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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: +44 (0)118 957 0516
E: sbrooker@pitmans.com

Nicola Kirk
Partner
T: +44 (0) 118 957 0226
E: nkirk@pitmans.com

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

David Archer
Partner
T: +44 (0)207 634 4651
E: darcher@pitmans.com

Bonas Group Pension Scheme – pre-pack administration

The Pensions Regulator (tPR) announced on 9 June 2011 that it has settled its dispute with Michel Van De Wiele NV (VDW) regarding the Bonas Pension Scheme. TPR will now issue a Contribution Notice for £60,000 instead of the £5 million it had originally awarded.

VDW is the Belgium based parent company of Bonas UK. Bonas UK had a defined benefit pension scheme called Bonas Group Pension Scheme which had a deficit. TPR became involved in 2006 when Bonas UK was put into a “pre pack” administration in what seemed to be a way of avoiding the increasing pensions deficit. The business and certain assets of Bonas UK were then brought by a subsidiary of VDW leaving the pension liability behind. TPR issued it’s first ever Contribution Notice on 29 June 2010 for £5 million to VDW on the basis that VDW’s actions came about in order to prevent further liability to the Bonas UK Pension Scheme and also to avoid Section 75 of the Pensions Act 2004, in which tPR can order a company to repay monies to the Scheme.

VDW appealed to the Upper Tribunal (Tax and Chancery) Chamber asking for the Contribution Notice to be struck out. Although this was refused, Warren J’s opinion proved to be helpful in highlighting that the amount that could be sought by tPR by way of a Contribution Notice had to be reasonable given the amount available to the employer after the act or failure to act had taken place. Whilst the Scheme can be compensated for the detriment a Contribution Notice amount cannot go further as to impose a penalty on the VDW for its behaviour. Recovery of further amounts is the domain of a Financial Support Direction (FSD) and the present application did not concern a FSD. However a full hearing did not take place to fully explore Warren J’s opinion as tPR chose to settle.

A Contribution Notice can be issued under section 38 of the Pensions Act 2004 by tPR. It is a demand on either a company or an individual to pay a sum of money into a pension scheme. TPR’s decision to settle has been seen by many to be some what disappointing. TPR was acting under it’s powers granted under Section 38 of PA 2004 as originally enacted. However in 2008 section 38 was amended to include a “material detriment test” (as set out in Section 38A). If tPR believes an act or a failure to act “has detrimentally affected in a material way the likelihood of accrued scheme benefit’s being received”, then the test has been satisfied. In reaching this decision tPR must take into account various factors such as the value of the assets, effect of the act/failure on those assets and so on. This extra limb provided under section 38 provides tPR with further grounds to issue a Contribution Notice to the party in question. Had this test been applicable when tPR issued it’s first Contribution Notice it is questionable whether the same outcome would have been reached. However whether tPR will take advantage of the revised section 38 remains to be seen.

Great Lakes - chapter 11 bankruptcy

In relation to the Great Lakes UK Limited Pension Plan a settlement was again reached before a full hearing with the Determination Panel could take place as reported by tPR on 13 July 2011. TPR decided to investigate two companies – Chemtura Manufacturing UK Limited (CMUK), the sole sponsoring employer to the pension plan and Chemtura Corporation, CMUK’s parent company, after the Trustees of the pension scheme raised concerns in June 2009 to tPR of the Chapter 11 bankruptcy protection that a number of the group companies had filed in March 2009.  As at 30 June 2009 the pension scheme, had a buy-out deficit (i.e. the amount required to purchase benefits in full with an insurance company of approximately £95 million).  TPR investigated and issued a “warning notice” to both companies threatening to issue FSD’s under section 43 of the Pensions Act 2004. However in May 2011 both companies entered into an agreement with the Trustees of the pension plan in which they agreed to pay £60 million into the pension scheme over the next three years plus additional contributions connected to other pension liabilities and security providing protection to the pension scheme going forward. Additionally and an interesting point of note is that the Trustees also agreed to withdraw the pension scheme’s claims in the Chapter 11 bankruptcy and allow the process to continue without delay in exchange for the creditors agreement to be bound by the English regulatory process in relation to the pension scheme debt.

