAT on the original sale by the value of the voupon. In the view of the High Court, however, no reasonable VAT Tribunal could have come to that conclusion: the voupon could affect the VAT payable only when redeemed against a purchase.

Additional Payment Caught for CGT
When a company is being taken over, there are many ways to structure the transaction. A recent case shows how important it can be to make sure that such transactions are correctly structured for tax purposes.

It involved a company director, who sold his shares for cash to the buyer of the company. In addition to the money for the shares, the purchase agreement provided that the company would make a further payment as directed by him. The further payment was made to a third party, who paid it into a pension scheme for the director.

Although the facts were complex, the issue revolved around whether or not the payment into the pension scheme was part of the consideration for his shares for Capital Gains Tax (CGT) purposes. HM Revenue and Customs (HMRC) argued that it was, whilst the director argued that it was not.

In court, HMRC’s argument prevailed.

Had the payment into the pension scheme been made before the agreement was made for the sale of the shares, it would not have constituted consideration for the shares for CGT purposes. Company share sale agreements are often complex and there are many potential pitfalls.



Company Law

Directors – You Need Protection
Directors of companies which become insolvent can find themselves in the firing line if they are found to have been complicit in the company engaging in ‘wrongful trading’ – continuing to trade and to incur debts when there is no realistic prospect of the company avoiding insolvent liquidation. In such circumstances, directors may be required to contribute personally towards the losses of the creditors.

A director’s duty in such circumstances is to act in the best interests of the creditors of the company. Some directors are unaware that when a company is liquidated, the liquidator is required to prepare a report on the conduct of the directors, which can be used as the basis for a decision to ban a director from holding directorships or to require a director to make a contribution to the company’s creditors.

It is therefore very important for company directors to ensure they are aware of the company’s current financial position and to take advice when doubts arise: the defence against a charge of wrongful trading is that the director took every reasonable step to minimise losses to the creditors of the company.

If you are unable to persuade your fellow directors to take your advice, you should be doubly careful: even paying some creditors and not others can create a liability. Pleading ignorance is not a defence: directors are expected to keep themselves up to date with the company’s financial position.

The Institute of Directors has published a useful guide for directors, which can be downloaded from the Internet at
http://www.iod.com/intershoproot/eCS/Store/en/pdfs/dutiesresponsibilities.pdf.

Intellectual Property

Assets Unprotected May Be Assets Lost
Businesses which own patents need to have a system in place to ensure that they do not lapse by default. Failure to pay patent renewal fees will mean that the patent lapses and the previously patented material is then capable of being exploited by anyone.

Although the UK Intellectual Property Office (UKIPO) has the power to restore a lapsed patent, it will consider all the circumstances when such an application is made. If the lapse is due to failure to take reasonable care to ensure that the fees are paid by the due date, it is highly probable that the application will fail.

In a recent case, a company had failed to pay a patent renewal fee due in September 2004 on a patent which accordingly lapsed when the six-month grace period expired in March 2005.

The position was complicated because the firm owning the patent was experiencing financial difficulties and was engaged, during the relevant period, in transferring the management of its patent portfolio from one firm of patent attorneys to another.

Nonetheless, the UKIPO refused to reinstate the patent after an application to restore it was filed in April 2006. The decision was upheld by the High Court.

It is critical that where intellectual property (IP) is owned which is of value to a business, a system is put in place for making sure that your commercial rights with regard to it do not lapse. In particular, notices relating to renewals or challenges to any form of IP need to be dealt with promptly.

Register It or Lose It
There can be few, if any, musical instruments as instantly identifiable as the Fender Stratocaster® and Telecaster®. Although the names have been registered trade marks owned by the Fender Corporation for many years, the company had not attempted to register the distinctive body shapes of the instruments until recently. The shapes of the headstocks of both guitars and their logos have long been registered as trade marks.

Regrettably for Fender, the existence of widespread copying of the shapes for more than half a century (both guitars were introduced in the 1950s) has led to millions of ‘fake Fenders’ being sold throughout the world.

