In this month’s update for directors, secretaries and general counsels we:
- consider a case where a salaried director was held not to be an employee;
- examine the new arbitration process for covid-related commercial rent arrears; and
- learn lessons on interpretating pre-emption rights from a dispute involving Swindon Town FC
Salaried director was not an employee
The Employment Appeal Tribunal has held that a director, who received payments described as "salary" was not in fact an employee or worker and so the various employment-related claims he had brought were unsustainable.
The case of Rainford v Dorset Aquatics Limited EA-2020-000123-BA arose out of a dispute between two brothers, Bradley and Ben. The brothers were co-directors and 40/60 shareholders in a small family company which did landscape work and made water features.
On their accountants' advice, the brothers were each paid an equal monthly "salary" by the company, from which PAYE and NI were deducted, and they also agreed on the amount of dividends to be paid at the end of each financial year. Bradley worked as the site manager at premises owned by the company but neither he nor Ben had a written employment contract.
When the brothers fell out, Bradley brought a claim for unfair dismissal, notice pay, unlawful deductions and holiday pay. But the company argued that he was not actually an employee entitled to bring those claims.
The judge noted that there is no reason in principle why someone who is a shareholder and director of a company cannot also be an employee, even if the person has total control over the company. Whether they are an employee or worker is a question of fact.
There are various different factors that the court will look at when assessing someone's status. For example, a genuine right of substitution is inconsistent with an employee's obligation to perform personal services. And if that general right of substitution exists, it is immaterial whether or not it is actually exercised. Similarly, whilst the payment of "salary" with payslips and deductions would suggest an employment relationship, it is not decisive on its own.
In this case, the company exercised little or no control over Bradley’s work: he had set his own hours and holidays, and could undertake other work. The tribunal accepted Ben's evidence that he would have accepted a substitute site manager nominated by Bradley to act in his place, even though the issue had never arisen in practice. The payment of "salary", with wage slips and deductions, was found to be of little significance where it had been organised by the company accountant for tax reasons, without any particular awareness on the part of the recipient and it related to only a small part of their total payments from the company.
At first instance, the tribunal had found that Bradley was neither an employee nor a worker. That decision was upheld on appeal.
The tribunal confirmed that it was perfectly possible for a person to be both an employee of a company and a director/shareholder. However, the exact status of an individual will be decided by taking into account all the relevant circumstances and, as this case shows, it will not always be sufficient that the director received a salary for the work they were carrying out.
New arbitration scheme for rent arrears
The Commercial Rent (Coronavirus) Bill 2021-22 sets out the framework of a new arbitration scheme aimed at helping landlords and tenants resolve disputes in relation to pandemic-related rent arrears. A related Code of Practice, aligned with the new Bill, supplements the arbitration process.
Over the last two years the government introduced a range of measures aimed at supporting businesses that were forced to close during the pandemic. This included a restriction on the landlord's ability to forfeit a lease for non-payment of rent and a prohibition on issuing a winding up petition in relation to commercial rent arrears that arose as a result of the pandemic.
The new Bill, which is due to come into force when those existing measures end in March 2022, aims to assist businesses and their landlords in resolving disputes and transitioning back to "business as usual". The Bill seeks to force landlords and tenants to share the burden of arrears, taking into account their respective interests.
The Bill provides for a temporary moratorium on the enforcement of protected rent debts to allow time for a dispute to be resolved, either by the new arbitration process or otherwise.
Only business tenants that were forced to close during the pandemic will be able to take advantage of the arbitration scheme and then only in relation to rent arrears (including service charges, insurance costs, VAT and interest) that relate to the period between 21 March 2020 and the last date on which that business was forced to close due to covid-related restrictions.
The parties must first comply with a pre-arbitration process, aimed at encouraging them to reach an agreement on the proposed arrears. This requires one party to notify the other of its intention to apply for arbitration and to provide details of its proposals to settle the arrears. The other party then has 14 days within which to respond and provide a counter offer. Once a further 14 days has elapsed, during which the counter offer can be considered, either party can apply for arbitration. Applications must be made within six months of the Bill coming into force (which is expected to be on 25 March 2022) and the arbitration fees must be paid in advance by the applicant.