Parminder Latimer
Director
T: +44 (0)20 7634 4625
E: platimer@pitmans.com

Whilst revelations of the alleged scandalous behaviour at the News of the World are sure to rumble on for some time yet, the jilted journalists and other former employees of the newspaper will no doubt be keen to put the public relations disaster behind them and look to rebuild their careers.

However, the question for many of those individuals will be how they can recover from the reputational damage they might have suffered through their association with the disgraced tabloid icon. Staring down the barrel of a possible lengthy period of joblessness, what are the employment law ramifications that they should bear in mind?

Damages for stigmatisation

In the case of Malik v BCCI (1997), the House of Lords set an important precedent which allows employees to claim so-called “stigma” damages from their former employers where in that case the dishonest and corrupt conduct of the employer’s business adversely affects that employee’s future employment prospects. Such a claim may be justified on the basis that the damage has been caused by a breach of the implied term of mutual trust and confidence in the employment contract.

Should the allegations of wrongdoing at the News of the World be substantiated in the forthcoming police investigation and any subsequent public inquiry, the newspaper’s former employees may see this as a clear indication that the News of the World had acted in a manner which is in breach of the implied term of mutual trust and confidence and that has caused them a serious detriment in their efforts to secure new employment.

Collective Redundancy

The sudden cessation of business at the News of the World has meant the 200 or so former staff are now free to tend their gardens whilst being taken through the redundancy consultation process; the law states that where an employer proposes 100 or more redundancies at one establishment within a period of 90 days, it must collectively consult about these with appropriate representatives of the affected employees.

It is a requirement that the consultation must start “in good time” (i.e. before any proposals for dismissal have been finalised and allowing representatives to have a real opportunity to affect the decision).  Furthermore, consultation must be undertaken with a view to avoiding or reducing the number of dismissals and mitigating their consequences.

It is difficult to see how these obligations can be met by the newspaper’s owners with an open mind now that publication has ceased for good. This being the case, the employees may argue that the consultation process being followed is merely a sham and request that their representatives make a claim for a protective award of up to 90 days pay for all affected employees.

The Sun on Sunday – Does TUPE apply?

In the immediate aftermath of the News of the World closure, rumours abound that, like a phoenix from the flames, a “new” entity, the Sun on Sunday would step into the void. Indeed, it has been widely reported that the internet domain names thesunonsunday.co.uk and sunonsunday.co.uk were registered on 5 July 2011, just two days before the closure announcement.

Some commentators have suggested that such circumstances could lead to the former News of the World staff TUPE’ing across to the new publication. However, we understand that News Group Newspapers Limited employs the Sun and the News of the World staff. If News Group Newspapers Limited employed The Sun on Sunday staff then TUPE is irrelevant. If the employer of the News of the World staff was different to the employer of the new Sun on Sunday newspaper and key elements of the economic entity of the News of the World transfer then TUPE is a possibility.

If News Group Newspapers Limited employ The Sun and the News of the World staff, that is relevant to the question of whether the News of the World’s employees are, in the legal sense, redundant. This is because, if, at the time the News of the World was shut down, it was already known by News Group Newspapers Limited that it would shortly commence publication of the Sun on Sunday it would be difficult for the company to argue that there had been a decrease in the need of it for employees. Such circumstances could give rise to claims that the potentially fair reason for dismissal of redundancy does not apply and the News of the World staff were therefore unfairly dismissed.

Whether or not the News of the World staff are technically redundant will be an interesting talking point for employment lawyers, but the eventual answer is unlikely to provide the affected individuals with much comfort. Over the next few weeks and months the parliamentary select committee, public inquiry and criminal investigations are likely to take centre stage in the media but we will continue to keep a focussed eye on the employment tribunal to see how these issues are resolved.

For more information on the article please contact our employment team:

Mark Symons
+44 (0) 118 957 0340
msymons@pitmans.com

Richard Devall
+44 (0) 118 957 0602
rdevall@pitmans.com

Jamie Lynch
+44 (0) 118 957 0506
jlynch@pitmans.com

Courtesy of Managing Information Magazine.

