Corporate FILE May 2011

Free Legal Review of your Credit Control Process

In these increasingly challenging times for all businesses, ensuring your credit control policies and procedures, and terms and conditions on trading are as effective as possible is a must, if you want to minimise the risk of unpaid bills and bad debts.

Brethertons is offering businesses a FREE review of your internal credit policy and supporting legal documents, to help your business avoid making costly mistakes. Obtaining specialist advice on how to protect your business could not be easier. We come to your office, look at your legal procedures at NO cost to you.

To arrange a free, no obligation Credit Review or to discuss our Commercial Recoveries Services, please contact:

Jackie Ray, Head of Commercial Recoveries
Tel: +44 (0)1295 661457
Email: jackieray@brethertons.co.uk

Brethertons Recognised as ‘Leaders in their Field’
 

Brethertons has enhanced its credentials as a leading law firm according to the independent legal ‘bible’ Chambers UK 2011.  Five senior experts were recognised as ‘Leaders in their Field’ by Chambers UK, the UK’s leading legal research directory.

The Chambers Guide, widely regarded as the most authoritative guide to the legal profession in the UK, is compiled after detailed research over a six month period including thousands of telephone and face-to-face meetings with clients and other law firms.  It ranks law firms and lawyers in 70 legal specialist areas. Rankings are based on technical legal ability, client service, commercial astuteness, diligence, commitment and the other qualities that are most valued by clients.

Burden of Proof for Disqualification of Directors

A High Court decision has confirmed that for the purpose of obtaining an order disqualifying a person from acting as a director on the grounds that they are not a fit person to do so, the burden of proof required is the civil burden (balance of probabilities), not the criminal one (beyond a reasonable doubt).

The Secretary of State has the power, under the Directors Disqualification Act 1986, to ban a person from acting as a director of a company for up to 15 years and this power is frequently used when the conduct of a director is sufficiently unsatisfactory. Disqualification proceedings are frequently brought in the wake of company insolvencies.

If you are concerned about the behaviour of fellow directors or that your company may be trading while insolvent, contact Edward Bible for advice.

Compromise Agreements – Tax Rule Changes

Employers who are making employees redundant and intending to use compromise agreements should note that from 6 April 2011 the operation of PAYE changes in relation to payments made after an employee has been issued with their P45.

From that date, an employer must withhold tax from a payment made to an ex-employee, after the P45 has been issued, at the basic, higher or additional rate of tax as if the employee has no allowances. The previous rule was that basic rate tax would be deducted and a tax indemnity sought from the employee.

The new rule also affects gains on share option and award schemes that arise after the employee has left employment, the tax on the earnings of new employees who do not produce a P45 and occupational pension payments where a pension is paid in addition to the salary of an employee.

The practical effects of the changes include the requirement for the taxpayer to pursue HM Revenue and Customs for a refund of overpaid tax resulting from the application of the new rules and a reduction in the benefit of paying termination payments after the issue of the P45.

First Conviction Under New Corporate Manslaughter Law

A workplace death in 2008 has led to the first conviction of a company under the Corporate Manslaughter and Corporate Homicide Act 2007.

Alexander Wright, who was 27 at the time of his death, was investigating soil conditions in a pit when it collapsed, killing him. In the first successful prosecution under the Act, Cotswold Geotechnical Holdings was found guilty of corporate manslaughter over his death. The company was fined £385,000, which it has the option of paying over a 10-year period due to its present financial position. Charges against the company’s managing director were dropped in October last year owing to his ill-health.

The Act was passed to make it easier to prosecute companies over health and safety breaches resulting in fatalities. Previously, it was necessary to identify a ‘controlling mind’, usually a director of the company, in order to establish criminal liability. This proved especially difficult in the case of larger entities: the only successful prosecution under the previous legislation involved a one-man company. There were several noteworthy failed prosecutions – in particular regarding the Herald of Free Enterprise disaster and the Hatfield rail crash.

Says Jitendra Patel, “This case involved a small company where executive responsibility was easier to establish: indeed, the judge stated that the director who could not be prosecuted due to his ill-health ‘was in substance the company’. It remains to be seen how effective the Act will be in prosecutions of larger organisations.”

