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Abolition of Protected Rights from 6 April 2012

1. Background:

1.1 In 2005, the Pensions Commission recommended abolishing the option for schemes to contract-out of the State Second Pension (‘S2P’) on the protected rights basis.  The reasons were the complexities caused by administering protected rights and the lack of member understanding.

1.2 The result is that protected rights will be abolished on 6 April 2012 and this applies to all pension schemes.   All rules and references to “protected rights” in pensions-related legislation will either be repealed, or where appropriate, amended.

1.3 On abolition, protected rights will cease to exist.  They will become ordinary money purchase scheme benefits.   

1.4 Contracting-out in final salary schemes on the reference scheme basis is not subject to change.

2. Why abolish contracting-out on the protected rights basis?

2.1 By removing the option of contracting-out of S2P, it is hoped that complexity in the pensions system will be removed.   There will no longer be the need to track protected rights separately and scheme administration will become more manageable, simplifying record keeping and the processing of benefits and transfers.

2.2 In addition, there are currently a number of restrictive rules applying to protected rights.  For example, the annuity bought with protected rights funds must include an attaching survivor’s pension of at least 50% of the member’s pension. These requirements will disappear from 6 April 2012, providing welcome flexibility for members.

3. Increased NI costs and impact on employer contributions

3.1 When contracting-out on the protected rights basis, employees and employers pay reduced NI contributions in exchange for giving up accrual of the S2P. The contracted-out scheme then invests the rebates on behalf of each employee. The current rebates mean that employees pay 1.6% lower NI contributions and employers pay 1.4% lower NI contributions. In addition, HMRC pays further age related rebates into the scheme.
 
3.2 With effect from 6 April 2012, NI contributions will revert to standard rates and the rebates from HMRC will cease. Employer and Employee contribution rates usually include the contracted-out rebate.

3.3 This means that contributions into DC schemes after 6 April 2012 will reduce, with a corresponding reduction in the rate at which funds accumulate.

3.4 For DB schemes, this which means that after 6 April 2012 employer contributions will increase. Employers are likely to wish schemes to continue contracting-out on the COSR basis after 6 April 2012 in order to maintain the rebate.

3.5 Employers may therefore wish to review contribution rates that apply to their scheme after 6 April 2012.

4. What will trustees need to do?

4.1 Where scheme rules have incorporated the protected rights provisions into the rules themselves rather than just referring to the relevant legislation, the scheme rules will have to be amended to remove any such references.  The DWP has issued draft regulations for consultation providing an amendment power under section 68 of the Pensions Act 1995 without the necessity to consider restrictions on changes affecting accrued rights under section 67 of the 1995 Act or the scheme amendment power. It is proposed that the amendment power to remove scheme rules relating to protected rights is exercised by the trustees by resolution. 

4.2 The draft amendment power is very wide but there might be cases where it is not sufficient to amend scheme rules.  Accordingly, scheme rules will need to be reviewed to determine if any changes are required, and if so, whether the statutory amendment power provided by the DWP will be sufficient.

4.3 The power provided is time limited; trustees will have until the end of a three year transitional period (6 April 2015) to make amendments to their rules.  The draft regulations permit the trustees’ resolution to be signed now or after 6 April 2012 – in each case the effective date can be 6 April 2012. 

4.4 The three year transitional period will allow for the payment of final year’s rebates and the late payment or recovery of recalculated rebates due to adjustments to individuals’ NI records.  At the end of this transitional period,  HMRC will no longer track protected rights, so trustees should ask their administrators to ensure that all records are correct prior to this date.

4.5 Under the amended Disclosure Regulations, trustees must inform members that the scheme is no longer contracted-out within one month after 6 April 2012.  Trustees will also have a period of four months following 6 April 2012 to inform members of the effect of the abolition of contracting-out, namely, the removal of protected rights and basis for future accrual of scheme benefits.  Alternatively, this information can be provided by the trustees within the year leading up to the abolition date.

4.6 Trustees may want to consider additional information to include in this announcement, for example, explaining in more detail why protected rights are no longer referred to.

4.7 Member booklets will also need to be reviewed to make sure they are appropriate following the abolition.

5. Do contracting-out certificates need to be varied or surrendered and how do schemes elect to contract-out on the COSR basis?    

5.1 For DB or DC schemes ceasing to contract-out on the COMP basis, there is no need for trustees to formally surrender their contracting-out certificate; they will all be cancelled automatically on 6 April 2012.

5.2 If a DB or DC scheme currently contracted-out on the COMP basis wants to become a COSR scheme, the normal “election” processes apply.

5.3 If a COMB scheme ceases to contract-out on a COMP basis, there is no need to surrender or vary the mixed benefit contracting-out certificate in relation to the DC section or to obtain a DB only contracting-out certificate. The existing certificate will remain valid for that section of the scheme which remains contracted-out on a COSR basis.

5.4 Practical assistance in managing the run-up to April 2012 is being publicised via HMRC’s series of ‘Countdown Bulletins’.

This note only applies to pension schemes that are currently contracted-out of the State Second Pension on the protected rights basis.