Understanding Privacy and Data Protection in the internet context is a complex business, and there is a desperate need for easy-to-comprehend guidance, especially for users. How do we offer that guidance in ways that are meaningful and yet digestible? Lawyer Philip James, a partner with Pitmans SK Sport and Entertainment LLP, has expounded the idea of a Highway Code for Privacy and Data Protection. Managing Information magazine went along to talk to him about these ideas.

Managing Information Magazine (MI): Why have you mooted the idea of a Privacy and Data Protection Highway Code?

Philip James (PJ): There is traffic on the roads, and there is traffic on the web. There are common themes in managing road traffic flows and behaviour which could also be applied to the internet.

MI: Can you give us an example of that?

PJ: When you come to a junction, traffic  lights indicate which way and when you can go, and other signs indicate what you can and cannot do. We need variations on that theme to support and guide users’ understanding of Privacy and Data Protection and how to make more informed decisions about disclosing personal details online.

MI: Why do you think signs are necessary, wouldn’t text-based guidance do the same job?

PJ: Generally speaking, people’s receptivity to signs is better and their reaction is quicker than to text.

MI: Would there be other potential benefits from a Highway Code for the internet?

PJ: Traffic on the web is a new environment for us. We are at the beginning of a Highway Code guiding traffic on the web. Privacy is a motivation of course, but it could also be a good way of driving traffic and make it more efficient.

MI: How might this work in practice?

PJ: The Information Commissioner (“ICO”) is taking a more layered approach to Privacy Policies. For example, a web page could have an icon taking users to a short form of privacy policy, and then to a longer text for greater detail. Google has a privacy ‘dashboard’ for example – users are familiar with dashboards in their cars. Why not have a more widespread privacy dashboard? There are three elements to compliance:
• Education
• Notice
• Control.
A Privacy and Data Protection Highway Code would help with the understanding of all three elements.

MI: Do you have any practical examples of how such a scheme might operate?

PJ: In the field of online behavioural advertising, icons which take users to easy-to-understand codes of practice are placed on websites. The codes have been developed and are overseen by the Internet Advertising Bureau (IAB). Although it is not policed by the IAB as such, those who sign up (voluntarily) to the code of practice are independently audited (see: http://www.youronlinechoices.com/good-practice-principles). There is a list on the IAB web pages of those organisations which are signatories and have been audited, those which are signatories and are complying, and those which are signatories and are committed to compliance. A lot more could be done along these lines to educate people.

MI: Could you tell us a little more about that?

PJ: At the moment, there isn’t any specification setting out the size a privacy notice is meant to be – for example a percentage of a web page. In a broadcasting context, if you have a notice on screen, for example on a teleshopping channel, a code of practice sets out the minimum text and box sizes for warning notices/viewer alerts. This idea could be adapted for privacy notices on the web, provided the guidance was not overly proscriptive.

MI: Can you tell us more about how the signs would help?

PJ: There are significant challenges in enforcing a Privacy and Data Protection Highway Code, not least because of trying to implement uniform international standards. In the maritime sphere, we have a system of buoyage to guide vessels –port buoys are red; starboard is green. The colours denote which side a vessel must pass. However, in Japan, the Americas, South Korea, and the Philippines the rules for a vessel passing green and starboard buoys are the other way around. Similarly, we drive on the left in the UK and right in Europe. Whether you are talking buoys or road signs, it is based around colours, silhouettes and shapes, and possibly also noises, which give more help than purely text. It is important that any Privacy and Data Protection Highway Code is standardised throughout the world to avoid confusion.

MI: So how might such ideas help us with Privacy and Data Protection?

PJ: It can help us to manage some of the complexities and terminology, make things easier to understand and more accessible. People say they will introduce new sections on their websites entitled ‘cookie guidance’. This word ‘cookie’ will mean nothing to your average man or woman on the street (other than in the context of biscuits). Is a reference to ‘cookie guidance’ all that helpful? Does anyone beyond those who are privacy lawyers and those who have expertise in web technology understand it? Instead we could include sections labelled ‘Privacy information’ and ‘How we use your data’ or use signs and imagery to communicate these concepts.

