The High Court has handed down its judgment on the challenge to the default retirement age of 65 – introduced in 2006 by the Employment Equality (Age) Regulations – brought by the charities Age Concern and Help the Aged in conjunction with the Equality and Human Rights Commission.

The challenge was made on the basis that the imposition of the mandatory retirement age meant that the Regulations did not fully implement into UK law EU Council Directive 2000/78, which outlaws age discrimination in employment and vocational training.

The matter was referred to the European Court of Justice, which ruled that a national retirement age may be lawful but must be justified by legitimate social policy objectives, such as those related to employment policy, the labour market or vocational training. It is for the national courts to decide whether a mandatory retirement age can be justified as a proportionate means of achieving a legitimate aim.

The High Court has now ruled against the charities, rejecting their challenge on the basis that the Government was able to justify the imposition of the mandatory retirement age at the time it was first introduced in 2006. However, the decision might have been different had the legislation been introduced now, as the state of the job market has changed considerably. In reaching its decision, the Court took into account the Government’s recent announcement that it has decided to bring forward, from 2011 to 2010, its promised evidence-based review of the default retirement age. Mr Justice Blake said that he could not presently see how 65 could remain as the default retirement age after the review.

More than 260 cases relating to dismissal on the grounds of retirement at age 65 had been stayed pending the High Court’s ruling. If the ruling stands, these claims are likely to be dismissed.

There are many workers who wish to continue working after the age of 65 but, for the time being, it is not age discrimination for employers to have in place a compulsory retirement age of 65 or older. However, there are statutory procedures that must be followed, which include giving employees at least six months’ notice of their intended date of retirement and notifying them that they have the right to request to continue working beyond either the default retirement age or the normal retirement age set by the employer.

Taking Pension Early Can Mean Reduction
The Court of Appeal has overturned what was to many a surprising decision of the High Court and confirmed that when a company pension scheme member takes benefits early (at 60 rather than 65), the benefits may be subject to an actuarially-calculated reduction for the pension income taken early.

The Court ruled that the earlier decision meant those who took pensions early would benefit from a ‘windfall’ that was unfair on the company and the other pension scheme members.

Get Ready for Compulsory Pensions
The Pensions Act 2008 contains provisions which will make it compulsory (from 2012 for larger employers and 2015 for small employers) for an employer to enrol qualifying workers aged between 22 and the state pension age who earn more than a de minimus amount (currently set at £5,035 per annum) into a pension scheme and to make contributions to the scheme.

The employer will be required to contribute a minimum of 3 per cent of salary and the employee will be required to contribute a minimum of 4 per cent of salary, up to a maximum of (currently) £3,600 per annum.

There will be substantial fines for failure to comply with the new regulations. Clearly, there are likely to be many changes to the provisions between now and the planned implementation dates, but this is a good time to start thinking through the potential impact of the new regime on your business.

Freezing Orders
As anyone who has ever tried to collect a debt knows, there is a big difference between obtaining judgment and obtaining payment.

In difficult cases, one of the ways a debtor can be encouraged to pay is by obtaining a freezing order against his or her assets: this is a court order which prevents the subject of it from disposing of assets or removing them from the country. It is often described as a ‘nuclear option’, because of the effect it has on the subject of the order, and is only granted in serious cases. If an application for a freezing order turns out to be inappropriate, it is normal for the applicant to bear both their own and the debtor’s legal costs.

To obtain a freezing order, the person owed the money will first have to establish that there is a good case for a sum being due and then show that there is a real risk that the debtor will dissipate the assets over which a freezing order is sought.

Liability Remains Where Not Excluded
Having deserted units in a retail complex can have negative effects on the other tenants and the landlord. It is therefore common for such leases to contain a ‘keep open’ clause, which provides for the payment of damages to the landlord if a retailer closes a store in breach of its lease.