Summary and action points for trustees

• Protected rights in all schemes to be abolished from 6 April 2012; schemes will no longer be able to contract-out on a money purchase basis from that date.
• Seek legal advice as to whether the scheme rules need to be amended. If yes, pass trustees’ resolution to remove protected rights provisions from the scheme rules.
• For schemes ceasing to contract-out, inform members that the scheme will no longer be contracted-out after 6 April 2012, and the effect that this will have.
• Ask the scheme administrator to ensure that all records relating to protected rights benefits are up to date.  
• Consider the need to update the member booklet and other member literature.

We would be very happy to review your scheme rules on this issue. Please contact Pitmans Pensions team or your usual Pitmans contact.

David Hosford
Partner
T: +44 (0)118 957 0363
E: dhosford@pitmans.com

Symon Rowley
Director
T: +44 (0)118 957 0301
E: srowley@pitmans.com

Limited liability is not complete protection for directors and they must carefully consider their actions and, indeed, failures to act in order to avoid “piercing the corporate veil”.  Directors may be ordered to contribute to the assets of the company even where they have not acted dishonestly.

Wrongful trading is often called “trading whilst insolvent” but this is only half the story. Directors may find themselves personally liable for wrongful trading where, at some point in time, they should have concluded that the company would not be able to avoid insolvent liquidation but continued to trade. In those circumstances the director may be ordered, by the court, to contribute to the assets of the company for the benefit of its creditors.

A director will be able to raise a defence to such a claim if he took every step to minimise losses to creditors that he ought to have taken.

The acts and omissions of the director are considered both subjectively and objectively. The court will take into account the facts and matters that a reasonably diligent director ought to have known or been able to ascertain and steps that he ought to have taken. The fictional “reasonably diligent person” will be taken to have the general knowledge, skill and experience expected of a person carrying out the same functions as the director and the general knowledge, skill and experience that the director actually had. Ignorance is not a defence.

This is not the only pitfall that a director of an insolvent company may face.

The Court has wide powers to order that a director should make a contribution to a company’s assets where a director has misapplied, retained or become accountable for company property or has been guilty of any misfeasance or breach of any fiduciary or other duty.

Duties of directors have been developed through common law over many years and were codified by the Companies Act 2006.  Directors and the board must remember that a company is a separate legal entity of which they are merely employees and custodians but their role and position of trust means that they must achieve high standard of responsibility and duty of care and act in good faith at all times.

Directors’ duties are to:

• promote the success of the company;

• exercise reasonable care, skill and diligence;

• exercise independent judgment;

• avoid conflicts of interest.

Ordinarily these duties are owed to the company and its shareholders but directors of insolvent companies owe these duties to the creditors. A failure to observe these duties may lead to personal liability.
Each legislative provision that a director may fall foul of cannot be considered in isolation.  Any act or omission could lead to claims under a number of statutory provisions or common law and support an application by the Secretary of State for a director to be disqualified from acting as such.

Misapplication of company property may also lead to a clawback from the recipient, whether that is a director or third party, where assets are transferred less than their market value.

Directors should avoid paying any creditors, including themselves, in priority to other creditors since such payments may be clawed back if they are a “preference” made (or deemed to have been made) with a view to putting the recipients in a better position on insolvency than they would otherwise have been.

Transferring assets and preferring creditors would also be circumstances that would support an application by the secretary of state to disqualify a director from acting as such in the future.

What should directors do when their company may be insolvent?

Directors should:

• ensure that up to date and accurate management information is available and monitor the company’s finances and cash flow on a regular, at least monthly, basis and more regularly if the financial situation worsens;

• prepare cash flow statements so that they can anticipate the times when the company may not be able to pay creditors and plan for them e.g. through communication and negotiation with creditors;

• if insolvency cannot be avoided, consider whether the company can continue to trade. This should only be considered an option if the board determines that insolvent liquidation is not inevitable and creditors will not be prejudiced e.g. a continued period of trading will improve the company’s fortunes or a cost cutting exercise and/or turnaround strategy will return the company to solvency.  Directors should record their decision to continue to trade and the reasons for them in the form of board minutes and a review of the decision should take place regularly;

• take professional advice and have that advice recorded in writing;

• consider whether to continue to take a salary at the level currently awarded or at all and reduce or suspend remuneration is necessary. Directors should be aware that HMRC and the Secretary of State will take a dim view of directors who effectively “bank roll” their company with “credit” from HMRC unless an agreement has been reached, particularly in circumstances where funds that could have been used to pay HMRC have instead been used to pay the directors;

• treat all creditors fairly and equally. New supplies should not be ordered unless they can be paid for nor should new contracts be entered into unless they can be performed;

• avoid transferring assets of the company away from it, including intangible assets such as intellectual property, without taking advice and ensuring that full market value is paid;

• consider whether to invoke an insolvency process, such as a liquidation or administration or seek a formal arrangement with creditors through a Company Voluntary Arrangement.

Resigning as a director will not absolve a director from liability.  Further non-directors may be liable as if they were a director where their behaviour, in controlling the affairs of the company and the actions of the board, is akin to that of a director such that they may be considered to be “shadow directors”.

For further information contact Pitmans’ Insolvency & Restructuring team in London or Reading.

Suzanne Brooker
Partner
T: 0118 957 0516
E: sbrooker@pitmans.com

Nicola Kirk
Partner
T: 0118 957 0226
E: nkirk@pitmans.com

Denise Fawcett
Partner
T: 0207 634 4642
E: dfawcett@pitmans.com

David Archer
Partner
T: 0207 634 4651
E: darcher@pitmans.com

This article was published by Asset Finance International

The new Bribery Act (the “Act”), is a wholesale reform of the old bribery laws which were a complicated and confusing combination of statutory and common law offences from more than 100 years of legal development in this area.

