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Corporate law update: a round up of 2021

Gateley Legal

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In this episode, host Sophie Brookes provides an overview of the most impactful developments in corporate law in 2021 with a particular focus on the changes that were implemented as a result of the pandemic.

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In this episode:

  • We discuss the relaxation of market practice around the requirements for witnessing documents.
  • We provide an overview of the national security screening regime which is to be implemented on 4 January 2022.
  • We discuss the changes that were made to the IR 35 regime in April 2021.
  • We reflect on the temporary process for the digital stamping of documents now being made permanent. 
  • We provide an overview of the Corporate Insolvency and Governance Act, known as CIGA, which introduced various measures to help alleviate practical and financial difficulties caused by the pandemic. 
  • We discuss a number of cases from the past year, one of which is a good reminder that directors can only use those powers for the purposes for which they've been given. 

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This episode is part of our Talking Business podcast series. Learn more about the series and what we cover. This podcast is available on iTunes, Spotify and Soundcloud.

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Sophie Brookes: Welcome to Talking Business, your straight talking guide to dealing with corporate matters. Whether you are a private or public company, an owner managed business, or an entrepreneur, a director, company secretary, or in-house counsel, this is the podcast for you. My name is Sophie Brooks and I'm a partner in our corporate team. I was a transactional lawyer for a number of years before becoming a professional support lawyer, which means I'm now responsible for know-how across our corporate team. Each month, I'll provide an update on the latest developments that matter to you, and will be joined by an expert to take a deep dive into a key corporate law topic.

Hi, everyone. In this episode, I thought we would do a roundup of things that have cropped up in 2021, sort of the interesting highlights from 2021. It's going to be a bit of a focus really on sort of changes or things that came in as a result of the pandemic, which perhaps have now been retained and have become permanent measures. And I thought rather than doing a top 10, I thought given that it's Christmas we'll do a top 12 and it'll be like our 12 days of Christmas. So I'm going to start off with our 12 drummers drumming, is again something that came out of the pandemic. Which is kind of a relaxation of market practice around the requirements for witnessing documents.

So historically there's actually no legal requirement for the witness on a document when they're witnessing somebody's signature to be independent. But historically market practice was always that you did get an independent witness because the function of a witness was to provide independent evidence about the signature of a document, and therefore it was thought better that that would be provided by an independent witness. But as I say, there's no actual legal requirement for that. And with the lockdown and the various restrictions that we've had, obviously that's made it difficult in some cases for people to be witnessing documents with somebody else. Often people are isolating or locked down just with family members.

 

And that kind of relaxation of permitting a family member and accepting a family member to act as a witness is something which seems to have stayed with us, even though restrictions have been lifted on and off throughout the last sort of 18 months. So the witness, whilst people are kind of happy-ish, now that it can be another family member, it can't be a party to the same document. So if you've got an agreement between a couple of people, they can't witness each other's signature. And also the witness does have to be physically present, you can't witness a signature remotely. And obviously the witness must actually witness the signatory signing.

And there was a case earlier this year where a solicitor was presented with some documents that had already been signed by the client and also the client's father, for whom the solicitor had acted for a number of years. And so the solicitor just acted as a witness and signed next to those signatures, but they didn't actually see the two parties sign. And in fact, the son had actually forged the father's signature on the document. So the solicitor witnessed a signature when they hadn't seen the signature signed and they were subsequently fined, I think it was about £20,000 by these Solicitors Disciplinary Tribunal. So a good reminder, that you must actually be physically present and see the signatory sign.

Okay, moving on to number 11, 11 pipers is piping. So here I thought I would mention the National Security and Investment Act 2021. So those of you that have listened to previous episodes will know that I've mentioned this few times before, because I think it is going to mark a bit of a step change in corporate transactions, and it is something that people need to think about and be aware of. So I've kind of been mentioning it a few times to sort of drip it into your consciousness over the course of the year. So the act received Royal Ascent in 2021, but the provisions don't actually come into force until the 4th of January next year, 2022. But transactions which are completed in 2021 could potentially be called in for review after the 4th of January implementation date, if they give rise to national security concerns.

But once the regime is enforced next year, there are three key features. So the first is a mandatory notification regime for some transactions in certain specified sectors. Then we've got a voluntary notification regime for transactions which give rise to national security concerns. And then we've got new call-in powers under which the government can review transactions which should or could have been notified under either the mandatory or the voluntary regime. So in terms of what kind of effect this is going to have on us going forward, I think there's going to be a need for increased due diligence by buyers to confirm in particular that the target is not operating in one of the 17 specified sectors, and therefore the transaction doesn't require mandatory notification, because if it does require mandatory notification, then you can't complete the transaction until you get clearance from the new investment security unit.