The Scottish courts recently had to consider such a circumstance. The damages due because a tenant had vacated its premises had been calculated and paid to the landlord. The unit had been closed for several years when the landlord served a schedule of dilapidations on the former tenant, requiring compensation of more than £600,000, in accordance with the dilapidations clause in the lease.

The tenant refused to pay, arguing that payment of damages under the keep open clause meant that its responsibility was limited to keeping the premises wind and watertight.

The court ruled that, in the absence of a clause which acted to cancel the tenant’s liability for dilapidations in the event that the keep open clause was triggered, the tenant was liable for the dilapidations.

The law will enforce a contract which is not on the face of it unfair. It is important to make sure that the implications of any lease agreement or other contractual arrangement you want to undertake are fully understood before you sign on the dotted line.

Not all potential pitfalls are clear at the outset. We can help you avoid costly mistakes.

Treasury Proposes New Construction Tax Regime
Hard on the heels of several cases dealing with whether builders on construction sites are employed or self-employed for employment law purposes, the Treasury has announced yet another review of the employment status of construction workers for tax purposes.

The review, only a few years after the system of taxation of workers in the building industry was overhauled, is designed to address the problem of ‘false self-employment’. This occurs when workers are treated as self-employed for Income Tax and National Insurance purposes despite the fact that the way in which the work is carried out on a day-to-day basis demonstrates that there is an employment relationship.

The Treasury’s proposals would treat all workers in the construction industry as employed except those who:

• provide the plant and equipment required for the job that they have been engaged to carry out. This would not include normal ‘tradesman’s tools’, as these are traditionally supplied by tradesmen;
• provide the material necessary to do the work; or
• provide other workers to carry out the work under contract and are responsible for paying subcontractors.

The consultation document can be viewed at http://www.hm-treasury.gov.uk/consult_false_selfemployment_construction.htm. The consultation closes on 12 October 2009.

Selling Your Business – Tax Considerations
With many companies suffering from the effects of the recession, business owners looking for an exit are thick on the ground. One problem those in this situation face is that if their business is in a fairly weak financial position, it is difficult to take a tough stance when negotiating over the structure of the sale.

Purchasers will normally prefer to buy the assets of a company rather than its shares. Most vendors will prefer a share sale rather than an asset sale because of the availability of entrepreneur’s relief for Capital Gains Tax (CGT) purposes and the problems with extracting the cash from a company tax-efficiently if the assets of the company are sold. In practice, entrepreneur’s relief often means a maximum rate of CGT of 10 per cent is paid. Extracting funds by way of dividend means that the Income Tax dividend rate of 32.5 per cent is applicable.

One possibility is to put the company into liquidation when the assets have been reduced to cash. If this is done, the distributions will be treated as distributions of capital and taxed under the CGT rules. However, a formal liquidation can be expensive.

A second possibility is to dissolve the company informally. HM Revenue and Customs will by concession treat distributions in an informal dissolution as capital distributions. However, this approach is not without problems. A creditor of the company has 20 years from the date of an informal dissolution to make a claim against the company (in a formal liquidation, the period is two years) – a long time to live with any uncertainty.

In the event that a capital distribution is made, this will qualify for entrepreneur’s relief, provided certain conditions have been met for the 12 months prior to the distribution. These are that the person claiming the relief must have been an employee or director of the company, must own more than five per cent of the shares and the company must be a trading company. Any such payment must be made within three years of the cessation of trade.

Your business may well be the most valuable asset you own. It is essential that you plan your exit strategy carefully and preferably early. High quality professional advice is crucial to maximising the benefit to you and your family.

Blow for Charities as Tax Man Moves Goalposts
Charities which acquire buildings face an unexpected blow following the announcement by HM Revenue and Customs (HMRC) that a concession relating to property used for charitable purposes is to be altered. The announcement came out of the blue, with no prior consultation having been held.