The need for reform was widely acknowledged, however, the final result may have alarming consequences for corporate entities, including asset lenders and equipment leasing companies operating in and outside the UK, as many law abiding businesses could inadvertently break the new rules if they are not properly prepared. Therefore, it is important for organisations to consider now what the Act means for them and what actions they need to take as a result.

To read more, please click here.

1. Dismissing an employee for negligence

The Employment Appeal Tribunal has held that in cases of gross negligence dismissal will only be appropriate if the employer has carried out a reasonable investigation into the alleged negligence; if it was reasonable on the basis of that investigation for the employer to believe that the employee had been negligent; if the employer did in fact believe that the employee was negligent; and if dismissal was a reasonable sanction.

What does this mean?
A dismissal on grounds of negligence will be unfair if the employer fails to carry out a proper investigation into the allegations and fails to treat the employee fairly and reasonably.

What should employers do?
Always take specific legal advice before dismissing an employee or taking action short of dismissal, whether for negligence or for some other reason.

2. Payment in lieu of holiday leave

The Employment Appeal Tribunal has held that an employee is only entitled to holiday pay under regulation 16(1) of the Working Time Regulations if he or she has actually taken the leave in respect of which they seek to be paid, and has given notice of their intention to take leave in accordance with regulation 15.

What does this mean?
Employees accrue statutory holiday leave entitlement during periods of sickness absence. However, they will only be entitled to payment in lieu of holiday leave if they have given notice of their intention to take leave.

What should employers do?
Employers are, as a general rule, under no duty to advise their employees of their legal rights. Employers are, therefore, not required to advise their employees that if they don’t request time off they will lose any entitlement they may have to receive payment in lieu.

3. The Pensions Act 2011

The Pensions Act 2011 was passed on 3 November. The Act accelerates the timetables, set out in previous legislation, for increasing the state pension age to 66 and for equalising the state pension ages of men and women. The Act also contains a number of measures which amend the automatic enrolment provisions for workplace pension schemes.

What does this mean?
From April 2016 the state pension age for women will rise, equalising with the state pension age for men of 65 by November 2018. Between December 2018 and October 2020 state pension ages for both men and women will be increased from 65 to 66. In addition to these changes, the Chancellor announced on 29 November 2011 that the increase of the state pension age to 67 has been brought forward and is now set to take place between April 2026 and April 2028 instead of between 2034 and 2036.

Subject to employer staging dates, employees aged 22 years or older who have not reached pensionable age will need to be automatically enrolled into a workplace pension from 1 October 2012 if they earn £7,475 or more. However, there is an optional waiting period of up to 3 months before the duty to automatically enrol an employee commences.

What should employers do?
Employers should check their staging date. (Employers with fewer than 50 persons in their largest PAYE scheme will not be staged in until after the end of this Parliament.) More information on staging dates can be found here.

In the meantime, employers should start thinking about updating their employment documentation such as contracts of employment so as to allow for employee and employer pension contributions.

4. Disciplinary proceedings

The Employment Appeal Tribunal has reminded employers, in giving judgment in a recent case, of the need to act reasonably both when initiating and conducting disciplinary proceedings.

What does this mean?
Employers who make allegations against their employees without there being an adequate basis for making such allegations and who do not act reasonably when conducting disciplinary proceedings may be liable for unfair dismissal.

What should employers do?
Employers should always take specific legal advice before dismissing an employee or taking action short of dismissal.

5. Whistle-blowing

The Employment Appeal Tribunal has held that dismissal is fair where misconduct was the reason for dismissal and the dismissal was not connected with the making of a protected disclosure by the employee.

What does this mean?
Where a dismissal is connected with the making of a protected disclosure by the employee the dismissal will be automatically unfair. However, employees who make protected disclosures are not entitled to blanket protection and can still be dismissed for misconduct or other fair reasons.

What should employers do?
Employers should objectively assess the circumstances and consider whether they have grounds for a fair dismissal. Always take specific legal advice before dismissing an employee or taking action short of dismissal.

6. Vicarious liability

The High Court has held that there need not be an employment relationship for vicarious liability to exist.

What does this mean?
A party can now be vicariously liable for the wrongdoings of another, even if they are not employer and employee, as long as there is a close relationship between the two of them. Where the question of vicarious liability is an issue it will be necessary to look at all the surrounding facts and circumstances when considering the nature of the relationship. In particular, it will be necessary to consider the nature and purpose of the relationship, whether tools, equipment, uniform or premises are provided to assist the performance of the role, the extent to which the one party has been authorised or empowered to act on behalf of the other, and the extent to which the wrongdoer may reasonably be perceived as acting on behalf of the authoriser. The extent to which there is control, supervision, advice and support will be of relevance but not determinative.

What should employers do?
Employers should bear in mind that in theory they could now be vicariously liable for the actions of third parties such as independent contractors if the relationship is a particularly close one. Employers who are concerned that such liability may exist should take legal advice and, where appropriate, ensure that they have adequate insurance and indemnities in place to cover such liability.