So I think we're probably going to see an increase in precautionary notifications where people are a bit nervous about whether or not the transaction might be caught, whether or not it might require notification, whether or not it might get called in for review. And perhaps more transactions becoming conditional clearance from the ISU, and therefore the sort of knock on effect of that, making deal timetables more protracted. We're going to have to wait and see how it shakes out. Obviously the government is keen to catch those transactions which actually genuinely have a national security concern about them. The problem is that the legislation, as is often the case, is quite widely drafted and could easily catch a lot of transactions which perhaps you or I would not think normally did have that kind of national security concern. But I think until we see this sort of general approach from the ISU and actually the extent of a sort of reasonableness, if you like of that approach, then people are perhaps going to have to be a little bit more cautious on their transactions for now.

Okay, moving on at number 10, 10 lords are leaping. So we're spooling back to April here, April 2021, when there were changes made to the IR 35 regime, basically extending the public sector off-payroll working rules to large and medium sized companies in the private sector. So what that means is that from April the hiring organization, so basically the fee payer if you like, is now responsible for determining the tax status of any contractors that are engaged through an intermediary personal service company, and therefore whether or not they fall within IR 35. And where they do, and therefore they are deemed to be an employee for tax purposes, HMRC will seek recovery of tax and national insurance contributions from the fee payer in the first instance, rather than the worker.

So again, I think that has led to a lot of people reviewing those kind of arrangements, and in a number of cases I think sort of removing the personal service company and actually engaging directly with the individual, perhaps on an employment basis where that more accurately reflects the nature of the relationship between the parties. Where the arrangements are still via a personal service company, because they're genuinely self-employed, those contracts will generally have an indemnity in them to pass that tax liability back from the engaging company back to the worker. But obviously an indemnity is only as good as the value of the person that sits behind it. So actually, it still would be the fee payer in the front line to pay the relevant tax to HMRC, and then it would be a question of whether or not they were actually able to recover that from the individual.

Okay, nine ladies dancing. So here I thought I would mention that the temporary process for the digital stamping of documents introduced by HMRC in response to the pandemic has now been made permanent. So this happened a little while ago. So documents can now be emailed to HMRC, and at the same time payment of the duty, the relevant stamp duty, is made to the account designated by HMRC for that purpose. So we're talking here particularly about stock transfer forms, and also there's a form, a particular form, an SH03 that you have to file when you are doing a share buyback, which also has to be stamped in this way. My top tip here is to be very careful and make sure that you use the same reference when you send the documents, when you send the email with the documents, and then also when you make the payment to make sure that HMRC can easily match the two up at their end.

Okay, so we're onto number eight now. We're down to eight maids are milking. And here I was going to mention the Corporate Insolvency and Governance Act, known as CIGA, which introduced various measures to help alleviate some of the sort of practical and financial difficulties caused by the pandemic. So in particular, there were things like new procedures for holding virtual general meetings, and also extensions to company filing deadlines. All of those particular measures have terminated now. So the usual kind of pre-COVID rules apply in relation to company meetings and filings. But CIGA also introduced various provisions in relation to winding up petitions, and those were extended several times since they originally came in sort of back in March-April 2020, but then earlier this year they were replaced with new restrictions which broadly prohibit a creditor from presenting a winding up petition unless certain conditions are met.

So those conditions that have to be met in order to present a winding up petition are that the relevant debt has to relate to something other than non-payment of rent under a business tendency. So effectively, the previous prohibition on presenting a winding up petition for unpaid commercial rent is effectively retained. Then the creditor has to have made a formal request to the company seeking proposals for the payment of the debt. And the company has to have not made a proposal about the payment of the debt which satisfies the creditor within a 21 day period.

So basically there's a sort of compulsory 21 day period between a demand for repayment and then presentation of the winding up petition, although in exceptional circumstances, actually the court can shorten that. And then the final condition is that the debt has to be for £10,000 or more. So that's gone up, originally it was for £5,000. So those new measures are enforced now in relation to issuing winding up petitions, and they currently are due to be enforced until the end of March 2022. And then we'll have to wait and see what happens after that date.