Currently, a charity pays no VAT on the acquisition or construction of a new building if it is 90 per cent used for charitable purposes. In practice, this means that charities can let part of their premises to defray costs and not suffer a VAT penalty. However, from 1 January 2010, the proportion of the property which must be used for charitable purposes to qualify for the concessionary treatment will rise to 95 per cent.

HMRC claim that the change will affect few charities and will lead to no increase in the tax take, which rather begs the question as to why it was thought necessary in the first place. HMRC are being subjected to heavy lobbying by representatives of charities, which are already struggling with the effect of the recession on donations. Do not be at all surprised if the Chancellor announces a U-turn in the autumn pre-budget statement. However, if this does not occur, charities considering building or acquiring properties should consider the implications of HMRC’s announcement.

Waivers of Salary – Pitfalls
When company cash flow is tight, a director may decide to waive salary in order to help ease the cash position. However, care needs to be exercised as unless the waiver is done correctly, the PAYE on the salary waived (which, together with the related National Insurance Contributions, can amount to more than a third of the gross salary) may still be payable.

The reason for this is that under the PAYE rules, a salary can be considered to have been received for PAYE purposes in circumstances in which it has not, in fact, been paid.

The most common situations in which this occurs are when a director becomes legally entitled to a salary payment but does not draw it or when a sum on account of earnings is credited in the accounts of the company. In both of these cases, PAYE will be due on the salary waived.

There are other circumstances in which salary not taken can be taxable. If you are considering waiving your salary, in whole or in part, take advice to ensure you avoid the traps. HM Revenue and Customs can be unforgiving when PAYE irregularities are found: it is better to be safe than sorry.

Company Cannot Benefit From Illegality
A spirited attempt by a company, controlled by a single director, to blame its auditors for not detecting fraud was recently rejected by the House of Lords.

The liquidator of the company brought a claim for damages on behalf of the company against the auditors for failing to detect the frauds carried out by its sole director.

The main issue was whether a director’s illegal acts and intentions could be imputed to the company. In this instance, all those concerned with the management of the company had knowledge of the fraud. Accordingly, awareness of the fraud was imputed to the company and the claim therefore failed on the basis that a claim cannot be brought which arises from one’s own criminal conduct.

Arguments that the claim should be allowed because of the public duty of the auditors to detect fraud and because the company was the ‘secondary victim’ of the fraud were also rejected.

The Lords’ decision was by a 3-2 majority, which suggests that in somewhat different circumstances the outcome might have been different. The auditors will no doubt be relieved and the creditors of the company are left to bear the loss.

Directors can, in certain circumstances, be made personally liable for the actions of the companies they direct and, where the company engages in fraudulent activity, the risk of personal liability for directors is high.

Minority Shareholder Gains £400,000 Payoff
It is rare to see a petition under the Companies Act regarding the payment of excessive remuneration to a director, but the Scottish Outer House of the Court of Session had to deal with just such a case earlier this year.

It involved the sole director of a company, who also owned the majority of the shares. A minority shareholder claimed that the director conducted the company’s affairs in a manner which was unfairly prejudicial to the interests of the company’s members and made a claim to that effect in court (under what is now Section 994 of the Companies Act 2006).

The minority shareholder specifically alleged that no dividends had been paid to shareholders and that:

• he had been wholly excluded from the management of the company;
• the director had unlawfully borrowed money from the company, in part to buy shares to give himself control over it;
• the director spent the company’s money defending a case brought against him personally;
• the director arranged for the company to buy an expensive car for the director’s sole use; and
• over a period of approximately three years, the company paid the director in the region of £900,000 in income and pension contributions and this was severely understated in the company accounts.

The Court examined all the evidence, which covered the entire commercial history of the company, before deciding that the director’s conduct was prejudicial to the other shareholders. It ordered that the director be required to buy the petitioner’s shares. The equity value of the company was put at £2,740,642 and a discount of 40 per cent applied because of the petitioner’s minority shareholding. This resulted in his shareholding being valued at £469,800.

