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This article was first published by Solicitors Journal on 17 April 2012, and is reproduced by kind permission

The cases of Key2Law (Surrey) LLP – v – De’Antiquis and Spaceright Europe Limited – v – Baillavoine have provided further clarification as to the protection afforded to employees under TUPE in the case of a transfer of an employer’s business and assets in an Administration.  The position had been unclear following the decision of the Employment Appeal Tribunal in Oakland –v- Wellswood (Yorkshore) Limited in 2009.

The Transfer of Undertakings (Protection of Employment) Regulations 1981 and 2006  (TUPE) confers on employees certain rights in the event of a transfer of an employer’s business.  TUPE provides that employees will automatically transfer to the transferee on their existing terms of employment and the transferee will then inherit employment liabilities and obligations in relation to them.   Further, a dismissal which was connected to the transfer will be automatically unfair, unless the reason is economic, technical or organisational (referred to as an “ETO” reason), entailing changes in the workforce.

Clearly, the potential adoption of liability under employment contracts would discourage purchasers of insolvent businesses and so the government introduced provisions in order to assist by adding some flexibility.

TUPE provides that, where the employer is subject to “bankruptcy proceedings or any analogous insolvency proceedings which were instituted with a view to the liquidation of the assets of the transferor”, employees would not automatically transfer to the transferee and a dismissal for reasons connected with the transfer would not be automatically unfair.

TUPE also provides that, where there are “relevant insolvency proceedings” (being “insolvency proceedings which have been opened in relation to the transferor not with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner”) there would be greater scope to vary the terms of employment, where the variation is designed to safeguard employment by ensuring the survival of the business or part of it.

There have been a number of decisions in the Employment Tribunal and above that have demonstrated the shortcomings in TUPE, and more particularly the definitions of “relevant insolvency proceedings” and “bankruptcy proceedings or any analogous insolvency proceedings”  when it comes to be applied to an administration.

It is important to understand the difference between an administration and a liquidation.

The statutory purpose of an administration is to achieve one of the following objectives:

• The rescue of the company as a going concern; and only if that cannot be achieved
• The achievement of a better result for the company’s creditors as a whole than would be likely if the company were wound up; and if that cannot be achieved
• The realisation of some or all of the company’s property to make a distribution to one or more secured or preferential creditor.

Often, the administrator, once appointed, will trade the company either with a view to rescuing it and returning it to its directors (albeit this is rare) or in order to preserve goodwill and avoid termination or breach of contracts whilst the business is marketed for sale.

Conversely, the purpose of a liquidation is to sell assets and distribute them to creditors.  A company can only trade in liquidation in so far as it is necessary for the beneficial winding up of the company and even then the permission of the Court may be required.  A liquidation procedure therefore fits squarely into the definition of a process “with a view to the liquidation of the assets” whereas an administration process does not.

Administrator objectives

It is not always clear, at the outset of an administration, what the objective of the administrator may be and it may change as the possibility of achieving the primary and/or secondary objective disappears.  There is no obligation upon the administrator to state his objectives until he makes his proposal to the company’s creditor’s which may be up to 8 weeks after the administration.  His only obligation is to consider each of the objectives and either perform the administration so as to achieve the primary objective or dismiss it and move onto the secondary and possibly the tertiary objective. To that extent an administration should always be commenced with a view to rescuing the company as a going concern.  Does that mean that an administration can never be considered to have been carried out with a view to liquidation of assets, regardless of the actual outcome, such that it would never be possible to avoid the consequences of TUPE and that a dismissal connected to a transfer of the business would be automatically unfair?

In practice, very often the second or third objective is achieved by selling the assets of the business in one go so that the business is sold as a going concern.  Effectively the insolvent company’s assets will have been liquidated albeit the business will have been preserved through the sale.   Sometimes this will happen after a period of trading whilst in administration. Sometimes the buyer is found before the company goes into administration and the sale effected upon administration in order to preserve the goodwill and trade of the business (a “pre-pack” sale).  Often, once the business has been sold the company quickly moves into a liquidation.  Does that mean that such administrations were commenced with a view to liquidation of assets or does it depend upon whether there was a post-administration period of trading?