The US Federal Trademark Trial and Appeal Board rejected Fender’s application after it was opposed by 17 other guitar manufacturers.

If you have distinctive designs, failure to protect them may lead to significant losses.

Contract

Clarity the Key in Contracts
Clarity in property contracts is crucial, as is illustrated by a recent decision of the Court of Appeal.

The case dealt with a property deal in which planning permission had to be obtained. The contracts for such deals are often conditional on the granting of planning permission. In this case, however, the scenario was somewhat different. The buyer wished to turn the property being purchased into flats, which required the permission of a third party because of a covenant on the property that existed because it was in a conservation area.

The vendor agreed to meet the costs of obtaining the permission, which were estimated not to exceed £12,000. The third party rather oddly refused to grant permission to release the covenant until planning permission for the development had been received. The buyer decided to purchase the buildings (at a cost of £862,000) before planning permission was granted.

The way the contract was drafted was far from clear and it did not anticipate the actual circumstances. As a result, a term would have to be implied into it to deal with the position as it transpired in fact. The buyer claimed that it should receive a discount on the purchase price for the estimated cost of obtaining the release of the covenant. The vendor claimed that no discount was payable, on the basis that, at the time of sale, the covenant had not been changed. In court, the judge did not support either interpretation of the contract, so the dispute wound up in the Court of Appeal. There, LJ Arden commented that, “If the agreement is susceptible of an interpretation which will make it enforceable and effective, the Court will prefer that interpretation to any interpretation which would result in its being void. The Court will also prefer an interpretation which produces a result which the parties are likely to have agreed over an improbable result.”

The Court concluded that the appropriate discount must be ‘an amount which is reasonably required for the purpose of obtaining a release or variation of the applicable restrictive covenants such as would enable the Development…to take place’.

What is slightly surprising is that this dispute ended up in the Court of Appeal at all, with both sides meeting their costs – likely to be several times the sum under dispute.

The more variables there are in a contract, the more important it is that it is clearly drafted.

Making Retention of Title Work
Prior to the recession, Retention of Title (RoT) clauses probably received less attention than they should have from many businesses. However, RoT is now back in the spotlight.

An effective RoT clause will normally allow you to recover the goods you have supplied (assuming they are identifiable and have not been incorporated within other goods) if they are not paid for.

If you are worried about the ability of your customers to pay for the goods you supply, here is a short guide to making RoT clauses operate effectively.

1. Make sure it is clear in your terms of trade that title in the goods you sell does not pass to the buyer until they are paid for and that your customer is aware that this is the case;
2. Make sure all goods are signed for and confirmed as being in good condition on arrival;
3. Make sure separate deliveries of goods are identifiable if possible – this will help if some goods are paid for and others of the same type are not. Use of an ‘all monies’ clause (in which title to goods only passes when the account is fully paid) may be of assistance; and
4. Make sure that any issues regarding quality are dealt with promptly and are fully documented, so the fact that there are no outstanding issues relating to the goods supplied is well evidenced.

If any of your customers is starting to become a ‘difficult payer’, take advice before the situation becomes critical.

Insolvency

Auditor Owes No Duty of Care for Director’s Losses
When you don’t believe what your auditor tells you, things can get difficult, especially when you are the guarantor of loans to your company.

In a recent case, the sole director of a small company had guaranteed a bank loan to the company, as is commonplace. The director was also the main shareholder of the company. When the audited accounts were made available to him, he claimed that he did not believe them. He also claimed, however, that he had relied on the accounts when he agreed to guarantee the loan from the bank.

It subsequently transpired that the accounts, which were unqualified, had grossly overstated the profits of the company and included as assets investments of nil or minimal value. The company failed and the director/shareholder brought an action against the auditors claiming that their negligence contributed to his loss under the guarantee.

The court considered that the director must have known that the company was trading at a loss and should not have relied on the accounts. In any event, the company’s auditors did not participate in the negotiation of the bank loan and owed no duty of care as a result to the director.