If the arbitrator believes that the tenant's business is viable (or would be with relief from the arrears) they must make an award for relief in one or more of the following forms:
- writing off the whole or part of the debt;
- giving time to pay, including payment by instalments; and
- reducing (including to zero) any interest payable on the arrears.
The arbitrator's award must also make an award in relation to costs, requiring half (or such other amount as the arbitrator determines) of the arbitration fees paid upfront by the applicant to be borne by the other party. Each party must meet their own legal and other costs relating to the arbitration.
Code of Practice
The Code of Practice provides guidance on how landlords and tenants should approach negotiations relating to arrears. It also gives further information about the arbitration process, the kind of evidence that will be considered, and the key principles of fairness, affordability, and viability to which an arbitrator must adhere.
The Code is clear that where a tenant can afford to pay, it must do so and preservation of the tenant's business must not come at the cost of the landlord's solvency. But the Code also provides that tenants should not have to take on more debt or restructure their business simply in order to pay rent.
The government hopes that the scheme will help preserve otherwise viable businesses and the jobs they support. Although the Bill will only apply to pandemic-related arrears, the Code will apply to all commercial rent disputes, including those that fall outside the scope of the arbitration scheme.
High court interprets pre-employment on transfer provisions in articles
The High Court has provided useful guidance on the interpretation of a common provision found in pre-emption on transfer rights in a company's articles of association.
In the absence of specific provisions in a company's articles of association, the shares in that company are freely transferable by the members who hold them. But when a member wishes to transfer their shares the other members may prefer to acquire them, ensuring control of the company remains within the existing group and they do not find themselves sharing ownership with a new party with whom they may prefer not to be in business.
In Standing v Power  EWHC 1744 (Ch) the High Court had to interpret the pre-emption provisions contained in the articles of association of a company that was the ultimate holding company of Swindon Town Football Club.
The company had 100 shares in issue of which 85 were held by one shareholder and 15 by another. The majority shareholder gave notice of his intention to sell all his 85 shares to a third party. Following the pre-emption provisions, the company then sent an offer notice to the minority shareholder offering to sell that shareholder 13 of the transfer shares (ie 15% of 85).
The minority shareholder, believing it should have be offered all the shares, served a notice of acceptance purporting to accept a purchase of 85 shares.
The disagreement between the parties centred on the interpretation of a provision in the pre-emption rights which stated: "'The sale shares shall be offered to the members (other than the proposing transferor) as nearly as may be in proportion to the number of shares held by them respectively" [emphasis added].
The court had to decide whether this meant:
- that the number of shares to be offered to a shareholder was just the percentage of the shares to be sold under the transfer notice which is equal to that shareholder's percentage of all the shares (ie in this case, 15% of 85 shares = 13 shares); or
- that all the shares must be offered to the non-selling shareholders, divided among them in proportion to their respective shareholdings (ie in this case, where there was only one non-selling shareholder, 100% of the 85 shares).
The court acknowledged that, taken by itself, the provision in the articles was ambiguous since the word "them" could refer to "the members" (meaning all of the members) or the members other than the proposing transferor.
But the judge said that, taken in context, the only sensible interpretation was the second option above. If the first option was correct, it would render the provision entirely useless since the intention of the provisions was clearly that the transferring shareholder could be forced to sell to the other shareholders only if purchasing members could be found for all the shares.
Accordingly, the court held that the only sensible interpretation of the relevant provision in the articles was that the word "them" referred to all the members other than the proposing transferor. As a result, the minority shareholder should have been offered all 85 shares that were subject to the transfer notice.
The court went on to order that the offer notice be rectified so that it referred to 85, rather than 13, shares.
This decision provides useful guidance on the meaning of a common provision in articles of association. It is also an example of the court's approach to interpretation where an ambiguous provision could be given different meanings. The court confirmed that where one interpretation reflected the "normal and expected manner in which a [person] of business would contract" and the other produces a "nonsense", clearly the first one would be preferred.
This case was part of a long-running dispute between the two shareholders for control in relation to Swindon Town FC. As the judge noted, in serving a transfer notice the majority shareholder thought he could only be compelled to sell 13 of his shares to the minority and that he would be free to sell the remainder to the party of his choice. But his high stakes strategy failed when he tried to rely on the court interpreting the ambiguity in the articles in his favour.