In Oakland the insolvent company had been sold back to its director and shareholder on the day that it went into administration. The Employment Appeal Tribunal decided that, in circumstances where the company would not trade in administration and would shortly enter into liquidation, this was “bankruptcy proceedings or any analogous insolvency proceedings… instituted with a view to the liquidation of the assets of the transferor” such that the employees did not automatically transfer to the transferee.  The Employment Appeal Tribunal did not say that this would always be the case but considered that it would be a question of fact to be determined by the Court.  This would mean that a Court would have to reconstitute the circumstances existing at the time of the commencement of the process and the objective of the administration in the mind of the administrators at that time.

Not only would this decision mean a great degree of uncertainty as to the rights of employees against transferees and the risk of a transferee adopting employee liabilities but the decision would encourage the use of  pre-pack administration where the purchaser would, on this view, be able to take the business free of employee liabilities.

Seeing clearly

A contrary view was adopted by the Employment Appeal Tribunal in OTG – v – Barke.  However, the Court of Appeal has recently considered the issue in two cases which now provide much needed guidance on the position.

In 2011, in Key2Law, the Court of Appeal considered the effect of an administration on employees.  In this case a company went into administration in the hope that a buyer could be found but it wasn’t. Instead firms of solicitors were engaged by the administrators to carry out the work of the company as its agent.

The Employment Appeal Tribunal had considered that the aim of an administration was not a question of fact but was absolute, depending upon the procedure adopted and that, since the primary aim of an administration is to rescue a company as a going concern, it would not be a process analogous to bankruptcy.  The Court of Appeal agreed, accordingly employees of companies in administration would automatically transfer to a transferee and be protected from dismissals by reason of the transfer of the business.

In Spaceright, the business and assets of the company were sold one month after the company went into administration.  At the time of the administration a buyer of the business had not been identified.  The Court of Appeal had to decide whether the dismissal of the managing director of the company was connected with the transfer of the business.  It decided that it was, notwithstanding that the actual buyer was not in contemplation at the time of the dismissal.  This is an important clarification.  Further, the Court considered that the dismissal did not relate to the ongoing business, for example, a general reduction in the number of employees to assist trading as a going concern, accordingly the dismissal was not for an ETO reason and was unfair.

Purchasers of the business of companies in administration, and other transferees, need to be aware that they are likely to adopt liabilities in relation to employees.  Purchasers should be advised that employment liabilities cannot be avoided by reaching an agreement with the administrators of the seller that they will procure the dismissal of employees before the sale of a business and assets. This is an important consideration for purchasers in any purchase but where there is a sale by an administrator, a purchaser cannot expect an indemnity from the seller or the administrator in relation to any liabilities that the purchaser may find that they have adopted.  Indeed, administrators will often insist on the purchaser providing an indemnity in favour of the seller and invariably in respect of himself, in respect of any claims subsequently made by employees against them.

All too often purchasers are unaware of this risk and the question of employment liabilities becomes a “deal breaker”.  Either the sale will fall away, potentially damaging the value of the business, or the purchaser will negotiate a reduction in the purchase price, reducing the return to creditors, or the purchaser will have to take the risk that it may have to take on employees that it does not need and/or risk employment claims from employees that are or have been involved in the business.  The claims that may be made against a purchaser may be substantial, including claims for failure to consult employees in relation to a transfer.  Liability for such failure may amount to up to 13 weeks pay per employee.

Policy decisions

Pre-pack sales of businesses out of an administration have received a great deal of bad publicity in the press fuelled by unpaid creditors left high and dry.  However, it is well established that the advantage of a “pre-pack” sale in an administration is that jobs are usually saved.  The government has considered whether pre-pack sales should be outlawed or further regulated.  Whilst more stringent reporting requirements and duties have been imposed upon administrators, in an attempt to avoid sales back to directors of an insolvent business, for the purpose of avoiding having to pay creditors, proposals that creditors should receive notice of an intended sale have been dropped.

Ultimately the government has a policy decision to make as to whether legislation protects creditors or employees.  Particularly in the current economic environment, the interests of employees must be considered to be paramount. That said, in general a sale of a business as a going concern is likely to result in a higher return to creditors (albeit it is usually secured creditors that benefit) than a break-up sale of assets, in a liquidation, would achieve.  Further, where employee liabilities transfer to a buyer of the business, the level of liabilities in the insolvent company is reduced thereby potentially increasing the level of any distribution of funds in the administration to unsecured creditors.