In Brief

Failure to Keep Records Proves Expensive

A failure to keep proper records has recently proved to be expensive for aerospace giant BAE Systems.

The company was fined £500,000 in relation to payments totalling more than £7 million that it had paid to a Tanzanian businessman in connection with a £28 million military procurement contract. There was no proper record of the payments or what they were for. BAE did not contest the finding.

The company also paid more than £200,000 in costs incurred by the Serious Fraud Office in respect of the case.

OFT Guidance on Director Disqualification and Competition Law

The Office of Fair Trading (OFT) has the power to apply for an order banning a person from being a director in cases in which competition law is breached. Orders are granted under the Directors Disqualification Act 1986 and are issued when the conduct of a director is such that it renders them unfit to act as a director. More than 2,000 such orders were sought last year.

The OFT has recently issued guidance on when it will seek such orders. In essence, it will follow a five-step test, asking the following questions:

1. Has there been a breach of competition law?
2. Was the breach significant in nature and was a financial penalty imposed?
3. Did the company concerned benefit from leniency?
4. What was the director’s degree of responsibility for the breach?
5. Are there aggravating or mitigating circumstances?

Being disqualified to act as a director is a severe penalty for any business person. If you have concerns about the conduct of a company of which you are a director, contact us for advice.

For further information on director disqualifications, see the OFT website at http://www.oft.gov.uk/.

Shareholder Cannot Unreasonably Withhold Consent

A shareholder must act reasonably. This was the conclusion of the court when faced with a situation in which a shareholder sought to force a company to give him documents by refusing to give permission for a share valuation to be done by the company’s accountant if it did not. The share valuation was required in the circumstances by the company’s articles of association. Such provisions are common in company articles to decide the value of shares when shareholders leave the company and are required to offer their shares to the existing shareholders.

A prior ruling of the court concluded that, in such circumstances, there is a tripartite agreement between the company, the shareholders and the company’s accountant. By refusing to agree to the valuation, the shareholder sought to create a stalemate if the information he sought was not provided.

The company therefore went to court to obtain a ruling that the articles should have implied into them a term that the agreement of the shareholders to the share valuation would not be unreasonably withheld. The court agreed.

This case will come as a comfort to those who fear that a recalcitrant shareholder may try to scupper plans that involve procedures that require the agreement of shareholders.

If you are having problems with shareholders in your company, or require advice on the reorganisation of shareholdings, contact Brian Auld.

Time to Review Tax Arrangements?

Over the years, a number of ‘tax-efficient’ methods of giving remuneration have been developed, such as Employee Benefit Trusts (EBTs) and Employer-Funded Unapproved Retirement Benefit Schemes (EFURBS).

The Government has recently published draft anti-avoidance legislation aimed at so-called ‘disguised remuneration’ and, as drafted, the legislation could cause problems for many legitimate employee share schemes using EBTs or EFURBS.

If you are using any form of indirect remuneration for your employees, now may be a good time to have your arrangements reviewed in the light of the proposed changes, so you are ready to act if you need to before revised legislation bites.

Winding Up Your Company – Warning

There are hundreds – possibly thousands – of companies listed as ‘dormant’ at Companies House and often these are retained rather than wound up because although they do not trade, they do contain assets.

For more than a quarter of a century it has been possible to wind up a company informally and distribute the assets amongst the shareholders by using a procedure described in HM Revenue and Customs (HMRC) extra-statutory concession C16. The concession allows dividends paid as part of a scheme to wind up a company to be treated as returns of capital, and thus subject to Capital Gains Tax (CGT), rather than dividends, which are subject to Income Tax (IT).

However, the term ‘informally’ is one which should not cause complacency, as more recently it has been noted that the return to shareholders of the share capital of the company without a formal winding-up is strictly unlawful.

This position was dealt with by a further concession, which regularised the position if the distribution to the shareholders was £4,000 or less. In practice, HMRC have ignored the issue, but it is widely rumoured that proposed new legislation will make distributions exceeding £4,000 subject to IT, which will bring many such distributions into the IT net.

In many cases, a straightforward solution will be found in the ‘purchase of own shares’ legislation, which allows a company to purchase its shares from the shareholders, paying them out of its reserves. Such distributions are subject to CGT, not IT.