In depth

Corporate update: the latest corporate law developments May 2022

Gateley Legal

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In this month’s update we consider:

  • examine an ambiguous contractual clause purporting to prevent oral variations to an agreement;
  • explain the new requirement for overseas entities that own UK land to register details of their beneficial owners at Companies House; and
  • consider when a director will be “knowingly concerned” in, and so liable for, a company’s breach of the financial promotion restriction.”

Contractual variation clause way ambiguous

In Integral Petroleum SA v Bank GPB International SA [2022] EWHC 659 (Comm) the High court had to consider whether a variation clause in a facility agreement prohibited oral modifications but found that the specific clause was ambiguous as to its effect.

Anti-oral variation clauses

Many contracts will contain a clause stating that the contract can only be varied by written agreement between the parties. This is an attempt to provide certainty and avoid future disputes as to what was or wasn't agreed between the parties.

There has previously been some debate about the effect of such a clause given that it is a well-established rule of English law that contracts can be made orally as well as in writing. So, it was sometimes argued that despite an 'anti-oral variation' clause, the parties could agree orally to vary the contract to remove (or at least waive) the anti-oral variation clause and then agree orally to an amendment to the contractual terms.

But in 2018 the Supreme Court upheld the validity of anti-oral variation clauses in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 confirming that the parties to a contract should be bound to the form of variation to which they have agreed. If that provided for variations to be in writing, then an oral modification would be ineffective.

The facts

In the current case, the clause in the facility agreement stated that: "any term of the Finance Documents may be amended or waived with the agreement of the Borrower or Lender in writing".

When the bank attempted to recover amounts due under the finance documents, the borrower argued that it was not in default because the bank had orally agreed to extend the relevant maturity dates.

The bank argued that any oral modification of the facility agreement was invalid due to the above variation clause which required all amendments to be in writing. The bank applied for summary judgment in its claim against the borrower.

The decision

The judge said that the meaning of the variation clause was ambiguous. It could mean:

  • that the variation had to be effected in a written document; or
  • that an oral variation was valid provided it was evidenced in writing.

The judge confirmed that when construing the relevant clause it was necessary to weigh the natural meaning of the language used against the factual context and commercial common sense. In this case, in relation to the factual context, the bank argued that the term sheet provided for a two-stage process with variations having to be made in writing. But the evidence of the borrower was that, previously, it had reached oral agreements with the bank which had then been reduced to writing.

It was only possible to resolve the weight which should be given to these conflicting arguments with oral evidence and cross examination of the relevant witnesses. So the court was unable to grant the bank's application for summary judgment on the matter and held that a trial was necessary to decide the matter.

Comment

The use of plain English and simplified language in legal documents should be encouraged. But this case is a useful reminder that simple language must still be unambiguous to be effective. Here it was not clear from the drafting that the parties had indeed intended to prohibit oral variations of the finance documents. 

New register of overseas entities owning UK property

A key element of the Economic Crime (Transparency and Enforcement Act) 2022 is a new Register of overseas entities owning property in the UK. Although originally announced by David Cameron as part of the May 2016 Anti-Corruption Summit in London, there was little action on progressing the Register until earlier this year when the war in Ukraine and related sanctions measures shone a spotlight on foreign ownership of UK assets.

The registration requirement

Once the registration requirement is in force, any overseas entity (such as a company or any other entity which is a legal person under the law by which it is governed) which owns a "qualifying estate" in the UK will have to register with Companies House before applying to register its title to that estate at the Land Registry.

A "qualifying estate" for this purpose is a freehold estate or a leasehold estate where the lease is granted for more than seven years.

The beneficial owners

The registration at Companies House must include details of the relevant overseas entity as well as information about its beneficial owners. The overseas entity must take reasonable steps to identify its beneficial owners.
An entity's beneficial owners are identified using similar criteria to those employed in the existing "PSC" regime which requires UK companies to identify those people with significant control over them. So, a beneficial owner of an overseas entity will be an individual or other legal entity that:

  • holds directly or indirectly more than 25% of the shares of the overseas entity;
  • holds directly or indirectly more than 25% of the voting rights in the overseas entity;
  • holds directly or indirectly the right to appoint or remove a majority of the overseas entity's directors;
  • has the right to exercise or actually exercises significant influence or control over the overseas entity; or
  • has the right to exercise or actually exercises significant influence or control over an entity which is not a legal person under the law of its jurisdiction (such as a trust, partnership or unincorporated association) where the trustees of that trust or the members of the partnership or unincorporated entity meet any of the above tests.

The information about beneficial owners which must be registered includes the person's name, date of birth and nationality as well as a residential and service address and the date on which the person became a registrable beneficial owner. Where the beneficial owners is the trustee of a trust, additional information relating to the trust must also be provided, including details of the trustees, the beneficiaries and the settlor.