At its best, Oakland created a period of uncertainty when many purchasers may have been comforted by the decision and held the view that employment liabilities for dismissed employees would rest with the insolvent company.

At its worst, the decision potentially meant that the transfer of employment rights could be avoided when a business was sold out of an administration process.  This is entirely contrary to the understanding of insolvency professionals and the basis upon which policy upon administrations has been formed.  The decisions in Key2Law and Spaceright must therefore be welcomed.

Denise Fawcett
Partner
T: 0207 634 0642
E: dfawcett@pitmans.com

The EU insolvency law has resulted in insolvent debtors shopping for a better jurisdiction in which to become bankrupt.  This article examines why and how.

Why?

The EC Regulation on Insolvency Proceedings 2000 (the ECIR), came into effect in May 2002, providing a framework for the national jurisdictions to work together by recognition of each states insolvency mechanisms.  However the EC Regulation does not harmonise substantive differences in insolvency law between the subscribing nations.

England and Wales aim to encourage entrepreneurialism and the comparatively friendly insolvency legislation has caused bankrupts to establish their centre of main interest (COMI) in England or Wales.  Automatic discharge of a bankrupt after 12 months and wiping of all pre bankruptcy debts so that the bankrupt can effectively start afresh (subject to certain exceptions) has caused England and Wales to become known as a ‘debtor friendly’ state.

Our ‘debtor friendly’ state is more marked when compared with Germany where the discharge from bankruptcy can take up to 9 years and Irish law where currently there is no automatic discharge and bankruptcy lasts 12 years.

How?

Recital 4 of the ECIR states that the regulation should not be used for forum shopping.  However, there is no clear definition of COMI and the ECIR therefore enables some insolvent debtors to establish a COMI in a more favourable jurisdiction.  The court will usually regard the country where the debtor carries on a business or earns their living as their COMI.  Recital 13 of the ECIR states that an individual’s COMI will be ‘the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties’.  The court will also have regard to the place where the debtor normally lives, how long they have lived their and how often they travel abroad.  The location of a debtor’s COMI will be a question of fact to be decided on the specific circumstances of each case.

Change?

Concerns have been raised that there is not sufficient policing of the line between genuine and fictional relocations.  Chadwick LJ in Shierson v Vlieland-Boddy [2005] BPIR 1170 said ‘that there is nothing… which prevents a debtor’s centre of main interests from being changed from time to time’.  There have however been a number of recent “cross border” bankruptcies which have been annulled in the courts of England and Wales following findings that the debtor’s COMI was not correct at the commencement of proceedings.  In Official Receiver –v- Huck [2011] BPIR 702, and Sparkasse Hannover –v- Korffer [2011] B.P.I.R the courts held that the debtors COMI was not England.  Both cases emphasise that in establishing a COMI there must be a necessary element of permanence.     In practice, for a debtor to establish their COMI, the debtor will have to have had their arrangement for a minimum of 6 months for the court to consider such arrangement to be credible.

In 2010 there were 59,173 bankruptcies in England and Wales compared with only 9 bankruptcies in the Republic of Ireland.  In quarter 3 of 2011, there were 9,567 bankruptcies in England and Wales compared with 301 bankruptcies in Northern Ireland.  Ireland’s financial difficulties have been well noted since 2008 and it seems at odds to see so few bankruptcies compared with England and Wales.  Arguably these statistics demonstrate the ability to shop for bankruptcy.

The creditor perspective is that reform of the ECIR is needed to limit the scope for insolvent debtors to switch their COMI in anticipation of filing for bankruptcy.   The European Commission has committed to reviewing the position by 1 June 2012 and its recommendation for any change to the EU law will be awaited with interest.