PJ: It took a significant length of time for the roads Highway Code to develop, and now it is international in scope. In the internet sphere, it would be good to have a similar international highway code that children learned at school. People associate a padlock symbol with security for example. A lock image of some description could be used to indicate privacy information. Microsoft are developing ‘private browsing’ on Internet Explorer 9. If you don’t want to have your browsing tracked, it would be useful to have a symbol or an icon on which users could click to opt out of having their browsing tracked.

MI: How might colours be used?

PJ: It would be good to have a common colour for textboxes relating to Privacy and Data Protection. However, it shouldn’t be taken too far. I wouldn’t want to impair the creativity of website designers by being excessively strict about what colours can be used.

MI: Do you have an idea of other symbols and signs which might be useful?

PJ: In terms of symbols, binoculars, magnifying glasses, telescopes and safes are examples of what could be used as symbols and icons to indicate privacy information and options. There may be some road Highway Code signs which could be used, such as traffic lights and stop signs. The latter could be used in conjunction for example with a text box: ‘Have you obtained permission to use the person’s information?’ A compass could be used as an icon for geolocation information – giving the option to turn on and off the function which identifies your whereabouts.

MI: Who should oversee this, to achieve some sort of standardization?

PJ: You could of course spend a lot of time dreaming up signs and symbols which can be used. It would be useful if the ICO would express views on what constitutes good signage in the Privacy and Data Protection sphere.

MI: Do you think a Privacy and Data Protection Highway Code should be enshrined in law?

PJ: I don’t think it necessarily has to be mandatory. I think a code of practice would work. Some people might already be doing this, of course. However, I don’t think there has been sufficient focus on the potential benefits. For example, some people are not aware of important differences between Tweeting and Facebook – Twitter is public whereas Facebook offers more privacy – some people understand this difference, others do not. A Privacy and Data Protection Highway Code could help with this. I don’t think people are sufficiently aware of the implications of submitting their personal details online.

MI: So where do we go from here?

PJ: You show me a sign and hopefully I will follow it. Just so long as it’s not a dead-end. For children in schools, developing an online version of a lollipop lady would greatly assist learning and understanding these issues.

For further information about data protection or Pitmans Intellectual Property legal services, please contact:

Philip James
Partner, Intellectual Property
+44 (0)207 634 4655
pjames@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

The UK Bribery Act, which comes into force today, is one of the most significant statutes enacted in the last 10 years. The Act establishes a criminal offence for non-compliance, with heavy penalties including unlimited fines and prison sentences. 

Have you ensured your compliance?

This overview of the Act provides you with the knowledge you need to avoid falling foul of the law.

1. What are the offences under the Act?

The Act introduces four main offences:

• Making bribes;
• Receiving bribes;
• Bribery of foreign public officials; and
• The corporate offence of failing to prevent bribery (where the only defence is of having ‘adequate procedures’ in place to prevent bribery).

2. What are the penalties?

• Companies – an unlimited fine 
• Individuals – up to 10 years imprisonment, an unlimited fine or both
• Companies who are involved in public contract work could be debarred from tendering for public procurement contracts
• Directors may also be subject to a variety of risks, including prosecution as an officer of a company involved in bribery, and potentially disqualification from acting as a director

3. Are you liable for the actions of other people you work with?

Companies can be liable where offences are committed by their employees, joint venture partners, contractors or agents as the Act imposes liability for the acts of ‘associated persons’, which is very widely defined.

To take advantage of the ‘adequate procedures’ defence against this risk, a company will have to have established robust policies and procedures to show it has a culture resistant to bribery and corruption, and systems in place to enforce that culture.

4. What about corporate hospitality and facilitating payments?

The Guidance that the Ministry of Justice have published to accompany the Act states that reasonable and proportionate hospitality and promotional expenditure is acceptable. Corporate hospitality within reasonable bounds is therefore allowed, but there is no carve-out for “facilitation payments”.

5. Does the Act apply outside the UK?

The first two offences (of bribing and receiving bribes) can be committed outside the UK, but only where the party involved has a close connection with the UK.  The offence of bribing a foreign official will in many cases take place overseas, but to be prosecuted by the UK authorities under the Act, the briber will also have to have a close connection with the UK.  In each case that would require being a British citizen, or being ordinarily resident here, or incorporated in the UK. 

