On 1 October 2007 a number of substantive changes were made to company law by the implementation of provisions contained in the Companies Act 2006. The parts of the Act that came into force relate to: the partial codification of directors' duties; transactions involving directors; the holding and calling of general meetings; a new procedure for written resolutions for private companies; a new procedure for requesting access to the register of members; new information rights for beneficial shareholders and an expanded business review. Some of the changes introduced will affect all companies from now on, others are discretionary or only apply to particular types of companies, but in almost every case there are actions (summarised on pages 8 & 9) that should or could be taken to ensure compliance or to take advantage of the de-regulation introduced by these parts of the Act coming into force.
Delayed Implementation – 1 October 2009
At the beginning of November 2007, the Government announced that it had postponed the final implementation stage of the Companies Act 2006 originally scheduled for 1 October 2008 until 1 October 2009. The main reason given for the postponement was to give Companies House more time to complete the changes to its systems and processes necessary for the new legislation, as most of the parts due for implementation at that stage relate to company formation and filing obligations.
The parts of the Act definitely postponed until 1 October 2009 are: company formation, company constitution, company capacity, company name, registered office, re-registration to alter status, company members, business names, register of directors and residential addresses, company share capital and acquisition by limited company of its own shares, annual return, company charges, overseas companies, dissolution and restoration to the register and the registrar of companies.
On 13 December the Government confirmed that there is also to be a limited implementation phase in October 2008. The provisions which it has now been confirmed are to come into force on 1 October 2008 are:
- The remaining provisions relating to directors namely, the 'conflict of interest duties' [s 175 to 177], declaration of interest in existing transactions [s 182 to 187], corporate and under age directors [s 155 to 159].
- The repeal of the prohibition on private companies giving financial assistance in connection with the acquisition of their shares and the 'whitewash procedure' contained in Companies Act 1985.
- The provisions relating to objecting to company names and trading disclosures [s 69 to 74 and s 82 –85].
In addition, the new procedure for private companies to make capital reductions supported by a solvency statement without the need for a court order [s 642 to 644] is also to come into force on 1 October 2008.
At the same time it was confirmed that the implementation phase scheduled for 6 April 2008 is still to take place. This will bring into force the parts of the Act relating to: company secretaries, accounts, audit, debentures, public and private companies, certification and transfer of securities, distributions, arrangements and reconstruction and mergers and divisions of public companies. Brought forward into the April 2008 implementation are the provisions relating to the removal of entries relating to former members [s 121 and 128] and the new rules relating to requests to inspect the register of interests in shares, which bring in similar requirements for information supporting a request and the right of the company to obtain an order from the court not to make a disclosure as now apply to requests to inspect the register of members [s 811(4), 812 and 814].
One significant other change now proposed for April 2008 is the alteration to the rules relating to the execution of documents by companies to be consistent with the removal of the requirement for private companies to appoint a company secretary. Section 44 of the Act will provide that a company may validly execute a document if it is executed on its behalf by two 'authorised signatories' (authorised signatories being every director of the company and any company secretary appointed) or by a director in the presence of a witness who attests the signature.
Money Laundering Regulations 2007
Anti money laundering legislation aimed at preventing the use of the financial system for the laundering of the proceeds of drug and other serious crime or the funding of terrorism has been in place for over ten years. The original requirements were for financial institutions to set up procedures to verify the identity of clients and keep records of the evidence supplied, have internal reporting procedures for suspicions of money laundering and to train employees to recognise money laundering and in the use of the institutions' internal procedures. This is a constantly evolving area being twice extended and amended since the first legislation came into force.
The latest set of regulations is the Money Laundering Regulations 2007 (2007 Regulations). These Regulations come into force on 15 December 2007 replacing the current Money Laundering Regulations 2003 and implementing the EU's Third Money Laundering Directive. This Directive is wider in scope than its predecessors as it extends the category of businesses that will fall within the regulated sector to include trust and company service providers, 'high value dealers' (being a person or firm trading in goods for which he receives payment in respect of a transaction or series of linked transactions exceeding Euros 15,000) and life insurance intermediaries. A new category of person, a 'politically exposed person', is also introduced as a client in respect of whom, along with any of his close family members or known associates, the regulated business must conduct enhanced due diligence before accepting as a client.