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

Hannah Wright
Solicitor, Insolvency & Restructuring
T: 0118 957 0354
E: hwright@pitmans.com

Today, Chancellor of the Exchequer George Osbourne has announced a number of measures relating to Stamp Duty Land Tax. Namely:

• Regulations have been introduced in the budget to ensure that those who buy more expensive homes contribute more by way of stamp duty land tax;
• In addition, new regulations are being brought in to tackle tax avoidance when buying homes and to clamp down on loopholes, which include: setting up a limited liability company to buy the property, and immediately selling it back to the individual; and placing properties in overseas tax shelters, whereby stamp duty land tax is avoidable for those who are not a resident or domiciled here for tax.
• As from 22 March 2012  properties sold for more than £2m will be subject to a new 7% stamp duty land tax charge;
• Stamp duty land tax on residential properties over £2m bought via a company to increase to 15% as from 21 March 2012;
• The Government will consult on the introduction of an annual charge on residential properties over £2m purchased by offshore corporations with a view to new measures being in place by April 2013.

For further information please contact Pitmans Real Estate team.

Sally Sharp
Partner
T: 0118 957 0362
E: ssharp@pitmans.com

Andrew Davies
Partner
T: 0118 957 0221
E: adavies@pitmans.com

Paul Murray
Partner
T: 0118 957 0201
E: pmurray@pitmans.com

Delphine Mehouas
Partner
T: 0118 957 0353
E: dmehouas@pitamans.com

Andrew Taylor
Partner
T: 0207 634 4611
E: ataylor@pitmans.com

Thanks to the recent revelation that five directors at Lloyds Banking Group, including the former Chief Executive, will be asked to return a combined total of more than £1 million in bonuses, the topic of bankers’ remuneration is well and truly back on the media agenda.

So-called “payments for failure” made at the various financial institutions which have received enormous amounts of support from public funds have been the subject of much tabloid ire throughout the economic downturn.

The arguments in favour of facilitating “clawback” or reversal of bonus and share awards have had added weight since the FSA’s determination that remuneration structures in banks may have encouraged some employees to ignore long-term risks in favour of returning short-term gains which ensured that they earned their incentives.

Any company considering clawback will have to be very sure of their legal footing before attempting to force its employees to return shares acquired under employee share options (or other share incentive awards), or to pay over the proceeds of the sale of such shares, or to pay back cash bonuses. Notwithstanding the fact that such action could jeopardise the future incentive effect of share options and bonus schemes and, more seriously, might undermine the entire employment relationship, effective clawback may be difficult for three key reasons:

Firstly, unless the terms of a share award or bonus clearly specify that shares or cash can be clawed back in certain circumstances, there will be almost no chance of an employer being able to recover shares, the proceeds of shares or bonus payments from employees.

Second, clawback might be prohibited as an unlawful penalty; a contractual term which obliges A to make a specified payment to B if A is in breach may not be upheld by the courts if the payment for breach is found to be a “penalty” clause.

Finally, a clawback provision in a share incentive or bonus scheme may be triggered on a breach by an employee (or former employee) of a restrictive covenant. If so, the clawback provision might be deemed to be an unenforceable restraint of trade.

Despite these difficulties, we consider that properly constructed clawback provisions can be successfully deployed in the right circumstances. For more information please contact:

Mark Symons
Partner, Employment
T: 0118 957 0340
E: msymons@pitmans.com

Richard Devall
Partner, Employment
T: 0118 957 0602
E: rdevall@pitmans.com

Courtesy of the Thames Valley Business Magazine July/August 2011.

It has become increasingly commonplace for commentators to cast doubt on the effectiveness of the AIM market.  Since the start of the current financial turmoil, prior to which the number of new entrants to the market boomed, there has been a significant slump in primary issues and fundraisings on AIM.  This has of course coincided with a downturn in the global economy and the resulting drain on the cash available for investment in the UK, but does the problem run deeper than that?

When AIM was launched in 1995 it sought to provide a platform for smaller and growing companies, providing them with liquidity and access to capital on a global scale.  This made AIM a very popular choice for small and medium sized companies looking for growth and for investors looking for an exit route. Over the last 15 years the success of the AIM market has shown why it is important to have a strong, functioning junior stock market in the UK and it has become a model for other stock markets across the financial world. 

Most growing companies reach a point in their development when they need access to more capital.  Frequently they will turn to venture capital or private equity funding to obtain it.  Any such investors typically will be looking to exit that investment in a three to five year timescale, often dictated by the lifespan of the funds which they in turn have raised from external investors.  Although the growth of a secondary and tertiary buy out market over the years has meant that has become a very serious alternative, and a trade sale to a competitor is in many cases another option, an IPO onto AIM or the full list is one of the classic exit routes. 