The corporate offence of failing to prevent bribery can be committed by any UK incorporated body, UK formed partnership, or any foreign body corporate or partnership that carries out business or part of a business in the UK. This is regardless of whether the relevant conduct takes place in the UK or elsewhere and whether the bribery is done by a UK person or not.

6. What can you do to reduce your risk?

Companies need to ensure they can bring themselves within the adequate procedures defence to the corporate offence of failing to prevent bribery. This will require the introduction and implementation of appropriate anti-bribery and corruption policies and procedures.

7. What should you do now?

Contact our Corporate team, whose lead contacts are set out below. They can assist you by:

• Reviewing the ‘adequate procedures’ that you already have in place
• Reducing the risk of committing a bribery related offence
• Reducing the risk of fines or imprisonment of your executives
• Sharing best practice recommendations and experience
• Supplying anti-corruption and bribery policy precedents
• Delivering standard commercial and transactional precedents clauses
• Supporting you with relevant employment and HR terms and policies

Pitmans work with leading organisations in this field and are experienced in delivering anti-bribery and anti-corruption advice to its clients. We are also able to undertake detailed risk audits to help resolve your compliance issues.

For further information about the UK Bribery Act, please contact the Pitmans Corporate team, including:

Andrew Peddie
Corporate Partner
T: +44 (0)118 957 0321
E: apeddie@pitmans.com

Adam Dowdney
Corporate Partner
T: +44 (0)118 957 0574
E: adowdney@pitmans.com

Daniel Jacob
Corporate Partner
T: +44 (0)207 634 4653
E: djacob@pitmans.com

Facebook’s recent, silent UK roll-out of its auto-tagging functionality, which prompts users to tag facial-recognition links of friends, has given further cause for concern over privacy in relation to social network sites (“SNSs”). Philip James, Partner, and Carolyn Butler, Solicitor, at Pitmans LLP examine how the existing regulatory framework and technology needs to adapt and evolve to protect users’ identities online more effectively.

Tagging and Privacy

“I never forget a name or a face, but sometimes have difficulty correlating the two.”
Anon

Recently, the media’s attention has focused on the rights of individuals to control the use of their facial image online. In particular, Facebook’s largely unannounced launch of its auto-tagging functionality in the EU in June, which followed its official launch in the US in December last year, has caught the attention of the European Commission, as well as local regulators.

Facebook has featured ‘tagging’ on its photo-sharing facility for some time now. This is a feature that allows an individual in a photo to be identified by a ‘tag’ that contains personal information such as the individual’s name and a link to his or her profile on the relevant SNSs. For the benefit of anyone viewing the photo, the tag identifies the individual depicted from other people of the same name using that SNS. For the individual that has been tagged, he or she is alerted as part of the tagging process that a photo featuring them has been uploaded (and, significantly, only after they have been tagged are they notified and presented with an opportunity to remove the tag).

The process of tagging individuals in a series of photographs was previously a relatively manual exercise. Now, following the trend evident in Google’s Picasa image-organising suite and Face.com’s Photo Finder and Photo Tagger apps, Facebook’s auto-tagging function uses facial-recognition technology to streamline the tagging process. Facial-recognition software works as follows:

• it analyses a digital image for the distinguishable landmarks that make up facial features;

• it then converts the data derived from those landmarks into a numerical code called a ‘faceprint’;

• the faceprint acts like a digital ‘fingerprint’ which is then compared against other faceprints on a particular database to find a match; and

• since Facebook already has a vast database of tagged images at its disposal, its software identifies a person’s face in photos by analysing and comparing the new image against other images where that person has previously been tagged.

Given a faceprint’s similarity to a fingerprint, there is significant concern as to how tagging, and auto-tagging, in particular, compromises privacy. This concern derives from the lack of the requisite prior consent from the data subject to this type of tagging. This also raises the issue of whether a more stringent level of consent should be required for facial recognition tagging (and whether this should be considered to be sensitive personal data, in the same way as possibly location data should also be).

