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Corporate update: the latest corporate law developments May 2021

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In this month’s update for directors, secretaries and general counsels we:

  • look at whether any member of an LLP can be disqualified under CDDA1986;

  • consider the statutory requirements around inspecting a company’s register of members; and 

  • discuss the importance of complying with contractual notification provisions agreed between parties, particularly when those parties are experienced businessmen.

Any member of an LLP can be disqualified under CDDA1986

In Re Bell Pottinger Private Ltd [2021] EWHC 672 (Ch) the High Court held that any member of an LLP was potentially liable to disqualification proceedings under section 6 Company Directors Disqualification Act 1986 (CDDA1986) and that the application of section 6 was not limited to those members who sat on the LLP’s management board or whose position was equivalent to that of a company director.

The facts

The case arose out of a marketing campaign conducted by two members of Bell Pottinger LLP on behalf of Oakbay Investments PTY and the members’ alleged misconduct in relation to that campaign and the Oakbay account. Oakbay was owned by the Gupta bothers and the campaign was aimed at diverting attention away from attacks on them due to their connections with, and alleged undue influence over, the South African government. Bell Pottinger was accused of inciting racial tension, and operating fake Twitter accounts to mount racially driven campaigns.

As a result of their involvement with the Oakbay account the two members were removed as members of the LLP. Following the fallout from the campaign, the LLP lost several key client accounts and had its membership of the Public Relations and Communications Association terminated. It went into administration and then compulsory liquidation. The Secretary of State then issued disqualification proceedings against the two members under the CDDA1986.

Section 6 CDDA1986 provides that a director can be disqualified where their “conduct as a director of that company” makes them “unfit to be concerned in the management of a company”. Regulations apply that section to LLPs with the modifications that a reference to a company is to an LLP and a reference to a director is to a member of an LLP.

The two members applied to strike out the disqualification proceedings on the basis that Parliament only intended that those who are concerned in the management of the LLP should be subject to disqualification. They argued that, when it is applied to LLPs, the reference in section 6 to “conduct as a director of that company” should be read not simply as “conduct as a member of that [LLP]” but as referring to “conduct as a member of and in the management of that [LLP]”.

The decision

The court considered the wording of section 6 and said that the reference to “conduct as a director of that company” defines the relevant capacity in which the director is alleged to have misconducted themselves. The reference to “concerned in the management of a company” is the test of unfitness that the Court has to apply in relation to the director’s misconduct. The conduct is confined to allegations in relation to the company, whereas the test is whether that conduct shows the person to be unfit to be concerned in the management of any company.

Having reached that conclusion in relation to directors, the judge said that section 6 cannot have a different meaning when applied to members of an LLP. The only capacity that Parliament had available to it was that of a member of an LLP as the LLP Act only defines a member and there is no requirement to have a management board or any particular structure in an LLP.

Accordingly the judge held that all members of an LLP are potentially liable to face disqualification proceedings and that the conduct that can be relied on in those proceedings is anything done in the capacity of a member of the LLP.

What does this mean in practice?

The limited liability partnership structure is often used for professional service firms. It is common for large firms to have some form of management board to which the other members delegate authority for the day-to-day operation of the LLP. Junior members of the LLP in particular may feel they have little involvement in or control over the LLP’s management activities and so may feel it is unfair that they could face disqualification proceedings in those circumstances. But the judge stated that the protection for those junior members was that before bringing disqualification proceedings, the Secretary of State has to conclude that it was expedient in the public interest to do so. 

Inspecting the register of members

Every company is required to keep certain records and documents. This includes things like registers of the company’s members, directors and PSCs (people with significant control), as well as copies of directors’ service contracts, charges and board minutes. Many of these records must be made available for public inspection – this transparency being part of the quid pro quo for the company’s limited liability status which protects its participators. 

However, to protect the individuals whose personal details may be contained in those records, and to prevent the inspection right from being abused, a request to inspect certain records (principally, the register of members and the PSC register) must state certain information, including its intended purpose and details of anyone with whom the disclosed information will be shared. If the request does not comply with these requirements, the company may refuse inspection of the register. Since this procedure was introduced in October 2007 there have been a number of cases which have helped to shed light on when a company may lawfully refuse to comply with an inspection request. The latest is Sir Henry Royce Memorial Foundation v Hardy [2021] EWHC 714

The facts

In this case, the relevant company operated a charitable foundation aimed principally at preserving the legacy of Sir Henry Royce, the co-founder of Rolls-Royce. The company was run by a board of directors, elected by its members. The directors were all unpaid volunteers. The company had a ‘sister company’, the Rolls-Royce Enthusiasts Club (the Club) although in fact the two companies did not have a common membership. The board of each company could nominate a director of the other but, at the time of the trial in this case, there were no common directors. 

Mr Hardy was a member of company. He was also the finance director of the Club between December 2019 and April 2020. During that time he claimed to have discovered serious wrongdoing in the affairs of the Club which included allegations of fraud, theft and false accounting against some of the directors of the Club. Those individuals were also directors of the company. 

On 10 February 2020 Mr Hardy wrote to the company asking to inspect its register of members. In his letter, Mr Hardy stated that the purpose of that request was to convene a special meeting of the company’s members to explain the lack of an AGM, to distribute the annual accounts and to remove certain directors from office on the grounds that their alleged wrongdoing as directors of the Club had caused irreparable harm to the company. 