If this IPO exit route is increasingly closed out, it reduces the exit options for those investors.  Given how important the financial investor sector has been to the UK economy over the last two decades, this in itself is a reason to try to address some of the problems that AIM has been experiencing.  It is even more pressing because of the issues that currently dog the debt funding market.  As we know, many banks (both UK and international) are busy focusing on strengthening their own balance sheets following the 2008 credit crisis (and given the sovereign debt risk that is still out there in much of Europe) rather than on new lending to corporates.  Therefore, the number of avenues for corporates to seek new capital to grow their businesses is further reduced. 

So what has gone wrong and why have we seen an increase trend in de-listings and alternative investment routes? In some ways AIM has been a victim of its own success. Sold on a brochure of lighter regulation, access to international investors providing increased visibility and profile and the badge of being a listed company, entrants to market have not been hard to find in the good times.  Now that investment capital is limited, is the market is self regulating the quality of successful applicants as investors become more selective or cautious about where they invest their money? Is there a danger that this self regulation will disappear when the equity taps begin to open again and how should this be addressed? Alternatively is it the cost of regulation that is putting off growth companies these days from going down the IPO route?

More emphatic regulation by the London Stock Exchange both of AIM market companies and their Nominated Advisors would be welcomed in some quarters to counteract any reputational damage sustained over recent years and further improve the quality of market applicants.  In order to achieve this any such regulation could make it harder to get an inappropriate company onto the market, or make the consequences for failures to meet minimum standards more severe.  The fear amongst the investment community is however that over regulation may strike at the heart of what AIM is about and further dampen the appetites for IPOs.  

Whilst greater regulation is a cornerstone of a sound financial market, it is unlikely to address all of the issues currently facing AIM. There has been some discussion as to whether the UK Government should give further tax incentives to those making AIM investments.  While this seems unlikely in the current economic climate, encouraging a broader mix of investors into AIM, which is still dominated by investment funds, would certainly be likely to increase the range of investors and liquidity in the market generally, thereby reviving the market. 

Whilst it is true that if nothing is done to turn the AIM market around, it may continue to slide in popularity and that would be to the detriment of UK industry, particularly at the medium sized company level, many of the problems faced by AIM are not of its own doing and the solution should not be found in tinkering with the market. Medium sized companies need access to long term, reliable sources of capital.  The absence in the UK of a banking system like the German regional banks, who support these types of companies over the long run, means companies, who are not FTSE 350 size, but have long outgrown friends and family and business angel funding, do need a functioning junior public market as an alternative.  Regulation coupled with tax breaks can be a good thing where market regulation fails, but on their own they will not change market sentiments. Confidence is slowly returning and advisors are reporting an upturn in AIM related instructions. Now is the time for investors in AIM to lead the way, allowing medium sized companies to access capital, grow and succeed, providing confidence to other sectors in the economy. Of course we could just create a new regional banking structure – but that is another challenge altogether.

If you would like to know more information about this article, then please contact either Andrew Peddie or Daniel Jacob of our corporate team.

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

Majority Rule

In the case of Minmar (929) Ltd –v- Khalastchi and another [2011] EWHC 1159(Ch) the Court considered whether an out of court appointment of administrators, made by the directors of a company, was valid where the decision of the directors was not taken in accordance with the company’s Articles of Association.

The decision to appoint administrators was made by the majority of the directors of the company but the decision was made without a proper board meeting, no notice of the meeting had been given to directors, there was no quorum and only one person was in attendance.

The effect of Paragraph 105 of Schedule B1 of the Insolvency Act 1986 is that, where something is to be done by the directors of a company, it is to be done by a majority of the directors.  The court held that this did not mean that the majority of directors could dispense with the rules of internal management set out in the Articles of Association.  On these grounds it was held that the appointment was invalid and should be set aside.