Minority shareholders often think that there is nothing they can do when a company is run in a way they do not like. However, when a company is run in a way that is unfair to the minority shareholders, the Companies Act does offer a remedy.

What Profits Are Distributable?
One of the things which many company directors find confusing is the difference between distributable reserves (those from which dividends can be paid) and those which are non-distributable.

Recently, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland have published new, detailed guidance on this topic. The 130-page document can be downloaded from http://www.icas.org.uk/site/cms/download/aa/TECH_01_09_Distributable_profits.pdf.

To pay a distribution other than from profits ‘available for the purpose’ (which broadly means net retained profits) is unlawful. Section 847 of the Companies Act 2006 provides that where an unlawful distribution is made to a member (shareholder) and ‘at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable to repay it (or that part of it, as the case may be) to the company’.

One particular point is that where reserves arise because of revaluations of assets or where the balance sheet shows accumulated retained losses (regardless of whether the current year’s trading is profitable), a distribution to shareholders probably cannot lawfully be made.

Unsigned Distribution Agreement Leads to Dispute
A recent case, in which a dispute arose over the right to terminate a distribution agreement, has illustrated the risks of not having formal written contracts in place governing business transactions.

Jackson Distribution Ltd. entered into an arrangement with Tum Yeto Inc. in which Jackson Distribution would be the sole distributor in the UK and Ireland of certain Tum Yeto products. A number of emails were exchanged between the two companies, after which Jackson Distribution sent a draft agreement to Tum Yeto. Receipt of this agreement was acknowledged by Tum Yeto’s CEO, but it was never signed. Some time later, Tum Yeto sought to terminate the arrangement and, predictably, the matter ended up in court.

The court had to consider what terms actually applied, as well as whether or not Tum Yeto was entitled to terminate the relationship and whether Jackson Distribution had suffered any loss as a result.

The court found that there was no evidence that Tum Yeto and Jackson Distribution had ever agreed that the contractual relationship between them should be governed by the draft agreement. However, it found that the emails exchanged did constitute an agreement that Jackson Distribution should be Tum Yeto’s sole distributor and that either of them could terminate the agreement by giving ‘reasonable notice’. The court decided that, in the absence of a breach of contract by Jackson Distribution that would entitle Tum Yeto to terminate the agreement, a period of nine months constituted reasonable notice. In reaching this conclusion, the court considered various factors, including the length of the relationship, the initial investment and the percentage of Jackson Distribution’s turnover represented by the agreement.

This case shows how a dispute can arise as a result of the absence of a formal agreement. Had the two companies ensured that a signed contract was in place, detailing the circumstances in which the relationship could be terminated and the position of each party if this happened, the expense of bringing the case to court would almost certainly have been avoided.

Contract Termination Costs M&S
With cost-cutting still a priority for many businesses, the prospect of changing suppliers for recurring services is often attractive as it may offer the scope to reduce costs. However, it is important when considering such switches to make sure that the contract terms are carefully considered.

In a recent case, retail giant Marks & Spencer (M&S) wished to terminate a contract for computer maintenance. M&S believed that the contract operated to give it a choice as to whether to renew the maintenance agreement at the year end, but instead it required M&S to give notice prior to the end of the year if it wished to terminate the contract.

M&S did not give notice at the required time and as a result was liable for the payment due under the contract for the next year’s maintenance – more than £130,000.

It is always worth taking legal advice when you are considering terminating a contract to ensure you do not end up with unexpected liabilities.

Good Faith and Errors in Documents
If you enter into a business contract in good faith and it subsequently transpires that the contract was incorrectly authorised or otherwise invalid from the perspective of the other party’s internal regulations, where do you stand?

Two recent cases provide guidance on this contentious area.