7. Equal pay

Comparators who work at different places but are employed on common terms and conditions are able to bring equal pay claims before the Employment Tribunal. The employment judge’s decision that employees and their comparators who were employed on common terms and conditions could bring a claim for equal pay was upheld by the Inner House of the Court of Session. The employees in question were people who worked in schools, hotels, libraries and their comparators were gardeners, gravediggers and road workers.

What does this mean?
If a claimant can show that a comparator could move to the claimant’s place of work and continue to work on existing terms and conditions, common terms and conditions would apply and so could give rise to an equal pay claim.

What should employers do?
Employers should be careful when employing people at different establishments to ensure they are not comparators, or if they are, that they are paid equally. Legal advice should be taken when looking at this in relation to equal pay.

8. Trade union activities

Trade Union officials are entitled to special protection (automatic unfair dismissal rights) when conducting trade union activities. The Employment Appeal Tribunal has held that opinions expressed by a trade union official, at a meeting during a redundancy consultation process and, which were made on behalf of other workers as well as himself amounted to trade union activities.

What does this mean?
The employee was found to be dismissed for an automatically unfair reason as the reason for his dismissal was due to his trade union activities.

What should employers do?
Employers should treat disciplinary cases involving trade union officials with caution and always take specific legal advice before making a dismissal.

9. Employment Status

The Upper Tribunal dismissed an appeal from Weight Watchers (UK) Limited (the “Company”) regarding the status of their Weight Watchers leaders. The Company believed them to be self employed and not an employee for tax purposes. The Upper Tribunal disagreed and found they were employees. The Upper Tribunal looked at the degree of control the Company exercised over the leaders and the reality of the situation, not just the documentation in place.

What does this mean?
People who Weightwatchers thought were self employed are actually employees and thus they now face a huge tax bill. The Employment Tribunal has given a clear warning that they will ignore any documentation if they do not accurately reflect the true position.

What should employers do?
Employers should ensure they regularly review their documentation to ensure they reflect what is actually happening in practice. Employers would also be well advised to ensure they have provisions in place that ensure they can recover tax and national insurance contributions from their employees.

For further information on this article, please contact Pitmans Employment team.

Mark Symons
Partner, Head of Employment
T: +44 (0)118 957 0340
E: msymons@pitmans.com

As part of its continuing efforts to stimulate the UK’s ailing economy and halt the trend towards increasing levels of unemployment, the Government has turned its attention to making wide-sweeping changes to the regulation of employment relations.

The aim is to make UK labour law more business-friendly by easing employers’ fears about the consequences which might arise should the employment relationship turn sour. It has been argued that increased flexibility and confidence will encourage employers to employ more people and thus boost the economy.

The latest part of this process saw the Business Secretary, Vince Cable, announcing plans which will, if implemented, “radically reform employment relations”.

The proposed reforms are as follows:

Reform
Introducing a fee tier system when filing a claim at the Employment Tribunal. The system will either be one of the following:

• A fee paid when a claim is lodged and then a further fee prior to any subsequent hearing; or
• A fee paid when a claimant is seeking more than £30,000.

We say
- It is unusual to impose fees which restrict access to the courts or Tribunals for that purpose rather than funding the courts or Tribunals. Such a system would, it is hoped, discourage employees from engaging in so called “fishing trips” to see what financial benefit they might squeeze out of their employer by using the threat of an Employment Tribunal claim as leverage; the requirement to pay a fee is likely to put off such Claimants. However, there are a lot of very determined individuals who are likely to find the money to do this.

Reform
- Increasing the qualifying period for unfair dismissal to two years on 6 April 2012. This will give employers more time to identify potential under-performers or trouble-makers and weed them out of their organisation with less fear of reprisal.

We say
- There must be doubt whether this will achieve its objective because one suspect’s employers may still let people slip over the two years and discrimination claims could still be brought by employees with shorter service.

Reform
- Closing a “loop hole” in the law on whistle blowing by ensuring that employees will no longer be able to “blow the whistle” on breaches of their own employment contract.

We say
- This would be a major change and protect employers from a sizeable proportion of the whistle blowing claims that are currently raised. The move will have even greater resonance due to the increase in the unfair dismissal qualification period. This is because where an employee is able to prove whistle blowing, their dismissal is automatically unfair and there is no need for them to establish the necessary period of continuous service; for this reason alone, for some time there has been a substantial benefit in employees pursuing whistle blowing claims.

Reform
- Consulting on the possibility of introducing “protected conversations”. This will provide employers with a level of comfort as they will be able to discuss certain issues with their employees, such as performance, without it being able to be used against them.

We say
- It will be interesting to see how protected conversations will interact with discrimination issues; if a protected conversation includes evidence of or an act of discrimination, will the conversation still be protected? One would expect that it would not protect acts of discrimination but will such a conversation protect evidence of discrimination? The Government has said discrimination will not be protected but until the Consultation is launched it is unclear how they will do this. There are too many ifs and buts at present to know whether the introduction of protected conversations could be a good thing.

Reform
- Seeking evidence on introducing a no fault dismissal for micro firms (those with less than 10 employees).

We say
- This would effectively allow such businesses to dismiss staff without justification providing that they pay affected employees a standard settlement. No comment has been made about when evidence is to be submitted yet; however it has been reported that Mr Cable is himself not a supporter of this reform.

Reform
Other measures set out by Mr Cable that are aimed at cutting employment related red-tape include:

- Seeking evidence on the possibility of simplifying TUPE.