But that initial request did not state whether the information revealed by the inspection would be disclosed to any other person. On 13 February 2020 the company informed Mr Hardy by email that it was refusing him access to the register of members and that it would be applying to the court for an order that it need not comply with the request. Mr Hardy responded 15 minutes later stating that he had noticed that he had “inadvertently omitted” to state in his notice that he would not be making the information available to anyone else and that he had no intention of doing so.

The decision

The court held that Mr Hardy’s request to inspect the register of members was not a valid request and so made a no access order. 

By omitting to state in his request whether the information would be disclosed to anyone else (and, if so, to whom and for what purpose), Mr Hardy had failed to comply with the relevant statutory requirements. The court accepted that the phrase “I have no intention of making the information available to any other person” was sufficient to comply with the requirements and it was not necessary for the requesting party to say explicitly “the information will not be disclosed to any other person”. However, the court found that the omission of that information made the original request from Mr Hardy invalid: it did not contain all the information required by the statutory provisions. 

The judge then went on to consider whether the invalid request of 10 February could be corrected by the additional information provided in Mr Hardy’s email of 13 February 2020. He held that, given the short period (five days) within which a company must comply with a valid request or challenge it via the courts, the company needs to know where it stands when the request is made. If an error was discovered, a new (compliant) request could be made. But Mr Hardy had not done this and had instead sought to correct his initial request. As a result, the request made on 10 February was invalid and the company did not have to comply with it.

Notwithstanding that conclusion, the court went on to consider the purpose of Mr Hardy’s request and, in particular, whether seeking to remove directors from office due to their conduct in a different capacity (in this case, their conduct as directors of a different entity – the Club) could be a proper purpose. The judge said it was possible for this to be a proper purpose given that a person’s general conduct can reflect on particular institutions with which that person is connected. However, to do that it was necessary to go beyond simply making an allegation against the director in their capacity as a director of another company which, on its face, does not directly concern the activities of the subject company. In this case, Mr Hardy had not done this: there was nothing alleged against the directors in their capacity as directors of the company which would justify the request for details of the members to call a meeting for the purpose of removing them from office as directors of that company. Accordingly, in this case, that was not a proper purpose.

What does this mean in practice?

The case is a warning to those seeking to exercise their inspection right that failing to comply strictly with the statutory requirements will result in their request being refused. Given that the company is pushed into requesting a ‘no inspection’ order from the court in such a short time period, this failure could prove costly if the person making the invalid request is then ordered to pay the costs of the company’s successful court application.

Buyer was wrong to refuse to release monies from retention account

Another recent case has highlighted the courts’ desire to give effect to contractual certainty, particularly where the parties to those contracts are “experienced businessmen with the benefit of legal advice”.

The facts

The dispute in Arani & ors v Cordic Group Ltd [2021] EWHC 829 (Comm) arose out of the sale of a software company. Under the sale agreement the buyer agreed to pay £10.2m for the company’s shares. At completion, £2m of the consideration was paid into a retention account as security for post-completion warranty claims. The money held in the retention account was to be released to the sellers if no warranty claim had been notified to the sellers under the procedure set out in the agreement within 16 months of completion (the Release Date). A provision in the agreement stated that: “All sums payable by any party under this Agreement shall be paid free and clear of all deductions or withholdings unless such deduction or withholding is required by law.”

No warranty claim was notified by the buyer before the Release Date. However on the day after the Release Date, the buyer wrote to the sellers alleging breach of a number of the warranties in the sale agreement and refusing to release the monies from the retention account.

The sellers issued proceedings seeking an order for the release of the monies from the retention account. The buyer counterclaimed for breach of warranties and representations and also claimed that it was entitled to set off those counterclaims against the payment of the monies from the retention account.

The decision

The judge held that the sellers were entitled to summary judgment for specific performance of the agreement by the payment of the monies from the retention account to their solicitors. 

The judge said that the purpose of holding monies in the retention account was to provide the sellers with secure funds so they could get those monies without having to obtain and enforce a judgment debt. The only basis on which amounts could be held in the retention account beyond the Release Date was set out in the agreement and was dependent on the prior notification of a warranty claim. Given that no warranty claim had been notified, there was no basis for failing to comply with the mandatory requirement to release the monies from the retention account.

The judge went on to say that, even if the buyer’s letter alleging a warranty claim had been received before the Release Date, the buyer would not have been able to withhold the monies in the retention account since the letter did not comply with the contractual requirements for notifying a claim. Under the agreement, any notice of a warranty claim had to give “full particulars of the grounds on which the Warranty Claim under this Agreement is based”. But the judge characterised the buyer’s letter as merely reserving the right to bring proceedings, rather than specifying the claim that was actually being made. 

In addition, as noted above, the agreement made clear that amounts payable under it had to be paid in full with no set off. The judge noted that a right to set off may be excluded by clear and unambiguous agreement of the parties in the contract. In this case, the judge said the words in the agreement were indeed clear and unambiguous: they applied to all sums payable; they used the phrase “clear of all deductions or withholdings” – the very phrase which the Court of Appeal had previously held as being indicative of the exclusion of set off; and the only limited exceptions were those required by law – and there was no suggestion here that the buyer’s claim fell within that limited exception.

What does this mean in practice?

The judge clearly took a dim view of the buyer’s actions, stating that its letter alleging a warranty claim was “a last-minute tactic, designed to avoid having to pay the [sellers] the money in the Retention Account, in relation to matters of which the [buyer] had been aware” for over a year. The case is another reminder of the importance of complying with the contractual notification provisions agreed between the parties. The court is likely to require strict compliance with “carefully drafted provisions by experienced businessmen with the benefit of legal advice”. 

*Article first published in Accountancy Daily

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