Risk based compliance
One of the main features of the Third Money Laundering Directive is the introduction of risk-based due diligence requirements for regulated businesses, much of which is consistent with the current practices introduced in the UK by the 2003 regulations and the Joint Money Laundering Steering Group Guidance published in 2006 (Guidance). Under the 2007 Regulations, regulated businesses (which, in addition to the new businesses added, include credit and other financial institutions, auditors, insolvency practitioners, accountants, money service businesses and estate agents) must "establish and maintain appropriate and risk-sensitive policies and procedures" relating to:
- Customer due diligence measures and on-going monitoring including how to identify whether a person is a politically exposed person (being a person entrusted with a prominent public function by another state, EC institution or international body), in which case increased diligence will be required. On-going monitoring of relationships will involve scrutinising the transactions undertaken in the course of the business relationship, in particular to identify the source of funds and whether the types of transactions are consistent with the regulated business's knowledge of the customer, its business and risk profile as well as keeping documents obtained for the purposes of due diligence up to date.
- Reporting
- Record keeping. Records should include all evidence and supporting documents obtained to verify the identity of the customer at the commencement of the business relationship and during any on-going due diligence. Records should be kept for at least 5 years after the completion of the last activity arising from a transaction or the end of the business relationship. All records should be kept up to date.
- Internal control, such as additional measures to prevent the use of products or transactions favouring anonymity that may attract money laundering or terrorist funding.
- Risk assessment and management. This will need to include how to identify complex or unusual transactions or patterns of transactions and which, by reason of a lack of economic or lawful purpose, may be likely to be related to money laundering or terrorist funding. It will be important to keep the risk assessment policies up to date.
- The monitoring and management of compliance with, and the internal communication of, such policies and procedures. It will be necessary for regulated businesses to show the FSA (if they are a credit or financial institution), the OFT (if they are a consumer credit financial institution or estate agent) or HMRC (if not otherwise regulated) that their customer due diligence measures are appropriate.
The emphasis on risk-based policies and practices is new and is a recurring feature of the 2007 Regulations. It will be the responsibility of the regulated business to evaluate the risk of money laundering or terrorist funding in the context of each customer and to vary accordingly the extent of the customer due diligence and monitoring exercised. More stringent "know your customer" procedures are to be followed where the perceived risk is higher. The type of customer, business relationship and the transaction will all be relevant factors in determining the risk.
The 2007 Regulations specifically set out those situations where "enhanced" or "simplified" customer due diligence will be appropriate. Enhanced due diligence is to be applied, on a risk sensitive basis, in situations where the customer is not physically present, the customer is a politically exposed person or if the situation by its nature carries a high risk of money laundering or terrorist financing. In such situations further verification of the customer or beneficial owner, more details of the ownership or control of the client, more information on the purpose of the business relationship or the source of the funds and enhanced monitoring will be necessary.
In contrast, simplified due diligence will be acceptable if the customer is a credit or financial institution itself subject to the Money Laundering Directives, from a non EU state and supervised for compliance with equivalent anti money laundering requirements, a company with securities listed on a regulated market or a UK public authority.
Customer due diligence
There are new, more detailed customer due diligence obligations to add to those already in place. All customer due diligence obligations are triggered by the establishing of a 'business relationship', the conduct of an occasional or one-off transaction of more that Euros 15,000 or actual knowledge or suspicion of money laundering or terrorist financing. A business relationship is the business, professional or commercial relationship between the regulated business and the customer which is expected to have a duration. This element of duration is to be assessed when the contact between the institution and customer is established not when it is first made. There is a limited exemption for business carried out on an occasional or limited basis as the 2007 Regulations are only intended to apply to institutions when they conduct regulated business.
A regulated business is required to identify a customer and verify his identity on the basis of documents and data obtained from a reliable source. Where there is doubt about the adequacy of the documents previously obtained, further customer due diligence must be conducted. The identity of the customer and any beneficial owner must be verified before the establishment of a business relationship or the conduct of any occasional transaction. However, where the regulated business considers there is a low risk of money laundering and it is necessary not to interrupt the normal conduct of the business, the 2007 Regulations permit the verification of a customer's identity during the establishment of the business relationship, rather than before, save where the opening of a bank account is involved, in which case no money can be paid out of the account until the identification procedures have been completed.