- Seeking evidence on the merits of reducing the statutory consultation period required for when making collective redundancies to either 60, 45 or 30 days. Currently it is 90 days.

- The deadline for submitting evidence to both measures above is 31 January 2012.

- Consulting in relation to Compromise Agreements with a view to simplifying them.

- Reviewing and simplifying 17 National Minimum Wage regulations. These regulations will be merged into one consolidated set.

- Making CRB checks available online from 2013 and allowing them to be kept up to date subject to a fee.

- Reviewing and amending the laws on paternity and maternity leave to reflect the modern era. Parental leave is now shared and so the rules on parental leave need to be amended to allow flexibility.

We say
It is all very well considering bringing in all these changes to try to make life easier for employers but one of the main problems that employers have faced is the constant stream of legislation and case law on employment issues. Having to deal with further changes will impose its own burden.

Reform
- Enforcing a rule that all claims must go through ACAS first before they can be lodged at an Employment Tribunal, the aim being that most claims will be settled by conciliation.

- The possibility of a “Rapid Resolution Scheme”. A full consultation will take place before any decision is made.

- The Tribunal will also have the power to impose financial penalties on an employer who loses a claim. This is in addition to any damages awarded and can be up to £5,000 (with a 50% reduction if paid quickly). Any penalty will be payable to the Exchequer. This is hopefully not as unwelcoming as it sounds as it is down to the Tribunal’s discretion and is likely to only be awarded where exceptional circumstances are present.

We say
We see lots of evidence of the Employment Tribunals being stretched. Claimants may be keener to settle through ACAS if they can avoid a fee. It is hoped the overly-burdened Employment Tribunal system will be given some respite with the implementation of the above changes.

For further information about these proposals or if any of the proposals will affect you or your employees then please do not hesitate to contact Pitmans Employment team.

Mark Symons
Partner, Head of Employment
T: +44 (0)118 957 0340
E: msymons@pitmans.com

The ECJ has held that an order imposed by a Belgian court, which required an internet service provider (“ISP”) to filter and block access by its customers to files containing infringing copies of musical works, was incompatible with EU law. (Scarlet Extended SA v Société belge des auteurs, compositeurs et éditeurs SCRL, Case C-70/10, 24 November 2011.)

The case concerned questions referred by the Brussels Court of Appeal to the ECJ regarding Scarlet, an ISP. Scarlet was ordered by a Belgian court to make it impossible for its customers to share files that infringe rights held by members of SABAM, the Belgian Society of Authors, Composers and Publishers.

In 2004, SABAM established that users of Scarlet’s services were downloading works in SABAM’s catalogue from the Internet, without authorisation and without paying royalties, by means of peer-to-peer networks (a transparent method of file sharing which is independent, decentralised and features advanced search and download functions).
 
Upon application by SABAM, the President of the Brussels Court of First Instance ordered Scarlet, in its capacity as an ISP, to bring those copyright infringements to an end by making it impossible for its customers to send or receive in any way electronic files containing a musical work in SABAM’s repertoire by means of peer-to-peer software.

On appeal to the ECJ, it held that EU law precludes the imposition of an injunction by a national court which requires an ISP to install a filtering system with a view to preventing the illegal downloading of files. It concluded that such an injunction does not comply with the prohibition on imposing a general monitoring obligation on such a provider. The filtering system would mean that the ISP was required to monitor data relating to its customers, which is explicitly prohibited by Art 15 of the E-Commerce Directive.

The ECJ also ruled that the injunction did not comply with the requirement to strike a fair balance between, on the one hand, the right to intellectual property, and, on the other, the freedom to conduct business, the right to protection of personal data and the freedom to receive or impart information – fundamental rights safeguarded by the Charter of Fundamental Rights of the EU.

The case follows an earlier UK ruling where BT became the first ISP to be forced by a court order to block its customers from accessing a website on grounds of copyright infringement. The site in question, www.newzbin.com, allowed users to share data files, predominantly pirate films, TV show downloads and music. The case was brought by six major film studios.

Scarlet was held distinguishable in that the film studios were not asking for an unlimited filtering system for all customers, but rather for a clear and precise injunction requiring BT to implement an existing technical solution which BT itself had accepted would be technically feasible and the costs would not be excessive. Therefore, it was not in breach of Article 10 of the European Convention of Human Rights.

It is clear the scope of the injunction sought and the technical feasibility of achieving it will be relevant in each case. This also does not bode well for any orders which the Secretary of State may make under the Digital Economy Act (DEA), as any such orders to prevent unlawful file sharing may be unenforceable under EU law for similar reasons.

The online infringement provisions of the DEA oblige ISPs to assist in identifying copyright infringers and allow enhanced measures to be taken against copyright infringers, including an ability to require ISPs to suspend internet connection to persistent offenders. Following a recent Judicial Review (JR) by BT and Talk Talk, the High Court has held that the provisions of the DEA are compatible with EU law; so, whilst copyright owners and the government are relieved by the JR decision, the issue still very much remains open in light of Scarlet.

For more information, please do not hesitate to contact Pitmans’ Intellectual Property Team.