It is rare indeed for an auditor to be held liable in such circumstances and company directors need to take care – just because accounts have been audited does not mean that they are correct, nor does it mean that a company’s position at a later date is similar in any way to that shown in the last filed audited accounts.

Insolvencies – Director Disqualifications on the Rise
The number of company liquidations in the first quarter of 2009 was up a staggering 56 per cent compared with the same quarter last year. This equates to more than 1 per cent of all companies on the register going broke in a single quarter.

The increase in personal insolvencies was more than 19 per cent in the first quarter of 2009.

The number of disqualification proceedings against directors has also risen sharply, with 1,079 facing disqualification proceedings in 2008-2009 compared with 820 in 2007-2008. The most frequent reason for a disqualification being sought is underpayment of tax.

Directors are reminded that if their company gets into financial trouble, they can, in some circumstances, become personally liable to creditors who have been disadvantaged as a result of their actions: the duty of a director of a company which becomes insolvent is to take all reasonable steps to protect the interests of the creditors as a whole. In particular, paying some creditors rather than others can be a risky strategy

Buying From an Administrator – Pitfalls
With businesses becoming insolvent in large numbers, opportunities abound to acquire assets from their administrators. However, the low prices sought for the assets are due, at least in part, to the additional risk to the purchaser.

Here are some of the main issues to be aware of when buying property from an administrator:

• Vacant possession of a property will not normally be guaranteed and the cost of clearance of items left in the property should be borne in mind;
• No guarantees or warranties regarding the property will be given – undertaking proper due diligence to reduce risks is advisable;
• There may be items that appear to be a part of the property being sold which do not in fact belong to the insolvent business; and
• The administrator acts only as agent for the company and will accept no liability for errors or omissions.

Buying a property from an administrator is a risky business.

Data Protection

Trade Union Blacklists to be Prohibited
The Government has announced that it intends to strengthen the law by introducing new regulations to prevent union members being denied employment because of secret blacklists.

There is already legal protection against the misuse of people’s personal details. In March, the Information Commissioner reported that 40 construction companies had subscribed to a database service for vetting construction workers, which has now been closed under data protection law.

The Employment Relations Act 1999 gives the Government the power to introduce regulations prohibiting the blacklisting of workers for their union membership or activities.

In 2003, the Government carried out a full consultation on draft regulations to outlaw the compilation, dissemination and use of blacklists, but at that time no hard evidence was found that blacklisting was taking place. It was therefore decided to review the issue if and when hard evidence became available. Since there has already been a full consultation, this second consultation will be shorter than the usual twelve week period. Its aim is to ensure that the regulations take full account of developments since 2003.
The consultation will be launched in the early summer. Ministers plan to seek Parliamentary approval for the revised regulations in the autumn and to implement them as soon as possible thereafter.

Environment

Batteries
The Batteries and Accumulators (Placing on the Market) Regulations 2008 came into force on 26 September 2008. The Regulations implement the placing on the market obligations of EC Directive 2006/66/EC which:

• bans the placing on the EU market of new batteries containing more than agreed levels of cadmium and mercury;
• controls the marking of batteries; and
• sets design requirements on producers of electrical and electronic equipment that contains batteries.

The Waste Batteries and Accumulators Regulations 2009, which complement the existing Regulations, came into force on 5 May 2009.

The Regulations establish a new producer responsibility system for the collection, treatment and recycling of waste portable, industrial and automotive batteries.

For All Batteries
The Regulations introduce:

• requirements for any persons placing batteries on the market to register as a producer of batteries and report on waste batteries collected and sent for recycling; and
• requirements for the treatment and recycling of waste batteries.

For Portable Batteries Only
The Regulations establish interim collection targets to assess progress towards the Directive’s targets of collecting waste portable batteries equivalent to 25 per cent of sales by 2012 and 45 per cent by 2016. To fulfil their responsibilities for collection and recycling, producers must belong to a Battery Compliance Scheme (BCS) approved by the relevant UK Environment Agency. BCSs will also carry out publicity aimed at consumers, informing them how they can return their waste household batteries for recycling.