On Facebook, the consent is not sought before a tag is placed on a photo – they are only notified once they have been tagged. Even though, under Facebook’s terms of use, users are required to seek consent from those individuals before tagging them, this requirement is not brought to the users’ attention during the tagging process and undoubtedly, that requirement is not observed by users in practice. Gerard Lommel, of the Article 29 Data Protection Working Party, agrees that “tags of people on pictures should only happen based on people’s prior consent”. Nevertheless, consent is not automatically sought as part of the tagging mechanism, a fact that had not attracted much attention, let alone widespread criticism, until auto-tagging recently forced the issue into the limelight.

Under the current law, personal data is defined as:

“data relating to a living individual who can be identified from it, or from the data and other information which is in the possession of (or is likely to come into the possession of) the data controller”

Personal data must be lawfully processed, not kept longer than is necessary and, unless certain other exempting criteria apply, the data subject must give his or her unambiguous consent to processing. There is some debate as to whether SNSs can be properly characterised as “data controllers”, but the opinion of the Article 29 Working Party is that they are (see also recent opinions issued by the Canadian privacy regulator which is often seen as a trailblazer in relation to social-networking regulation).

Facebook would be well advised to review the ways in which it should obtain the requisite consents to process personal data in the content of its auto-tagging facial technology. In so doing, specific and informed consent will need to cover:

• Firstly, the actual processing of users’ faces to create the faceprint and name suggestion (‘faceprint name’) (undoubtedly, having their ID facially recognised was not in the contemplation of data subjects at the time of accepting Facebook’s terms of use); and

• Secondly, the act of tagging itself, once another user has confirmed the suggested faceprint name.

It will come as no surprise that all Facebook privacy settings are switched off by default (therefore opting users in to the technology). Once users have discovered the auto-tagging function existed, it is up to them to opt out of auto-tagging by amending their privacy settings. For many users, the procedure to engage privacy screening is too complicated for them to navigate successfully. Often, users do not realise that they need to amend their settings themselves. Since the activation of auto-tagging was not announced, users were not even aware of the need to adjust their privacy settings before (and not until some time after) the function was activated. This raises the question of what privacy notices users should be required to review before they sign up, as well as at the time any new feature is introduced. Requiring users to review and confirm their settings on their privacy dashboard at both points would greatly assist SNSs satisfy compliance requirements.

In a wider context, facial-recognition software used in other technological applications, such as in the analysis of CCTV footage, is fuelling civil liberties concerns and has prompted parliament to introduce further regulatory provisions. While the Information Commissioner already has a code of practice for monitoring CCTV images that covers the whole UK (including the public and private sectors), its enforcement powers have never been used . The Protection of Civil Liberties Bill, which is currently before the House of Commons, introduces measures such as a new body to regulate CCTV, a code of practice for surveillance camera systems (including facial and ‘gait’ (i.e. a persons way of walking) recognition systems), and provides for judicial approval of certain surveillance activities by local authorities.

EU Policy

The European Commission observed in its strategic communication on A comprehensive approach on personal data protection in the European Union, issued in November last year, that “social networking… presents significant challenges to the individual’s effective control over his/her personal data”. Vivian Reding, the Vice-President of the European Commission EU Justice Commissioner, agrees. In March she spoke to the European Parliament about how the modernisation of the existing legal framework will enshrine “four pillars” of online data protection for individuals. In relation to social-networking sites, individuals should enjoy:

• A right to be forgotten, where individuals have shall have the right to withdraw their consent to data processing, and have their personal data deleted from servers;

• Transparency, where users of social networking are properly informed of the restrictions over their control of their own private data or that their data may be made irretrievably public;

• Privacy by default, since privacy settings often require considerable operational effort in order to be put in place and therefore such settings are not a reliable indication of users’ consent; and

• Protection regardless of data location, where domestic privacy regulators shall be endowed with powers to investigate and engage in legal proceedings against non-EU data controllers whose services target consumers in the EU.

It is clear from this missive that the European Commission has SNSs including other location-based services firmly in its sights. Reding’s four pillars will encourage SNSs to lead by example to inculcate a culture of privacy.

The Article 29 Working Party has argued for data controllers to demonstrate greater accountability in, for example, producing and enforcing data protection compliance programmes. However, supplemental to that objective is the need for users to be better educated about the intrinsic risks and responsibilities in uploading their own and their friends’ personal data to SNSs. Whilst it is not suggested that the “household exemption” is removed and direct enforcement action is taken against individuals, regulators may consider that placing a duty on SNSs to ensure that users comply with data privacy laws is the only means of effectively protecting the public from their own worst enemy: themselves.