Philip James
Partner
T: +44 (0)207 634 4655
E: pjames@pitmans.com

This article first appeared in Solicitors Journal www.solicitorsjournal.com

Nortel and Lehman decision is upheld

The Court of Appeal has upheld the decision of the High Court in the matters of Nortel GMBH and Lehman Brothers International (Europe) (both in administration).  The High Court had decided that liability under a Contribution Notice issued by the Pensions Regulator against a company in administration or liquidation, in relation to liabilities of a defined benefit pension scheme, is an expense of that insolvency process.  Accordingly, this further extension of the types of expenses that have super-priority an insolvency process is confirmed. 

This decision will be of enormous concern to office holders who may find themselves with insufficient funds available, after payment of Contribution Notice liabilities, to fund their own remuneration and to floating charge holders and unsecured creditors who will find the funds available to them to satisfy their claims depleted.

Financiers will need to factor into lending decisions the possibility of substantial liabilities, not shown on a company’s balance sheet that would, if they arose, have priority over much of the secured and all unsecured lending.

Industry groups will continue to lobby the government for a change in legislation.  The government will have to balance protecting pension schemes, and therefore the Pension Protection Fund, at the cost of trade creditors and even HMRC and stifling investment and lending into groups with a final salary pension scheme.

Paymex Repayments Guidance

R3, the Debt Resolution Forum and other recognised professional bodies have issued a guide to the practical implications of the decision in Paymex Limited –v- The Commissioners for Her Majesty’s Revenue and Customs.

In this case, the First Tier Tax Tribunal held that the services of a company that arranged and implemented individual voluntary arrangements (“IVA”) were exempt from VAT since these services constituted negotiation in relation to debts and handling of payments, which attract the exemption under Article 135(1)(d) of Council Directive (EC) 2006/112/EC.  The Tribunal held that the question of whether a supply is exempt depends upon an objective economic assessment of the nature of the supply being made and not the nature of the taxable person making the supply. 

HMRC has confirmed that it will not be appealing the decision and will pay claims for overpaid tax falling within the findings of the Tribunal decision in this case.  Refunds must be treated as third party funds and paid into the relevant estate accounts or, where a case is closed, into client account, to be distributed without delay.

As it is the nature of the supply that needs to be considered in order to determine whether the supply is exempt from VAT, it appears that services relating to Company Voluntary Arrangements and Partnership Voluntary Arrangements could also be exempt.  However, HMRC has said that it will only consider refunds within the scope of the Paymex decision and, therefore, this will only apply to IVA’s.

Duty of Good Faith in IVA’s

In Kapoor –v- National Westminster Bank plc the debtor proposed an Individual Voluntary Arrangement.  He procured that one of his friends, an unconnected person, would pay a sum to a connected creditor, being more than the return in the Individual Voluntary Arrangement, in return for an assignment of part of the debt (thereby constituting an equitable assignment).  The friend then voted in favour of the IVA and outweighed the votes of other creditors opposed to the proposal. 

The Court of Appeal held that an equitable assignee of a debt could vote upon an IVA proposal.  However, it held that the debtor had a duty to be open and transparent in return for avoiding the investigations that would be likely in the event of a bankruptcy.  The assignment was on terms that were not commercial and was effected for the sole purpose of securing the approval of the IVA against the wishes of the general body of creditors.  On those grounds the IVA approval was revoked.

No Extension of Invalid Administration Appointments

There have been a number of cases recently looking at whether procedural irregularities may render an administration appointment invalid.

The case of Re Frontsouth (Witham) Limited is another in this line of cases.

An extension of the period of the administration had been obtained, purportedly, with the consent of the charge holders.  However, one charge holder had acknowledged the request for consent but had not given a full response.  

On the second application to the Court to extend the administration, the absence of the charge holder’s consent came to the court’s attention.

Paragraph 77(1)(b) of Schedule B1of the Insolvency Act 1986 provides that the administrators’ term of office may not be extended after the expiry of that term. If the first extension was invalid then the term of the administration would have expired and the Court would lack the jurisdiction to extend the term of office unless the defect could be remedied. 

This was particularly problematic since, during the extended periods of the administration, properties had been sold. 

The administrators asked the Court to use Rule 7.55 of the Insolvency Rules 1986 to find that the appointment was valid notwithstanding the procedural error.  Rule 7.55 provides that no insolvency proceedings shall be invalidated by any formal defect or irregularity unless the Court considers that substantial injustice has been cause by the defect or irregularity which cannot be remedied by Court order.

The Court refused to make an order extending the administration.

During the course of giving judgment, the Court referred to decisions made in earlier cases where the court had been asked to waive or remedy a defective and invalid administration appointment.

In Re G-Tech Construction Limited (“G-Tech”) and in Re Kaupthing Capital Partners II Master LP (“Master”), the wrong form of Notice of Appointment of an Administrator was used.  In Re Blights Builders Limited (“Re Blights”), an out of Court appointment was made at a time when a winding up petition was in existence (of which the shareholder appointing was unaware) such that the appointment should not have been made. In none of these cases did the Court consider itself able to waive procedural requirements and find that the appointments were, nevertheless, valid.

In Frontsouth, the Court also considered that rule 7.55 could not be used.  Firstly, where an appointment is invalid there are no “insolvency proceedings” and therefore Rule 7.55 has no application.  This reasoning was also applied in Re G-Tech and in Master. The Court also considered that Rule 7.55 was not to be used to remedy a fundamental flaw such as a failure to satisfy a procedure prerequisite for an appointment, thereby rendering a mandatory requirement optional.