Additionally, the regulated business must now identify whether there is a beneficial owner of the customer who is not the customer and, if so, verify the identity of the beneficial owner and understand the nature of the ownership and control of any legal person, trust or arrangement relating to the customer. A beneficial owner is a person who ultimately owns or controls at least 25% of the shares or voting rights, either directly or indirectly, of the customer.
Finally, the regulated business must identify the purpose and intended nature of the business relationship.
The 2007 Regulations do make one change that may reduce some of the customer due diligence burden as it will be possible for regulated businesses to rely on the due diligence of another regulated person, including credit and financial institutions, auditor, insolvency practitioner, accountant or legal professional in an EEA state or a non-EEA state who is supervised in the compliance of equivalent anti money laundering requirements. The consent of the third party must be obtained and the regulated business will not be able to rely on any defect in the third party's due diligence in the event of any failure to satisfy the requirements of the 2007 Regulations.
Breach of the 2007 Regulations is an offence punishable by a fine or imprisonment for up to 2 years. In addition all the money laundering offences in Part 7 of Proceeds of Crime Act 2002 will apply, which include the offence of failing to notify any knowledge or suspicion that another person is involved in money laundering.
This risk-based approach will involve a change of practice by regulated businesses and may involve them in a delicate balance. A risk averse approach is likely to increase the administration involved in establishing business relations and any situation where enhanced customer due diligence is required will lead to more detailed investigation of customers. Proper risk analysis will require good information gathering and careful consideration of customers and their transactions and could mean more money laundering reports are made. On the other hand, too cavalier an approach to risk assessment could leave institutions exposed to the failure of properly complying with the 2007 Regulations.
Joint Money Laundering Steering Group guidance for ABLs
In January 2006, the JMLSG published an amended version of its extensive guidance for the UK financial sector on the prevention of money laundering and combating the funding of terrorism. One of the key features, now reflected in the Third Money Laundering Directive and the Money Laundering Regulations 2007, is risk-based due diligence. Whilst some further changes have now been made to this Guidance, to reflect the provisions for relying on third party due diligence and alterations to definitions, these are not substantial and institutions already complying with the Guidance will only need to make minor changes to their policies and procedures to meet the new legislation's requirements.
The Guidance is in two parts. Part 1 is the main guidance containing the general provisions addressing senior management responsibility, internal controls and the money laundering reporting officer, the risk-based approach and customer due diligence, monitoring, reporting, training and staff awareness. Part 2 contains specific sector guidance. In August 2007 a new section containing guidance for the invoice finance sector was added to this Part 2. This section identifies the money laundering risks in invoice finance, the main ones being payment against invoices where there is no movement of goods or the overstating of the value of goods. The risks are indicated to be greater where there are cross-border transactions, reduced paper trails, the financier allowing the client to collect the debt and confidential and bulk products. Greater involvement in transactions by the invoice financier, such as the recording and managing of individual invoices and customers and collection by the invoice financier together with on-going due diligence, monitoring, site inspections and verification will reduce the risks of money laundering. The high level of contact between financier and client that is typical to invoice finance may itself make this sector less attractive to money launderers. The Guidance assesses the overall risk of money laundering in factoring to be lower than that in invoice discounting.
Invoice financiers are required to conduct a risk assessment for each client and introduce robust procedures to monitor money-laundering risks. Any changes to internal procedure or revision of risk assessment must be documented within the financier's overall risk assessment and this must be reviewed and updated regularly. Whilst there are obvious overlaps with procedures for managing general credit risks, particular attention will need to be paid to additional checks such as improving knowledge of the source of funds and monitoring of short term breaches of finance agreements for early indications of money laundering. Any suspicions must be promptly reported to SOCA.
With regard to its customer due diligence requirements contained in the Guidance, the invoice financier will be required to identify its client (the 'customer' in Part 1 of the Guidance), being the business entity with which it has a contractual relationship. The level of customer due diligence required is set out in Part 1 chapter 5 of the Guidance. This requires identification of the client (and in some cases further verification) together with a full understanding of the client and its business to establish expected activity patterns of the client. Invoice financiers are not required generally to conduct customer due diligence for money laundering purposes on their clients' customers, although depending on the risk assessment, some verification of underlying customers may be appropriate. The sector Guidance lists those situations where enhanced due diligence will be necessary, for example, where any party connected to a client is a 'politically exposed person' or is associated with a country identified as having high levels of money laundering or inadequate supervision or a high risk business such as one involving high levels of cash sales, cross border transactions or small, high value goods. Additional monitoring will be needed where there is a marked change from the expected activities, for example, changes in size, value or frequency of transactions, a change in location or goods or to payment methods or cycles. Invoice financiers will be familiar with much of the customer due diligence required both at commencement of the facility and during the life of the facility, as there is a close link here to the anti-fraud measures that form a primary control against other criminal misuse of invoice finance facilities. For maximum effect these processes should be closely co-ordinated.