Okay, for our next ones I've got two that are sort of both related to dividends or distributions. So firstly, number seven, seven swans a swimming for those of you that are keeping track. So this, there was a case earlier in the year, which considered the practice that I think a lot of smaller companies have where directors pay themselves monthly amounts which are then sort of reclassified maybe at the end of the financial year once the level of profits is known. So what tends to happen is that directors pay themselves a small amount of salary and then a larger amount, which is intended to be a dividend. But obviously until you get to the end of the financial year, you don't know whether or not you've had enough distributable profits in order to actually make that dividend payment.

Well in this case, the court said that actually the payments as they are made should be classified as loans, which can potentially then be cleared the year end by declaring a dividend. But if there's no dividend ever declared, either perhaps because there's no distributable profits or because maybe the formal procedures actually aren't followed to properly declare that dividend, then those loans can't be cleared. So effectively the director still owes the money back to the company, and therefore has happened in this case, if the company becomes insolvent and a liquidator is appointed, the liquidator can pursue the director to recover that amount of money.

So the next case, six geese a laying, sorry, also relates to how you can get dividends wrong. So the previous one involved something that was called a dividend, but was held not to be one. But the next case involved something that wasn't called a dividend, but actually the court said, "No, hang on, that is a dividend." So you can kind of get it wrong in several different ways. So here, what happened was that a subsidiary paid a management charge to its parent in order to clear an intercompany balance that was owed by the parent to the subsidiary because the two companies was then going to be sold to different buyers, so they wanted to clear off that intercompany debt.

So again, what happened was the subsidiary became insolvent and the liquidator that was appointed challenged those payments made by the subsidiary to the parent. And the court said here that the correct classification of the payment, which remember was classed by the companies as a management charge, well the court said, "No, it should have been classed as a voluntary distribution or dividend." Because basically the parent had never previously charged the subsidiary for any services, and there was no liability for services recorded in the subsidiary's books. So by paying the management charge when it didn't have to, the subsidiary had basically made a voluntary distribution of its assets to its parent. And in this case, because the value of that distribution exceeded the subsidiary's available distributable profits, then it was unlawful and therefore it could be recovered from the parent. So both those cases, seven swans a swimming one, and our six geese a laying one, I think our examples of sort of how it doesn't matter what you call it, the law will look at what it really is.

Okay, moving on. So we're down to five gold rings now. So I thought, given that we're talking about gold, we'll talk about fair value. So there was a case earlier this year which considered the meaning of fair value in the context of compulsory transfer of shares under provisions in articles of association. Which required the majority shareholder to buy out the minority at, quote, fair value. But what did that actually mean? So the minority shareholder said, "Well, it's just a simple pro rata amount of the value of the entire issued share capital of the company." So just value the whole, and then it's the pro rata amount. But the majority shareholder said, "No, that's not right. You have to look at the value of the shares as between sort of a willing buyer and a willing seller." And because the shares are a minority share holding, then you have to discount their value in order to reflect that.

And the court essentially agreed with the majority shareholder here. The court said you've got to look at what was being valued, because that's what you've got to give fair value to. And in this case, what you are valuing is a minority share holding. So the starting point is that you would apply a discount to that. You could overcome that with express wording. So you could say you don't discount in relation to a minority share holding, or indeed you don't apply a premium in relation to a majority shareholding. But if you don't qualify the words and you just say fair value, then you look at what's being valued. And if that is a minority share holding as it was here, then you would discount a value.

Okay, so we're down now to number four, four calling birds. And I mentioned CIGA before, the Corporate Insolvency and Governance Act, and we're coming back to CIGA again here. Because one of the things CIGA did was it introduced a new process called restructuring plans. So these can be used by a company that has encountered financial difficulties, where those difficulties are affecting its ability to carry on businesses as a going concern. And what the company does with a restructuring plan is it enters into a compromise or arrangement with its creditors and/or its shareholders. And the purpose of that compromise or arrangement has to be to eliminate or reduce or prevent the effect of those financial difficulties that the company is experiencing.

So there is already a process under the Company's Act called a scheme of arrangement where a company can enter into a compromise with its creditors or shareholders. But the key difference between that existing procedure and this new one, the new restructuring plan, is that under a restructuring plan that can become binding on dissenting creditors or members. So even if the members or creditors or a particular class of them don't vote in favour of it, then the plan can be binding on them, provided that it has been approved by at least one class of creditors who would receive a payment or have a genuine economic interest in the company and the relevant alternative. So the relevant alternative is whatever the court considers would be most likely to happen if the plan wasn't sanctioned. So provided a class of creditors or members that would receive a payment has approved it, and provided the dissenting class would be no worse off in the relevant alternative, then a restructuring plan can be binding on a dissenting class.