In both Frontsouth and Re Blights the Court noted that Rule 7.55 is a strange provision in itself since it suggests that where the invalidity of an appointment causes prejudice, it can be remedied by Court order.

Having had the application to extend the administration refused, the administrators asked the Court to make a back dated administration order and then immediately extend the period of it. 

However, a question arose as to the ability of the administrators to apply for an administration order.  They applied on behalf of the company, in their capacity of shareholders of the company’s parent company (over which they were also appointed as administrators).  However, the company’s Articles of Association provided that the business of the company be conducted by its Directors.  On that basis the Court saw difficulty in making the order on the shareholder’s application.

In any event, an application for an administration order was then made by a qualifying floating charge holder such that the Court did not need to consider the point further.  This issue is, nevertheless, worthy of note, given the decision of the Court in Minmar(929)-v- Freddy Khalatsschi in which an administration appointment made by the directors of the company was considered to be invalid since the decision to appoint was not reached in accordance with the provisions of the Articles of Association.

These cases bring to light the importance of ensuring strict compliance with the Insolvency Act and Rules when making an appointment.  The requirements are mandatory and Rule 7.55 is not a “slip rule” under which mistakes can be remedied.

Security over Principal’s Assets is No Defence to Statutory Demand

In White –v- Davenham Trust Limited, the Court clarified the principle that a statutory demand served upon a guarantor could be set aside, in circumstances where a demand, if made against the principal debtor, could have been set aside.

In this case the debtor was a company.  A debt due to the creditor (D) had been secured by fixed and floating charges over company assets.  The shareholder and director of the company (W) had guaranteed the company’s liabilities. The company went into administration and D wished to rely upon the guarantee to recover sums due from W.  D served a statutory demand on W.

The Insolvency Rules 1986 state that, where a creditor has security over a debtor’s assets for repayment of a debt (and has not waived that security) any statutory demand served should state the full amount of the debt and value of the security and claim only the unsecured balance.  If it does not then the statutory demand may be set aside.

W claimed that, as D could not issue a statutory demand against W, unless it waived its security over the company assets or valued the security, it would be unjust for D to be allowed to proceed with a statutory demand against W.

The Court of Appeal held that a creditor can choose how to recover a debt due to it.  It could pursue a guarantor notwithstanding that it has not pursued the principal debtor.  The existence of security over the principals’ assets did not affect this.  Therefore the statutory demand served upon W would not be set aside.

The Court considered the case of Remblance –v- Octagon Assets Limited where a statutory demand issued against the surety was set aside on the grounds that the principal debtor had a counterclaim that would not have been available to the surety.

In the case of W, the Court considered that a statutory demand could be set aside where there was a dispute that affected the amount claimed, such that the surety’s debt would otherwise be greater than the sum due from the principal debtor.  However, this was not the case here.

Court Refuses Relief for a Transaction at an Undervalue

In Trustee of Gordon Robin Claridge –v- Claridge & Claridge the Court was satisfied that there had been a transaction at an undervalue when a bankrupt husband allowed his wife to use his half share in a loan to renovate her property. However, the Court did not set aside the transaction.

The Judge exercised his discretion on the basis that the bankrupt’s wife had spent the money, thinking that she was entitled to do so and there was no evidence that the renovations had increased the value of the property.

The Court followed the 2007 case of Singla –v- Brown which is authority for the proposition that that the Court has a discretion not to order relief where justice requires it.

The Singla case concerned the purchase of a property in joint names followed by a severing of the joint tenancy and the transfer of 49% of the bankrupt’s interest to the joint owner.  The evidence showed it was always the parties’ intention that the property be owned beneficially by the transferee alone and it was clear that the transfer had been entered into to reflect this intention. The property had been purchased in joint names solely at the insistence of the mortgage company.

The decision in Claridge is likely to come under criticism as this does not appear to be the kind of exceptional case where the Court should use its discretion in this way.  In Singla an order setting aside the transaction would have resulted in an unintended windfall for the bankrupt and his creditors.  This Claridge case does not seem comparable with these facts.

For further information on this article, please contact Pitmans Insolvency & Restructuring team.

Denise Fawcett
Partner
T: +44 (0)207 634 4642
E: dfawcett@pitmans.com

Coutesy of Thames Valley Business Magazine November 2011

The Court of Appeal has given judgment in two cases involving challenges to s. 58 of the 2008 Finance Act. This section closed a tax loophole involving Isle of Man trust partnership arrangements and the particular feature which was challenged in each case was its retrospective effect. This meant that both applicants were suddenly liable to relatively significant sums in back tax and penalties, for the years in which they had (lawfully, at the time) taken advantage of tax mitigation schemes based around the relevant arrangements.

Mr Huitson was an IT contractor living in the UK and providing services here, as employee of an Isle of Man partnership. In the second case (Shiner) the applicants had been partners in a business acquiring and developing properties, but again as sub-contractors to a Manx partnership. The partnerships in question were between trust entities of which the applicants were beneficiaries. The partnership would contract with customers, and then employ the UK based individuals to undertake the work, but all profits were created and retained by the Isle of Man structures.