Producers who put less than 1 tonne of portable batteries on the market must register, but will not have to fund collection, treatment and recycling.

Guidance on the Waste Batteries and Accumulators Regulations can be found at http://www.berr.gov.uk/files/file51268.pdf.

From February 2010, certain retailers of household batteries will have to collect them in-store when they become waste.

Employment

Redundancy Dismissal and Age Discrimination
A recent case (Killa v Electronic Motions Systems Ltd.) illustrates the danger when making redundancy dismissals of failing to use objective criteria or a proper selection process to determine which employees are to go, and of not offering employees suitable alternative work where this is available.

59-year-old Mr Killa was employed by Electronic Motions Systems Ltd. as an electronic engineer. He was selected for redundancy without a proper selection process based on objective criteria being applied. At the end of the first redundancy consultation meeting, he was dismissed with immediate effect and asked to leave the company’s premises. He was not allowed to return to work. Although suitable alternative work was available, this was not offered to Mr Killa.

Mr Killa brought a claim of unfair dismissal and age discrimination. The Employment Tribunal (ET) found that his dismissal was unfair, both procedurally and substantively, and, as his employer could not explain the reasons for its actions, his selection for redundancy dismissal amounted to age discrimination.

The ET found that Mr Killa had done all he could to mitigate his loss by trying to find a new job, including training as an electrician to make it easier to find work.

The ET said that ‘it is not, unfortunately, the case that someone aged 59, 60 or over competes on a level playing field with younger people. The reality is that age discrimination exists and is likely to be highly influential in limiting his opportunities’. Mr Killa was awarded compensation of £90,361, including loss of earnings, loss of benefits and damages for injury to feelings on account of the manner in which he was dismissed.

When selecting workers for redundancy, objective criteria must be used and it is advisable to agree the basis for selection with employee representatives. Written records of the process should be kept. Selecting older workers in the absence of any objective justification for so doing is a risky strategy.

New Minimum Wage Rates Announced
The Government has announced new National Minimum Wage rates that will apply from 1 October 2009.

For workers aged 22 and over, the rate will increase from £5.73 to £5.80 an hour. The rate for 18- to 21-year-olds will rise from £4.77 to £4.83 and for 16- and 17-year-olds the rate will increase from £3.53 an hour to £3.57.

The accommodation offset will rise from £4.46 per day to £4.51 from 1 October 2009.

Consultation on Implementing the ‘Agency Workers Directive’
The Government is seeking views on the implementation into UK law of Directive 2008/104/EC on temporary agency work, usually referred to as the ‘Agency Workers Directive’. This affords agency workers equal treatment with regard to basic employment and working conditions as if they had been recruited directly by the end user. The qualifying period for the right to equal treatment in the UK will be 12 weeks' employment. 

The consultation document can be found at http://www.berr.gov.uk/consultations/page51233.html. The closing date for responses is 31 July 2009.

Health and Safety

First Corporate Manslaughter Case Commences in June
The first charge of corporate manslaughter since the new Corporate Manslaughter and Corporate Homicide Act 2007 (CMA) came into force last year was recently made against a company based in Gloucestershire.

Under the previous corporate manslaughter legislation, it was very difficult to bring a prosecution for corporate manslaughter, as one had to identify the person(s) responsible for the incident leading to the death. In large organisations, in which responsibility is diffuse, this can be almost impossible.

The CMA changed the position. Now, a company can be found guilty if the way its activities are managed or organised amounts to a gross breach of its duty of care and the result of that breach is the death of a person.

In the case in point, the company has been charged in relation to the death of a geotechnologist who was taking soil samples in a pit when the walls collapsed, crushing him to death. One of the company’s directors has also been charged with manslaughter in relation to the incident.

A company convicted of corporate manslaughter can be liable to pay an unlimited fine.

It is wise for organisations to keep their procedures under review, especially those with direct health and safety implications. Successful defences to charges of corporate manslaughter depend on being able to demonstrate that the organisation takes a responsible attitude to health and safety, with appropriate risk management procedures in place that are enforced rigorously.



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