In addition, the appointment was found to be invalid on the grounds that notice of intention to appoint an administrator was not given to the company.  It was argued that this was not necessary since this is merely an additional obligation imposed by Insolvency Rule 2.20(2), to be complied with only in circumstances where persons entitled to appoint an administrator or administrative receiver were to be served with such notice, in compliance with Paragraph 26(1) of Schedule B1.  The Court considered that the additional persons to be served with notice would be concerned with this whether or not there were persons to be served under Paragraph 26(1) and that notice should be given regardless.  It was noted that there is no prescribed form or period of notice specified.  As no notice was given to the company at all, the appointment of administrators was considered invalid on this ground too.

The Court acknowledged that it is difficult to reconcile paragraphs in Schedule B1 when trying to determine the notice that needs to be given. However, this decision gives some clarity as to the practice that the Court expects to be adopted in circumstances where the Insolvency Act is not only ambiguous but contradictory. 

Moral Hazard

The Pensions Regulator (“tPR”) has reached a settlement with Michel Van De Wiele NV (“VDW”) in relation to its claim against VDW for a contribution to the Bonas Group Pension Scheme, a scheme of which Bonas Machine Company Limited (“Bonas”) was the employer. VDW has, as a result, been issued with a Contribution Notice (one of tPR’s “Moral Hazard” powers) in the sum of £60,000.  This is substantially lower than the £5 million contribution that tPR’s Determinations Panel (the “DP”) decided should be made and a small contribution to the “buy out” deficit in the scheme of around £23 million.

The settlement follows a hearing in the Upper Tribunal of VDW’s application to bar tPR from pursuing certain allegations made against it.  Whilst Mr Justice Warren was not required to decide the claims against VDW, he considered them in some detail.  In the course of giving judgement, he expressed a view that the amount that the DP had decided should be paid by VDW was too high and that the amount should not have been more than around £100,000.

TPR is able to serve a Contribution Notice, under the Pensions Act 2004, upon a person associated and connected with an employer (i.e. an employer who is obliged to provide a final salary pension to its employees past and/or present) where (amongst other things) tPR is of the opinion that the person was a party to (or knowingly assisted in) an act or deliberate failure to act and where the main purpose or one of the main purposes of it was to prevent recovery of the whole or any part of a debt due to the pension scheme.  tPR is required to act reasonably.

VDW was Bonas’ parent company.  Its only client was a company in the VDW group.  Bonas was loss making and entirely reliant upon VDW’s support.  VDW decided to withdraw that support and Bonas went into Administration.  The assets of the company were immediately sold to another VDW group company incorporated by VDW for that purpose.

TPR relied on three acts in support of its claim: walking away from the pension scheme without openly engaging with the Trustees of the scheme or TPR; minimising the sum paid by VDW for the  assets of the business; and retaining the business while avoiding ongoing liabilities.

It was clear, from the evidence, that VDW had taken professional advice and had considered the possibility of contacting tPR to seek advance clearance from tPR.  It had also considered the possibility that tPR may use its Moral Hazard powers against VDW as a result of the sale.  VDW had chosen not to seek clearance.  The DP were in doubt that VDW took a calculated and deliberate risk in relation to the use of tPR’s powers and had a  purpose of minimising the amount that it paid into the scheme by failing to consult with creditors and by selling the business assets to a subsidiary without properly marketing the business for sale. Mr Justice Warren noted that there was no obligation to contact tPR or the Trustees but concluded that there could be a deliberate failure to do something even where there is no obligation to do it.

Mr Justice Warren considered that the liability imposed under a Contribution Notice could not be more than the amount that had been lost by the scheme as a result of relevant act or failure to act and that the amounts to be imposed on persons under Contribution Notices were intended to be compensatory and not a penalty.  Therefore, if it was the case that the employer would not have been able to pay the debt to the scheme, had the act or failure to act not occurred, then there would be no loss.  In the case of Bonas, the loss to the scheme was the amount that it would have received in its insolvency had the assets been sold a higher market price. 

Mr Justice Warren considered whether the cessation of the business of Bonas, causing the non-payment of future contributions to the scheme, could be said to be an act preventing payment of the debt to the scheme.  He considered that it did not have this effect, it merely caused the debt itself to increase.