Under the existing (pre-Finance Act 2008) Double Taxation arrangements between the Isle of Man and the UK, the profits were therefore treated as arising in the Isle of Man, such that no liability to UK tax arose, while as the profits were retained in trust no tax was payable in the Isle of Man either. This arrangement was not something that the taxpayers had come up with on their own – it was a legitimate scheme marketed by PriceWaterhouseCoopers and Montpelier respectively and HMRC had been aware of it for at least seven years prior to taking any action. Equally though, it was an “aggressive” scheme, in the sense that it took advantage of what was obviously an oversight in the original drafting, rather than a tax break which the government had deliberately intended to confer.

The challenge in Huitson was to the compatibility of the retrospective legislation with the Human Rights Act, and in particular the right to quiet enjoyment of property. Shiner’s challenge adopted these challenges, but also complained that the effect of the legislation was to impede the free movement of capital between Member States of the European Union and other countries.

In each case, the Court of Appeal gave these arguments short shrift. Since (despite being aware of it for some time) HMRC had never suggested that it would consent to schemes which took advantage of it, the Court found that the taxpayers should have been well aware both that the loopholes might be closed, and that the effect of the closure might be retrospective. The Court was required to balance the rights of the individuals to certainty in their dealings with the rights of the wider community and, taking particular account of the aggressive nature of the scheme, the Court held that the balance had to favour the community interest and that as such the retrospective legislation was not susceptible to challenge.

Because of the particular features of the case, the results were perhaps not very surprising, but insofar as it marks an endorsement of the Revenue’s ability to revisit existing loopholes and close them retrospectively where the community’s interest in increased tax revenue outweighs the interests of the individual, these decisions have potential implications for anyone who has engaged in any type of tax mitigation strategy.

Will Richmond-Coggan
Director, specialising in Contentious Trust and Probate matters
T: 0118 957 0369
E: wrcoggan@pitmans.com

Courtesy of Thames Valley Business Magazine November/December 2011

According to the Bank of England report on Trends in Lending (published October 2011) lending to UK businesses contracted in the three months to August, as did lending to small and medium-sized enterprises, write Pitmans’ Patrick Long and Mark Metcalfe.

Elements of the report reflected either a “muted demand” or a “marked decline in demand” for c4redti by SMEs along with the increased incidence of businesses paying down debt, cutting back on investment and non-essential spending. The report also highlighted other points of view and in particular that small businesses and new business start-ups “still found it difficult to gain access to credit”.

While bearing in mind the difficult credit environment we thought it timely to remind businesses who may require funding, (rather than using cash balances held), to launch and establish themselves or progress to the next stage of growth, of some of the sources that may be Available. This article briefly focuses on four areas.

Self funding/friends and family

Business funding may, if available, be obtained from family and friends, which involves lower arrangement and set-up costs and usual entails less complex negotiation. One advantage of obtaining finance in this way is that it is less expensive than using a recognised financial institution and you usually keep control of your business.  In addition there may be less pressure from your investors to make significant returns on their investments in the short term. The down side is that you may lose some friends if it does not work out! It is important that you should still protect your interests and make sure the arrangements are properly documented.

Debt financing

Approaching a Bank for a business loan is a common route for funding expansion. Banks may consider requests for funding in exchange for personal guarantees and security in the form of assets owned by an individual or a company. A good credit rating is something all businesses and individuals need in order to obtain bank debt finance and being in a position to produce the right supporting documents at the time of application is also essential. Whilst loan eligibility conditions remain stringent, if you can satisfy a bank’s criteria then business loans are good value and as a business you will not have to give away a share of your ownership.

For businesses that are expanding then invoice financing may be the appropriate alternative option as it generates immediate cash against sales invoices and is less reliant on credit rating to determine approval of the facility.

Venture capital

Venture capital supports business growth through high-risk, high return investments for approximately three to seven years before the funder exits. Venture capital provides small business funding to high-potential growth businesses in exchange for company shares. Equity investment is arguably the most complicated source of business funding to secure and obtaining equity investment can be time consuming. Also, unlike friends and family funders, the equity investor will want to recoup their investment amount plus as much profit as possible, which can add extra pressure on the business to succeed. However, equity finance is also one of the most accessible types of funding in terms of the sorts of businesses that can obtain it and working with the right equity investor can have a very positive influence on a business and may have the added benefit of opening new doors and markets to your business.

Depending on the stage of development of a business, there are different types of sources of equity funding. Smaller, earlier stage companies may be more attractive to groups of individual business angel investors.  Maybe your business should consider pitching to Dragons Den – lots of businesses do!

Slightly more mature businesses are likely to be able to attract venture capital funds and mature businesses are of interest to larger venture capitalist firms, known as ‘private equity’ houses.

Government Grants

Government grants play a pivotal role in providing funding for start-ups and small businesses. However, the grant will usually cover only a percentage of the finance needed and the business will need to prove their capability of providing the remaining funds needed. It is also important to note that the grants are usually only awarded to certain projects which fulfil a particular social or ethical need, such as creating new jobs. The government will also require the businesses to adhere to strict rules in order to avoid having to pay back the grant.

Although there are concerns in the market about raising funding we have successfully, through our strong network of contacts, assisted clients in securing lines of debt and equity funding in various sectors.

We would be pleased to hear from you, whether starting a new or running a well-established business, and share your experiences of raising capital in the current market.

Patrick Long
Partner
T: 0118 957 0488
E: plong@pitmans.com

Mark Metcalfe
Solicitor
T: 0118 957 0266
E: mmetcalfe@pitmans.com