Copies of the Guidance are available at www.jmlsg.org.uk
Tribunals Courts And Enforcement Act 2007This Act received Royal Assent in July 2007 but no date for implementation has been published yet.
In addition to the provisions contained in this Act aimed at improving the working of the tribunals system and increasing judicial diversity, are several sections that will be of interest to financiers and insolvency professionals:
- a unification of the law relating to the seizure and sale of goods,
- the abolition of the common law remedy of distress and the introduction of a new procedure for the recovery of commercial rent arrears,
- a new statutory framework for civil debt recovery, including measures to help creditors enforce judgments and gain access to information about the judgment debtor, and
- changes to the debt management schemes and new measures for relief from enforcement for certain debtors.
Seizure and sale of goods
The Act introduces a new procedure to be followed by enforcement agents when seizing and selling goods pursuant to writs or warrants of execution, delivery and possession containing the powers to seize and sell goods in order to recover sums due under an order of the issuing court. The terminology is changed to rename writs of execution and distress and warrants of 'fieri facias' as warrants and writs of control. A walking possession agreement is to be renamed a "controlled goods agreement".
The Act will replace the numerous, complex procedures contained in various pieces of existing legislation relating to the seizure and sale of goods with a simplified and modernised regime. It is also intended that a licensing system will be introduced to regulate enforcement agencies. As an interim measure a new certification process for such persons not employed by the Crown is contained in the Act.
Schedule 12 to the Act sets out the entire process to be followed by enforcement agents when taking control and selling goods. The procedure covers service of notice, taking control of the goods, powers of entry, which goods may be seized, taking care of and selling seized goods and the distribution of sale proceeds. Subject to a few specific exemptions, all the goods of the debtor may be seized and any interest in the goods assigned whilst they are bound by an enforcement power will be subject to that power unless the interest was acquired in good faith, for value and without notice of the enforcement power.
The Act provides for rights of the debtor to take action against an enforcement agent and recover damages for any breach of the procedure. There are also provisions for a creditor to bring an action against the debtor for causing loss by wrongfully interfering with the goods and the Act creates new offences of intentionally obstructing an enforcement agent in the performance of his duties and interfering with goods seized.
Distress and rent arrears
The Act will abolish the common law right to distrain for arrears of rent. Distrain for rent is a remedy arising from the landlord and tenant relationship that allows the landlord to take goods from the premises and hold them until the arrears are paid or sell the goods. In place of this common law right of all landlords, the Act introduces a limited right for the recovery of rent arrears due under a lease of commercial premises only.
Commercial Rent Arrears Recovery
The Commercial Rent Arrears Recovery procedure will allow landlords of commercial premises to use the new seizure and sale procedure under schedule 12 of the Act to recover rent arrears by taking control of the tenant's goods. The landlord will have the right to enter the premises in order to take goods belonging to the tenant, sell the goods and discharge the arrears from the sale of the goods. Where the leased premises are the subject of a mortgage, then a mortgagee who has given notice of an intention to repossess the property will acquire the rights of the landlord to recover arrears of rent where the lease was in existence before the creation of the mortgage or is not a lease created by any leasing power of the mortgagee. Any court appointed receiver of leased property will also be able to use the new recovery procedure in the name of the landlord.
The Commercial Rent Arrears Recovery procedure will apply to almost all leases and tenancies of any duration of commercial premises, being premises that do not include any part let or occupied as a dwelling. However a debtor tenant cannot prevent the use of the remedy by occupying the premises, or part, as a dwelling in breach of the terms of the lease. The lease must be in writing and the main terms, including rent payable, must clear and certain to all parties.