Right to be forgotten
Even where consent is given, data subjects will shortly have a legal right to withdraw their consent and request the deletion of content: a “right to be forgotten”. Implicitly, this applies to all online data concerning an individual, whether they uploaded it themselves or otherwise. Again, SNSs will need to consider how the developing EU policy, which will shortly become legislation, may affect the existing and future processes programmed into their products. Examples of this may include:

• introducing functionality that allows user generated content to ‘fade’ (or automatically be suppressed) after a defined period (cf. the time limits search engines employ);

• in addition to making it simpler for users to delete their profile, allowing users an ability to remove all tags (simple or faceprints) which reference their name (by means of identifying a UID which links any tags to their profile);

• encouraging third-party developers to produce Privacy Enhancing Technology (PETs) in the form of applications which users can add to their profile to give them greater control over the use of their ID, and to scour for and remove any unwanted tags, or provide users with customised privacy dashboards to allow greater control over their data.

By the same measure, the European Commission needs to be realistic and alive to the practical dynamics of SNSs in developing policy. While SNSs can remove content if notified to do so, they have little control over the content being uploaded by users, and the possibilities that content holds for infringing the rights of other users. The elements that SNSs can control, and which should therefore be targeted by the Commission, are the technical mechanics used to upload and protect personal data.

Poacher turned Gamekeeper
While certain applications have the potential to undermine privacy, the same tools can be harnessed to protect it. Although PETs are not new, consumers that may be alarmed by the ways in which their privacy may be compromised are driving the demand for technological solutions.

For example, Face.com’s Photo Finder already allows users to apply face-recognition software to Facebook searches to find photos of themselves or their friends that have not yet been tagged. This application could allow individuals to regain control of their own personal data by identifying unknown sources of personal data in order to arrange its deletion.

Google has to date resisted temptation to combine its Picasa face-recognition software with its popular Google Image Search, saying that such an innovative step would be “creepy”.

In any event, any organisation seeking to employ facial recognition technology should carry out a PIA (or privacy impact assessment) and ensure its technology has been devised using the concept of Privacy by Design (PbD). It would be an interesting exercise to audit what steps and precautions those who are currently employing such technologies have taken to measure the potential effect its use may have on people’s privacy. In the vein of ‘Jack Bauer and 24’: “we’re watching you”.

This article was published in the June 2011 issue of Data Protection Law & Policy and has kindly been reproduced with the consent of the publisher.

For further information regarding Pitmans Intellectual Property legal services, please contact:

Philip James
Partner, Intellectual Property
+44 (0)207 634 4655
pjames@pitmans.com

Carolyn Butler
Solicitor, Corporate
+44 (0)118 957 0234
cbutler@pitmans.com

For further information, please see “The Information Commissioner’s response to the Home Office Consultation on a code of practice relating to surveillance cameras” and “The Information Commissioner’s evidence to The Public Bill Committee on the Protection of Freedoms Bill”, both dated 24 May 2011 and available from the ICO’s website

Reporting the decision of the European Court of Human Rights in Strasbourg today, as they rejected Max Mosley’s attempt to impose a “pre-notification” obligation on journalists who are planning to run a story infringing a person’s privacy, most of the press are describing it as a victory for free speech.

It goes without saying, of course, that free speech is important. The ability to report on any subject without fear of censorship or stifling is something which is rightly regarded as a mark of a free, open and progressive society. The fact is, though, that free speech is not, and has never been, an absolute right. Untrue statements made in a manner calculated to harm a person’s reputation are for example subject to the laws of defamation. Similarly, laws exist to restrict the making of statements likely to inflame religious hatred, or incite violence.

Under the Human Rights legislation applied by the Strasbourg Court, and incorporated into domestic law by the 1998 Human Rights Act, free speech is simply one of a range of rights to be protected, sitting alongside other equally important rights such as the right to privacy (or more properly, the right to respect for one’s private and family life, home and correspondence). Both the right to freedom of expression and the right to privacy are expressly permitted to be curtailed in a variety of circumstances ranging from matters of national security to the consideration of the rights and reputations of others.