So what that means effectively is that the creditors who would be out of the money in an administration or liquidation say, where that's the most relevant alternative, they can't prevent a restructuring. And the division of the company's value is controlled by the creditors or shareholders who would be in the money. So Virgin Active was one of the ... Was the first company actually, to impose a restructuring plan on dissenting creditors earlier this year, where they managed to force a restructuring and arrangements onto four classes of landlords who had not approved the particular plans.

Okay, we're into the home straight, we're on three now. Three French hens. So here, I thought I would mention a case that related to director's duties. So directors of companies have various different powers, but there was a case earlier this year which is a good reminder that actually directors can only use those powers for the purposes for which they've been given. So in that particular case, the directors had used their power to issue shares, not for the legitimate purpose for which that power being granted, which the court said was to raise capital for the company, but they'd actually used them for an improper purpose in order to retain control of the company by watering down the share holdings of those who wanted to remove the existing directors. And in this case the court said, "Well, because that was the purpose for which you exercise your power, that's an improper purpose. And as a result, you are in breach of your duty to the company."

Okay, number two. Two turtle doves. So this is a very recent case actually, that dealt with contractual obligations. So contractual obligations can fall into two categories. You can either have an absolute obligation, so you say that a party to an agreement must do something. Or your obligation could be qualified, so you say that that party will try or endeavour to do something. And there are various sort of different categories of that qualified obligation. So you could say that a party will use their reasonable endeavours. And if your agreement says that, then what the party has to do is follow one reasonable course of action to try and achieve whatever the desired result is, whatever it is that they've said they will try to do.

Or they could use their best endeavours, and in that case the courts have said, "Well, if you've got to use your best endeavours, then you must exhaust all the reasonable courses of action available to you." And you have to put yourself in place of the other party and do all that you can to achieve the result, which could include sacrificing your own commercial interest. So it could include doing something that kind of goes against your own commercial interests, sort of in terms of expenditure or risk, that kind of thing. But in this particular case, we had something in between. So we didn't have reasonable endeavours, we didn't have best endeavours, we had an obligation to use all reasonable endeavours. And the court said, "Well, that kind of falls between those two." And if you have an all reasonable endeavours obligation, then what you've got to do is take all reasonable courses of action available, but sacrificing your own commercial interest is probably less likely than with the best endeavours obligation.

And depending on the wording and the context, then it might require you to sacrifice your commercial interest and take steps to your own detriment, or it might not. My top tip here would be wherever possible to avoid using those kind of generic reasonable endeavours or best endeavours obligations, and be as specific as you can in the contract about actually what it is that each contractual party has to do, what you expect them to do, and set those particular steps out in the agreement rather than relying on and generic wording which leaves you at the whim of interpretation of the court.

Okay, so we have arrived at our partridge in a pear tree, our final summary from 2021. And I thought without wishing to put a dampener on things, but given that it is the season of gifting, I thought I would mention a case which is a very good reminder about an organization's obligations and potential liabilities under the Bribery Act. So the Bribery Act introduced various different offenses when it came in, including both giving and receiving a bribe, as well as a specific offense of bribing a public official. But as well, there's an offense for an organization. So an organization will be guilty where an associated person bribes someone else with a view to obtaining or retaining business that organization. And an associated person here could be someone who performs services on behalf of the organization. So that could be employees, officers, agents, even associated companies.

And it's a strict liability offense here for this corporate offense. So that means that the organization will be liable regardless of whether or not it knew about the bribery that was sort of taking place on its behalf. And the only defence for an organization is if it can show that it had in place adequate procedures to prevent bribery from occurring. So in the recent case, there was a UK company that was providing oil field services in the Middle East, and it was fined £77 million for failing to prevent its head of sales from committing bribery on its behalf. And hopefully that case acted as a good reminder and prompted a lot of companies again, to look at their own internal policies and procedures and to make sure that they are adequate and they do protect it from similar allegations.

So that's it from me for 2021. We're going to have a short break and then we'll be back with some new episodes later in the new year. So Merry Christmas everybody, and I hope you have a very happy new year and I'm off for a mince pie.

Thank you for listening to Talking Business. To find out more about the series, please visit gateleyplc.com/podcast/talkingbusiness. From there, you can subscribe for all updates, meet our speakers and get more information on all of the topics being discussed.

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