After the registration

Once the registration is complete, the overseas entity will be given an ID by Companies House which it will then have to provide to the Land Registry with its application for registration of title to the relevant qualifying estate.
The overseas entity must update its registered information annually at Companies House.

Failure to comply

Before the end of the transitional period (which will be six months from when the new Register opens), the Land Registry will place a restriction on every registered title owned by an overseas entity where the property was acquired on or after 1 January 1999. The restriction will prohibit any "relevant disposition" (meaning, broadly, a transfer, a lease of more than seven years or a legal charge) unless the overseas entity is a registered overseas entity at the time of the disposition or it is exempt.

It will also be an offence for an overseas entity to fail to comply with a notice from Companies House requiring it to apply for registration. Overseas entities will have six months from the date of a notice to make such an application.

Comment

It is not yet known when the new provisions introducing the registration requirement will come into force. It may take some time for the relevant systems to be established at Companies House and the required staff to be recruited and trained. Once the provisions are in force, there will be a six month transitional period for overseas entities that acquired property after 1 January 1999 to register. But entities caught by the requirement cannot avoid it by disposing of the relevant property before the requirement comes into force: they will still need to register if they owned property on 28 February 2022 even if they have since disposed of it.

Court of appeal clarifies when director is 'knowingly concerned' in breach of finacial promotion restriction

In FCA v Ferreira [2022] EWCA Civ 397 the Court of Appeal clarified the circumstances in which a person will be considered to be "knowingly concerned" in, and therefore liable for, a beach of the financial promotion restriction in section 21 Financial Services and Markets Act 2000.

The financial promotion restriction

The financial promotion restriction provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity. There is an exception for communications which are made by, or have been approved by, an authorised person.

In addition, a person can also be found liable if they are "knowingly concerned" in a breach of the financial promotion restriction and either they profit from, or others suffer a loss from, that breach.

A person who breaches the financial promotion restriction can be punished by imprisonment and/or a fine. A person who is "knowingly concerned" in such a breach can be ordered to pay compensation to those affected by the breach.

The facts

Mr Skinner and Ms Ferreira were two of the directors of Our Price Records Limited. The company made two share offerings in 2014 and 2015 from which it raised about £3.6 million from 259 retail investors. However, the company never traded in any material way and in 2017 it went into administration.

When the FCA subsequently brought claims against those involved in the share offerings, it was agreed that the company had breached the financial promotion restriction. In her defence to a claim that she was "knowingly concerned" in that breach, Ms Ferreira argued that she did not know the breach had occurred. She had trusted her co-director, Mr Skinner, to organise the share offering in a legally compliant way and believed that the materials communicated to investors had been approved by the company's accountants. In fact, the company's accountants were not authorised to approve the communications and had been tricked into doing so by Mr Skinner.

The decision

At first instance, the judge found that Ms Ferreira did not know that the company's investment communications had not been validly approved but held that this was irrelevant. She had known that a relevant communication was being made and, the judge said, for a compensation order to be made against her, it was not necessary for her to also know that the communication had not been approved by an authorised person. The judge ordered Ms Ferreira to pay about £2.7 million to the FCA for the benefit of investors.

The appeal

Ms Ferreira appealed the decision, arguing that in order to be "knowingly concerned" in a breach of the financial promotion restriction, a person must know that the relevant communication was not approved. The Court of Appeal agreed with Ms Ferreira, holding that knowledge of the facts which make the act complained of a breach of the financial promotion restriction must include knowledge of the factual circumstances that prevent a potentially relevant disapplication from operating.

In his leading judgment, Lord Justice Snowden illustrated his reasoning with the following example: imagine a statute prohibited any communication inviting investment activity but also provided that this prohibition did not apply at weekends. In this case, the judge said, it would not be sufficient to establish that a director was "knowingly concerned" in a breach of the prohibition if the director knew that their company had placed an advertisement inviting an investment in a newspaper.

On its own, that fact would not indicate whether or not the prohibition had been breached. The missing fact which the director would also have to know is that the advertisement was not in a newspaper published at a weekend. So, in the present case, it was not enough for the director simply to know the facts giving rise to the breach – ie that an investment communication had been made. She also had to know the facts that made it a breach – ie that the communication had not been approved by an authorised person and therefore the relevant exception did not apply.

Comment

Directors of companies contemplating a fundraising will welcome the clarification provided by the Court of Appeal. The first instance decision could have resulted in an unreasonably wide range of people being liable for a breach of the financial promotion restriction: any employee or agent involved in sending an invitation to potential investors to invest in a company could have faced potential liability if the invitation was not validly authorised, regardless of whether the employee or agent was able to discover if it had in fact been validly authorised. The Court of Appeal's decision confirms that being "knowingly concerned" in a breach is different to simply being "concerned" in it.

This update was first published on Accountancy Daily.

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