In the first, a loan was advanced to a company by way of debenture, which is normal practice. When the lender wished to enforce the debenture, the company challenged its validity on the basis that the loan was authorised without the company’s internal regulations being followed. Necessary notices convening the board meetings at which the loan was authorised were not given and the board meetings were not held in the Netherlands, as was required by the articles of the company giving the debenture.

The company argued that the board resolutions authorising the debenture were not properly passed and could not therefore bind the company. In the view of the court, the lender had acted in good faith and it was thus protected by legislation that will bind a company ‘free of any limitation under the company’s constitution’. The debenture was therefore enforceable against the company.

In the second case, a bank found itself exposed under a debenture and cross-guarantee because only one director had signed the documentation. Two signatures were required and the director had counterfeited his co-director’s signature, this being usual practice for them when matters were agreed. However, on this occasion, there had been no agreement and the second director was unaware of the document. When the bank sought to appoint an administrator, after the company defaulted on its loan, the second director went to court to have the appointment set aside on the ground that the documentation for the loan had been forged.

Again, the court decided that the bank had acted in good faith. The forged document was enforceable against the company because the director who placed both ‘signatures’ on it had the ostensible authority of the other director to do so.

Patent Stands Despite Disclosure of Art
The ruling in a recent patent dispute will give some comfort to developers of products that are patented after the developer has already ‘let the cat out of the bag’.

The general rule is that a patent cannot be defended if the subject matter of the patent (the ‘art’) has become public knowledge before the patent application is made. In the case in point, a firm sought to fight an action for patent infringement on the basis that the prototype of the subsequently patented design for a folding stair had been shown to at least three members of the public and photographed by them and that a photograph had appeared in the press which showed the prototype in the background.

The defendant firm argued that the disclosure was sufficient to make the art public knowledge. The claimant firm argued that this was not sufficient: the three people who had seen the prototype had no special interest in the design or knowledge of the manufacture of the folding stair. They would not have been able to describe its particular features after seeing it.

The UK Patent Court upheld the patent.

This case is interesting as it runs somewhat counter to other decisions. An appeal must therefore be a distinct possibility. Even though this case turned out well for the claimant, it makes sound commercial sense to ensure that all intellectual property which needs to be formally protected is kept firmly under wraps until it is safe to make it public.

Court Takes Hard Line on Non-Cooperative Director
In litigation, it is common for the court to order the production of documents by the parties to the case. Failing to comply with such orders is unwise, as the court has the power to strike out (i.e. refuse to hear) a case unless the documents are produced. Where this occurs, the party which has failed to supply the relevant documents can apply for ‘relief’ from the order for their case to be struck out, if they feel the order was not justified.

There are several criteria the court will apply when considering an application for relief. These include considering whether the administration of justice will be served, whether the failure to supply the requested information was intentional and the extent to which the person has complied with other requests, orders etc.

However, the courts do tend to take a very robust attitude regarding such failures. In a recent case, a director of a company in liquidation applied for relief after an order was made that he must comply with requests for documents or lose his right to defend himself against charges of breaching his fiduciary duty to the company. The Court of Appeal ruled that the director’s non-compliance was serious and persistent and rejected the argument that it was relevant that he had a good chance of defending the claim. Without a material change in his circumstances or a legitimate reason for non-compliance, the original sanction had to stand.

When disclosure of documents is required by the court, the demand must be treated seriously. Ultimately, failing to comply with the court’s rulings can result in your case simply being rejected.

Wide Measure of Flexibility When Selecting Pool for Redundancy
Redundancy is a potentially fair reason for dismissal but may be found to be unfair, for example if a particular employee was unfairly selected for redundancy. Where the decision to make someone redundant follows the reasonable application of a fair selection process, the decision will not normally be open to question.

In Lomond Motors Ltd. v Clark, the Employment Appeal Tribunal (EAT) has confirmed that employers have a considerable measure of flexibility when determining the selection pool for redundancy.