The balancing exercise between these competing rights is something that the Courts undertake every time they have to consider a case involving privacy issues and the press. It is the exercise that the Courts undertook in determining that the News of the World’s story about Max Mosley represented an unwarranted intrusion into matters of which he had a reasonable expectation of privacy, and served no wider public interest. Mr Mosley was awarded damages and costs, but he has made the very valid point that nothing can restore the private life he had before the story broke. It is difficult to see that a Court undertaking that balancing exercise prior to publication would have come to a different conclusion, but of course the difference in timing would have made all the difference in the world to Mr Mosley and his family.

In this sense, privacy is a different right to the reputational rights protected by libel law. Publication of an untrue statement can be just as harmful to a reputation, but the subsequent publication of an apology or correction will in the majority of cases serve to extinguish, or at least greatly reduce, the harm done by the original publication. Where privacy is infringed, the essential facts on which the story is based are probably true, and once in the public domain they cannot be expunged. Is it really so unreasonable to suggest that in those specific circumstances, the Courts ought to have an opportunity to weigh the merits of the story against the invasion of privacy that is proposed, before the genie is irretrievably let out of the bottle?

Will Richmond-Coggan is a Solicitor-Advocate in the Dispute Resolution department, whose specialisms include defamation and media disputes, including privacy issues.  Will can be contacted on 0118 957 0369 or email wrcoggan@pitmans.com

The Information Commissioner’s Office (ICO) has published initial guidance on 9 May 2011 on what practical steps UK businesses will need to take to comply with the new Privacy and Electronic Communications Regulations. The Regulations govern the use of cookies or the placing or accessing of any information stored on a user’s device.

When do the Regulations come into force?

The Regulations come into force on 26 May 2011. This legislation, derived from an amendment to the EU’s Privacy and Electronic Communications Directive, will require all organisations operating websites, as well as advertisers and ad networks, to obtain informed consent from their visitors when storing or accessing cookies (or other information) on their computers and mobile devices. The only exception to this rule is if the cookie is ‘strictly necessary’ for a service requested by the user. An example of this would be remembering the items an individual may have placed in their virtual baskets when purchasing items online. In such circumstances, no consent will be required.

What does the guidance say?

The guidance is intended to assist businesses in considering what type of cookie their websites use, the purpose of each cookie, how intrusive their use is, and offers some suggestions as to some recommended methods for obtaining consent from users. The purpose of the guidance is not to provide a definitive compliance guide but rather to act as a starting point for those businesses who are considering how to comply with the new legislation when it comes into force.

What do I need to do now?

Under the new Regulations, businesses should perform a comprehensive audit of their websites, filter out unnecessary cookies and identify any ‘strictly necessary’ ones that would not require consent because they fall under the exception. This guidance also encourages businesses to evaluate the intrusiveness of each cookie, and consider changing how the most intrusive of these cookies are used (e.g. asking whether it is necessary to use flash cookies which can be tricky to block).

Why should I bother?

The new Regulations grant other new powers to the ICO, including the power to serve monetary penalties of up to £500,000 to organisations that commit serious breaches of the Regulations, including making unwanted marketing phone calls or sending spam email. Individuals and businesses will also have a right to bring a claim for breaches of the Regulations. The ICO will issue separate guidance on how they intend to enforce the new Regulations.

It is also good business. Telling people what you are leaving or accessing on their computer or mobile helps build trust. Being transparent wins loyalty and engaging with customers by means of notice, choice and education empowers people and helps them manage their own privacy. It also protects your brand by avoiding being seen to be covert.

Some pointers

Whilst the ICO’s guidance is welcomed, businesses will need to be creative and consider, on a case-by-case basis, how they can best achieve compliance, without disrupting user experience. This will involve (amongst other things):

• reviewing their privacy policy;
• adopting a ‘layered’ approach to inform users about how your site works to gain valid consent;
• reviewing contracts with ad networks to apportion responsibility;
• conducting an audit of your digital estate and cookie functionality; and
• ensuring websites are compatible with next generation browsers.

For further details, please contact Philip James on 0207 634 4655 or email pjames@pitmans.com