There are three conditions that must be satisfied before a landlord may use the new procedure. The tenant must be in arrears of rent before notice of enforcement is served, the amount owed must be certain or capable of calculation with certainty and the "net unpaid rent" (being the amount of unpaid rent, less interest, VAT or any "permitted deductions" that a tenant is entitled to make) must equal or exceed an amount to be prescribed. The net unpaid rent must equal or exceed the prescribed amount both at the time of service of the enforcement notice and immediately before the landlord takes control of the goods. Where the premises are sub-let the landlord may serve notice under the new procedure on the sub-tenant requiring the sub-tenant to pay the rent due to the intermediate tenant directly to the landlord and recover the arrears that way.
Although Commercial Rent Arrears Recovery is an out of court procedure, there are circumstances where the tenant may make an application to the court for it to intervene. If the prescribed conditions for its intervention have been met, the court may set aside the enforcement notice preventing the landlord from taking any further action because the preconditions for exercising the remedy have not been met, or suspend the enforcement where there is a dispute, such as to amount due, whilst the dispute is resolved.
The Commercial Rent Arrears Recovery remedy will not survive the end of the lease, save that the landlord may complete the sale of goods in respect of which he took control before the expiry of the lease or may continue to use the remedy for up to six months after the expiry of the lease (other than by forfeiture) where the tenant remains in occupation.
Debt recovery, enforcement and information
The Act makes a number of changes to existing court-based methods for enforcing debts in the civil courts, in particular attachment of earnings orders and charging orders and will introduce some new powers for the court, including obtaining information about debtors.
In relation to attachment of earnings order, the main changes are to the basis of calculation of deductions from earnings based on fixed rates and to give powers to the courts making the order to request details of any change to the name and address of a debtor's employer from HMRC to ensure that a debtor cannot evade the order by changing jobs.
The main change to be introduced in respect of charging orders is the removal of the current restriction against the making of a charging order where payments under an instalment order relating to the same sum are not in arrears. This will mean that a creditor will no longer be prejudiced where a debtor with large judgment debts, who is meeting his instalment payments, is able to sell his property without being required to pay off the debt. There will be a certain minimum threshold to prevent charging orders being used to secure payment of disproportionately small sums.
Creditors are also to be given new powers to apply to the court for information about what type of court based action it would be most appropriate for them to take to recover their debt. In connection with this 'information application' the court will be able to request information from the Department of Works and Pensions, HMRC, other government agencies and prescribed third parties, including banks and credit agencies, for information about a debtor who has failed to respond to a judgment or comply with the court-based methods of enforcement. The purpose of obtaining this information is to assist the court and creditor with the enforcement of the judgment debt and supplements the existing Order to Obtain Information, which can be of limited use where a debtor is not co-operating and fails to attend court to provide the information. Through the new information orders, creditors will be able to obtain such information as the debtor's name, address, date of birth, National Insurance number and the name and address of the debtor's employer.
Debt management
The Act makes some reforms to the main debt management schemes of Administration Orders and Enforcement Restriction Orders to make better provisions for people with low-value, multiple debts and introduces a new remedy, the Debt Relief Order, for those people who are unable to provide the fee to access the existing debt remedies of bankruptcy or individual voluntary arrangements. The precise criteria for eligibility are to be published in secondary legislation.
A Debt Relief Order may be made administratively by an official receiver, on payment of an entry fee by the debtor, without the need for court involvement. Applications are to be made online and a debtor will be able to obtain advice about making applications from debt advisory agencies. When granted the DBO will prevent creditors from enforcing their debts and the debtor will be discharged from all debts after one year, although creditors on receipt of notice of the order will have the right to object to the order on certain grounds. During the year the DBO is in place the debtor will be subject to the same restrictions and obligations as under a bankruptcy order and the same penalties that exist in the bankruptcy regime will apply where the debtor's conduct in relation to his insolvency is found to be culpable. The debtor will be required to account for any windfalls or increase in income that occur during the period of the DBO.
The final change in this part of the Act is the introduction of a power to enable the operator of debt management schemes, such as debt repayment plans, to compel better participation from creditors in the schemes by preventing enforcement action and to write off parts of debts where there has been compliance by the debtor with the terms of the scheme but he is unable to repay the full debt in the time frame agreed. The details of when and to what extent these powers may be exercised are to be prescribed in secondary legislation.
Pensions Act 2004: Moral Hazard Clearance Guidance Update
During Autumn 2007, the Pensions Regulator consulted on a revised version of its guidance on when clearance statements should be obtained for corporate events such as mergers and acquisitions or restructurings which could have an adverse impact on the ability of a company to meet its obligations towards its defined benefit pension scheme.