Mr Justice Warren’s views do not have to be followed in the Upper Tribunal.  However, if this is the view that the Upper Tribunal takes in future then the threat of a Contribution Notice may have less impact as a deterrent to others contemplating the same type of arrangements as VDW. It would appear that the most that tPR could require a person to contribute to the scheme, in the event of a sale at an undervalue, is the amount that it should have paid in any event, reduced further where there are other creditors that would have shared the additional proceeds of sale.  Such persons will therefore be dissuaded from applying for clearance in advance of the event since the price attached to clearance is likely to be higher than the amount payable under a Contribution Notice.

Mr Justice Warren was of the view that a Financial Support Direction (“FSD”) could be issued, in some cases, in order to recover additional funds or support for the Scheme.  An FSD can be issued where the employer has insufficient assets to pay half of the debt to the scheme but an associated and connected person could pay the balance.  That person could be required to provide support to the scheme e.g. payment, a guarantee, a charge over assets etc.  The effect of this is to ensure that an underfunded scheme has access to all of the value in a group of companies.  If Mr Justice Warren is correct then a party to a deliberate attempt to cause detriment could not be penalised for this but merely required to provide compensation to the scheme for its actual loss whereas a company that merely finds itself in a position of wealth, whilst the employer is not, without any deliberate act or intention to cause detriment to the scheme, may be required to support the scheme up to the full value of the debt due from the employer.

No Surrender

In Peoples Phone Ltd –v- Theophilos Nicolaou [2011] EWHC 1129 (Ch) the High Court held that the supervisor of  an Individual Voluntary Arrangement could not conclude the IVA and thereby prevent a potential creditor (“P”) from participating in the final dividend, where P’s entitlement was the subject of court proceedings yet to be determined.

P was a landlord who had entered into a Deed of Surrender that released the debtor from liabilities under the lease.  However, P was seeking rectification of the deed on the grounds that it was not intended that liability for rent arrears would be released. 

The supervisor took the view that the question of whether P’s claim was valid was to be considered at the time of the distribution and at that time there was no debt due under the terms of the Deed of Surrender.

On hearing P’s application to reverse or vary the supervisors’ decision, the Court considered that it should be adjourned and the rectification application decided in the first instance.  In the event that the Deed of Surrender was rectified, P’s status as a creditor would be reinstated from the date of the Deed of Surrender and P would therefore be entitled to a dividend.

Meanwhile, in Re WW Realisation 1 Ltd (In Administration) [2010] EWHC 3604, the Court held that a distribution could be made to secured creditors without any further provision being made for liabilities that may be payable as an expense of the administration unless such claims were notified to the administrators within 28 days of further letters being sent to potential claimants. 

The decision followed an application for directions made by the applicants as administrators (under paragraph 63 Schedule B1 of the Insolvency Act 1986) and liquidators (under section 168(3) Insolvency Act 1986).  The administrators had already sent letters to landlords and local authorities inviting them to submit claims as expenses of the administration. 

Anti-Social Administration Orders

An application was made for an administration order in relation to a social club on the grounds that it was a company under paragraph 111(1A) of Schedule B1 of the Insolvency Act 1986. 

The Court held that the club was not an unregistered company and could not be the subject of a winding-up order.  The application for an administration order was then refused.

Social clubs will have to turn to their constitution where the business needs to cease and the club needs to dissolve.

Understanding Employers

On 18 May 2011 Jobcentre Plus, R3 and the Insolvency Service entered into a Memorandum of Understanding.  This was an extension of an existing voluntary partnership between the three bodies.

The purpose of the partnership is to ensure cooperation and sharing of information between the organisations and development of joint practises.  The intention is to assist Jobcentre Plus in providing a service to redundant employees and to actively support Insolvency Practitioners by having experts on hand to answer questions and deal with employee queries.  Insolvency Practitioners will be encouraged to give “early warning” of potential redundancies to Jobcentre Plus.

It will be for R3 to communicate to Insolvency Practitioners the practise to be followed.

Denise Fawcett
Insolvency & Restructuring Partner
+44 (0)207 634 4642
dfawcett@pitmans.com

Introduction

The new Bribery Act, passed by parliament in 2010, was due to be implemented in April 2011.  However, at the end of January, a government spokesman said that the act would not come into force until three months after guidance to the act had been made available, which will be published “in due course”.

The Act is intended as 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 development of law in this area. The need for reform was widely acknowledged, however, the final result may have alarming consequences for corporate entities operating in the UK as many law abiding businesses could inadvertently break the new law if they are not careful.