Lomond Motors Ltd. (LML) originally operated as a car dealership from two sites, one in Glasgow and one in Ayr. Mr Clark was contracted to work as a branch accountant at the Glasgow premises ‘or such other address as the company may establish premises at’. LML later acquired two further sites, one in Edinburgh and one in Stirling, and established a subsidiary company, Lomond Motors East Ltd. (LML East). Mr Clark was asked to work as the branch accountant at the Stirling site but remained an employee of LML. The Edinburgh branch had its own accountant. Another employee was the branch accountant responsible for the sites at Glasgow and Ayr. When Mr Clark transferred to Stirling, it was acknowledged that the woman responsible for the Glasgow and Ayr branches did not have the experience necessary to perform the role at Stirling.

Following a subsequent review of the structure of both companies, the Group Financial Controller decided that it would be better to have just one accountant covering the Edinburgh and Stirling branches as this worked well in the case of Glasgow and Ayr. The selection pool for redundancy consisted of Mr Clark and the Edinburgh branch accountant and Mr Clark was selected for redundancy. He claimed unfair dismissal on the basis that the selection pool should have included all three branch accountants.

The Employment Tribunal (ET) found that the employer’s decision to limit the size of the selection pool for redundancy to two fell outside the band of reasonable responses in such circumstances and upheld Mr Clark’s claim. In the ET’s view, he was not employed by LML East, had not worked in Stirling very long, the jobs of the three accountants could be regarded as interchangeable and Mr Clark’s contract of employment contained a mobility clause.

On appeal, the EAT overturned the ET’s decision. The facts plainly pointed to the reasonableness of the decision to restrict the pool to the branch accountants at Stirling and Edinburgh. Whatever the formalities of his contract were, Mr Clark performed work for LML East. The two LML East branches formed a separate work centre and it was this operation that had a surplus accountant. By the time he was dismissed, Mr Clark had in fact worked for LML East for over a year. The ET’s finding that the jobs of all three accountants were interchangeable was undermined by its earlier finding that the branch accountant for Glasgow and Ayr did not have the experience necessary to work at the Stirling branch. Nor was the mobility clause in Mr Clark’s contract relevant in the circumstances. When considering the reasonableness of the determination of a selection pool for redundancy, it is a matter of examining the actual position at the time of redundancy.

In the EAT’s view, the ET had fallen into error and substituted its own view for that of the reasonable employer. Previous case law shows that different people can quite legitimately have different views as to what is or is not a fair response to a particular situation and this affords employers a broad measure of flexibility in determining the selection pool for redundancy. Merely identifying factors an employer has not taken into account does not of itself justify the conclusion that a decision is unreasonable. Any such finding must be based on a ‘sound rationale’.

New Minimum Wage Rates
Employers are reminded that increases in the National Minimum Wage (NMW) rates came into effect on 1 October 2009.

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

Safe Working at Height
A recent prosecution by the Health and Safety Executive (HSE) serves as a warning to company directors and business owners of the importance of implementing comprehensive, safe systems for working at height.

David Boulton worked for a company based in Stockton-on-Tees, Mobile Mini UK Ltd. He was unloading a temporary accommodation unit from a lorry and was standing on top of the unit, in order to attach a sling from a crane, when he fell and suffered fatal head injuries.

Mobile Mini UK Ltd. pleaded guilty to breaching Section 2(1) of the Health and Safety at Work Act 1974 and was fined £80,000 and ordered to pay costs of £8,000.

The HSE inspector found that the company’s health and safety systems were fundamentally flawed. Systems that were in place were so cumbersome that employees found them difficult to follow and other procedures necessary for safe working at height were not followed. No checks were made to ensure that workers adhered to the systems that were in place and some of the equipment used was sub-standard.

Falls from height remain one of the most common causes of death in the workplace. When undertaking work of this nature it is vital to have in place safety procedures that are easy to understand and cover all associated risks. These should be monitored regularly and staff training kept up to date.
For information on safe working at height, see hse.gov.uk/falls/index.htm.