Following the implementation of the Pensions Act 2004, which introduced the Pensions Regulator with powers to prevent employers avoiding their pension liabilities, guidance was published indicating when parties contemplating certain corporate transactions should obtain clearance from the Pensions Regulator that the proposed action would not give rise to the issue of a demand to make up a shortfall in a defined pension scheme fund. Three classifications of transactions were identified: Type A (events which are financially detrimental to the scheme as they adversely affect the priority of the scheme as creditor, result in a return of capital, alter the control of the debtor or attempt to compromise employer debt), Type B (events which do not affect the pension creditor) and Type C (events which might affect the pension creditor). The clearance procedure was only available for Type A events.
The original guidance was published over two years ago. The updates reflect the changes to the market since April 2005 and set out the Pension Regulator's expectations of how all parties to corporate events are to consider the possible detrimental effect of the event upon a pension scheme. In revising its clearance guidance, the Pensions Regulator has proposed a simplification of its classification of events by removing Types B and C whilst expanding the description of Type A events to include compromises and arrangements and extending the list of employer related events that could be Type A events.
The Pensions Regulator appears to be moving towards a more principles-based approach in the updated guidance for determining which events should be considered for clearance, replacing the prescriptive tests set out in the original guidance. To support this, there is more guidance provided on how to assess the materiality of corporate events and greater clarity in respect of the level of financial mitigation of a proposed corporate event that scheme trustees should be looking for. The need for regular and early communication between companies and the pension scheme trustees on any funding or recovery plans is emphasised in the guidance.
The final version of the new guidance is to be published in December 2007.
The Corporate Manslaughter And Corporate Homicide Act 2007
This Act received Royal Assent in July 2007. No date for implementation has been confirmed, but the latest indications are that it will be in April 2008.
The purpose of the Act is to provide a more accessible route for the successful prosecution and conviction of corporate bodies (but it also applies to partnerships, trade unions, employers' associations, government and Crown bodies and the police force) for manslaughter. An organisation will be guilty of corporate manslaughter if the way in which its activities are managed and organised causes a person's death, where there has been a gross breach of a duty of care owed by the organisation to the deceased. This statutory offence replaces the common law offence of manslaughter by gross negligence and turns attention to the management and organisational failings of the company.
Directors should note that the Act established corporate liability by considering the way in which the activities of the company are managed or organised by its senior management and whether this amounts to a substantial breach of a relevant duty of care. Liability is likely to be established collectively through cumulative conduct rather than attributed to an individual. The Act defines 'senior management' as persons with a significant role in the decision-making relating to how the whole or a substantial part of the company's activities are managed or organised or who have a significant role in the actual managing or organising of all or a substantial part of those activities. Liability can only be found where there has been a gross breach of a duty of care which must be related to the organisation's specific corporate functions or activities, for example, as employer, occupier of premises, supplier of goods or services, the construction or maintenance of buildings or vehicles or any other commercial activity. Gross negligence is defined as conduct that falls far below a reasonable standard, which may be hard to determine in any case.
Factors such as the company's record of compliance with existing health and safety legislation will be relevant.
The penalty for any company convicted of corporate manslaughter is an unlimited fine. In some circumstances the court may also order the company to remedy the failings that led to the breach of duty within a specified period, failure to do so being a separate offence, but there is no personal liability on directors.
Misrepresentation And Guarantees
Quest 4 Finance Ltd v MaxfieldQBD October 2007
This case highlights the dangers of making statements in documents intended to have legal effect that convey one message to the reader whilst the author intended something quite different. In this case, the financier's brochure promoting its financial product stated: "no personal guarantees are required from company directors". For the defendants, who were keen to avoid creating further personal guarantees, this statement was very attractive. The defendants read the statement and, believing it to be true, entered into the financing agreement.
Instead of asking for a personal guarantee, the brochure said that Quest only "required a warranty ... to cover the event of any fraudulent acts being knowingly committed". When the warranty document was produced for signature by the defendants it contained warranties that the company was in compliance with all its warranties under the finance agreement (which included a statement that the company was not involved in any insolvency proceedings at the time) and would, at all times during the life of the finance agreement, continue to comply with those warranties. Breach of warranty by the company would be a termination event upon which all monies due would be payable and also a breach of warranty by the defendants giving rise to a claim by the financier.