Offences Under the Act

The Act re-classifies the basic bribery offences of bribing another person and receiving a bribe whilst also introducing two new offences. The first of these is in respect of bribery of a foreign public official. Additionally the Act also creates an offence for corporate entities of failing to prevent bribery occurring within their organisation. The only defence to this is if the corporate entity has put in place “adequate procedures” designed to stop incidences of corruption. This offence applies to any corporate entity that carries on its business, or even part of its business, within the U.K.

The penalties can be extremely severe.  Individuals could face a maximum penalty of ten years imprisonment and/or an unlimited fine if found guilty. Corporate entities may face an unlimited fine in respect of an offence under the Act.

Facilitation Payments and Corporate Hospitality

A facilitation payment is usually a payment to a government official to speed up a routine bureaucratic action. These are illegal under the Act. However the decision to prosecute will be at the prosecutor’s discretion and he/she will consider various factors including whether it is in the public interest to prosecute.

Most concerning however is that prosecutorial discretion will also have to be relied on in respect of corporate hospitality, which may fall foul of the Act. It has at present been stated that “routine and inexpensive hospitality” will be permitted however “lavish or extraordinary hospitality” will not. What remains unclear is where this distinction will be drawn. Will a box of chocolates and a bottle of wine be acceptable? Will tickets to a football match? The result is that corporate entities in the UK find themselves in the awkward position of having to guess what level of advantage provided by way of corporate hospitality is reasonable and what may result in prosecution.

Conclusion

In light of the Act, the need is now more urgent than ever for corporate entities to either commit to implementing systems to counter bribery or review their current anti- bribery procedures to ensure they will be effective in preventing bribery being committed on their behalf and to be able to rely on the “adequate procedures” defence in appropriate circumstances.

All corporate entities may wish to put in place staff training programmes and ensure they have written procedures that are readily available. It may additionally be worthwhile to incorporate such policies into employment contracts and allow the employer to terminate employment in the case of breach.

With such severe penalties under the Act, it has become crucial that the action that is taken does not merely have the effect of prohibiting bribery but that it actively seeks to prevent it where it might arise. For some businesses this will involve nothing more radical than an assessment of their existing policies however for others it could mean a complete overhaul.

If you would like further information on the Bribery Act 2010 from Pitmans please visit the Pitmans Corporate website, or contact our team direct.

Adam Dowdney
adowdney@pitmans.com
+44 (0) 118 957 0574

Recently, The Thames Valley Business Magazine and Pitmans Solicitors gathered a group of local experts to consider the property investment market.  Below John Burbedge reproduces selected observations from the roundtable discussion.

The Roundtable message came loud and clear: Mortgages need to be made more readily available, particularly for first-time-buyers (FTB’s), to get the residential housing market moving, and with it the property sector in general.

The lack of lending was risking a ‘stifling’ of the market, claimed developed Mark Clayton.  “There is a danger that people just won’t move- and therefore the estate agents will not be paid, the lawyers will not be paid, the removal men will not be paid, the home furnishers on the high street will not be paid…and even the Government will not receive stamp duty (SDLT) or VAT on any other associated service, damaging the public purse.  People will stop spending on certain items and there will be casualties in the market place.”

In addition to higher deposits being required within costly mortgage funding and legal and moving costs, a stamp duty increase in April 2011 was adding to the financial difficulties of buying a home.  For many, without the Bank of Mum & Dad, it would be virtually impossible to move.

Mark Stuckey revealed: “The age of the average FTB without a deposit is 37.”

Anthony Henry-Lyons agreed: “The log-jam in UK property, and devolving from that incidental commercial and retail development, is not being able to get mortgages.”

“The market is all about the circle.  First-time-buyers get on it, then they upgrade and they move on, and on again and the circle keeps moving on.  But if you can’t get on the circle…”

With irony, he noted that FSA chairman Lord Turner is recommending greater mortgage and credit controls.  “How will we get mortgages to work?”

Read more about the: Pitmans Property Round Table Thames Valley Business Magazine Nov 2010 

For further information about Pitmans property expertise, or to speak to a member of the Pitmans Real Estate team please visit the website.