The court had to determine what the defendants had actually signed. The document was called a "warranty", not a guarantee. The brochure said there would be no personal guarantee required and any warranty given would only be called in the event of a fraud, which was not applicable to the facts of this case. The defendants argued that consequently there was no liability on them to pay the outstanding finance sums. For the court, the use of the label "warranty" did not disguise the fact that the substance of the obligation undertaken by the defendants was a guarantee, a promise that the company would perform its obligations, namely to comply with its warranties under the finance agreement, including no step being taken to enter administration. A promise does not have to relate solely to payment to constitute a guarantee, nor be called a guarantee, if it is of a character of a guarantee. The court held the warranty from the defendants was actually a personal guarantee.
It was further held that the statement in the brochure that no personal guarantee would be taken was not correct, nor was the statement that the warranty required was only to protect the financier in the event of fraud. Both statements were misleading, amounting to a misrepresentation, although innocent, that was intended to be relied on by potential customers and which was believed to be true and relied on by the defendants. This material representation would be enough to set aside the warranty.
Finally it was held that the financier could not rely on a "non-reliance clause" contained in the warranty. The aim of such a clause is to ensure all the rights of the parties are governed by the written terms of the agreement and, in this case, to separate the claim under the warranty from the (incorrect) statements in the brochure. It was held that Quest, knowing that the statements in the brochure that no personal guarantee was required and the warranty only related to fraud, would be attractive enough to potential customers to cause them to enter the agreements, could not then believe the declaration of non-reliance signed by the directors to be true and rely on it to recover against the defendants.
Misrepresentation is a powerful weapon against a contract, even where experienced businessmen are involved and there is no fraudulent or negligent statement made by the other party. Statements made with the intention that they be believed and relied on by another party in entering a contract must be true; if not, the contract may be set aside.
It is not possible to slip a guarantee in by the back door. The courts will look at the substance of an obligation, not the form. Calling a promise that has the nature of a guarantee by another name, will not hide it from the scrutiny of the courts, which tend to construe guarantees against the party seeking to enforce them.
Some statements made in the course of negotiation may be so significant that they cannot be disregarded in the context of the final written agreement and any attempt to exclude them from having an effect may not be successful if the documents themselves are inconsistent and the court is unconvinced that the party relying on the non-reliance clause could believe the declaration to be true in the context of statements it intends to exclude.
Consultation Over Redundancy
National Union of Mineworkers (Northumberland area) v UK Coal Mining Board EAT October 2007
The decision in this case could have serious repercussions for struggling businesses and their advisers. It was held that an employer should consult not only on the impact of redundancies and how to avoid them, but also on the reasons for the redundancies, an area relating to the management of the business that has not previously been brought within the scope of the redundancy legislation. It also has the consequence that the consultation process will need to be commenced at a much earlier stage of the company's rescue planning.
Section 188 of the Trade Unions and Labour Relations (Consolidation) Act 1992 requires employers proposing to make 20 or more employees at one establishment redundant within a period of 90 days or less to consult for at least 30 days (and to consult for 90 days where 99 or more employees are concerned) about the intended dismissals.
In this application, the miners' union argued that a consultation about ways to avoid redundancies was meaningless if only commenced once the decision to close the site had been made, as the closure was already determined and the redundancies inevitable. This argument was upheld.
A statutory consultation should begin at the stage the employer starts to consider a course of action that could lead to employees becoming redundant. The decision does not go as far as to say that the parties to the consultation have a right to interfere with the management of the company. However, it does pose practical problems for the directors of distressed companies and any insolvency adviser to the company, as it could lead to adverse information about the state of the business becoming public earlier, leading to a loss of value to the business and a consequential reduction in the options for the rescue of the business or recovery of creditors. In addition, a failure to correctly discharge this duty to consult about the intended dismissals and the reasons for the redundancies will result in a protective award being payable to the affected employees.
Companies Act 2006 1 October 2007 Implementation And Action
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CA06 changes |
Action |
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Directors' duties |
Codification of duties |
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Transactions involving directors |
Transactions subject to members' approval |
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General meetings |
Holding and calling meetings |
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Written resolutions |
New procedure for private companies |
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Electronic communications |
Extended use of electronic communications |
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Register of members |
Requests for access |
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Beneficial shareholders |
Information rights |
All companies:
Quoted companies:
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Business review |
Additional information |
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.