Recruitment Industry - Restrictive Covenants and the Internet

Can restrictive covenants still be enforceable when so much information about candidates and recruiting clients is available on the internet?  Yes, said the High Court in a recent case about the education recruitment market but it has  broader relevance for the recruitment industry.

In East England Schools v Palmer and Sugarman Group Ltd the education recruitment market was said to be “promiscuous”, i.e. with no loyalty between candidate teachers nor schools with the recruitment agencies they deal with. The case highlighted how the internet has profoundly changed the way agencies, recruiters and candidates operate. The question was whether the change has been so dramatic that agencies can no longer claim to have close business connections protectable from recruitment consultants’ activities when they switch jobs.

The High Court Judge hearing the case found that after the defendant employee had moved jobs she had solicited and dealt with (directly and indirectly through her new colleagues) teacher candidates and school clients that she had made connections with whilst working for her old employer. The Judge found her activities to be in breach of  her restrictive covenants.  

However, the employee and her new employer (also a defendant in the case) argued that the restrictions were not enforceable in the first place as the old employer had no property in those connections worthy of protection. This was because the information about candidates and recruiting schools was widely available on the internet and through social media sites. Nor was there any loyalty between candidates and schools to the agencies as they each registered with multiple agencies and shopped around for an agency who could meet their immediate needs on a case by case basis. 

Digging deeper into the workings of the market – important because each restrictive covenant enforcement case is decided on its specific facts  – the Judge recognised that relations between candidates and/or recruiters and recruitment agencies were “fragile” but held that a relationship  between a  recruiter (or job seeker) and the recruitment consultant could still be the deciding factor on who they chose to help make a match. The consultant can acquire knowledge  not publicly available, such as likes and dislikes, special requirements etc. Looking at the particular role and ways of working of the defendant employee and the relationships with the old agency’s clients, the Judge found that she could have such relationships and upheld the restrictions in principle. They were also drafted in a way that was enforceable.  

As a result, the employee and her new employer were ordered to pay damages to the old employer for the catalogue of placements made in breach of the restrictions. 

Employment Law in 2014: What to Expect - Equal Pay

Equal Pay

Expected that employment tribunals will be required, in accordance with the Enterprise and Regulatory Reform Act 2013, to order pay audits where an employer is found guilty of breaching the equal pay provisions under the Equality Act 2010. 

Employment Law in 2014: What to Expect - National Minimum Wage

October 2014 - National Minimum Wage

Potential rise in national minimum wage depending on recommendations of the Low Pay Commission and the economic climate.

Employment Law in 2014: What to Expect - Sickness

Spring 2014 - Sickness

Introduction of a new government funded independent assessment service to assess ill health. The aim is to introduce this in April, but it may be towards the end of 2014. Its remit will include free assessment by occupational health professionals for employees who are off sick for four weeks or more, and advice for employers on how to assist employees who are long term sick to return to work.

Employment Law in 2014: What to Expect - Statutory Sick Pay

6th April 2014 - Statutory Sick Pay

 

• Increases from £86.70 per week to £87.55 per week.

• Abolition of the strict record keeping requirements, however employers will still be required to maintain records but in a more flexible way and for a shorter duration. 

Employment Law in 2014: What to Expect - Financial penalties

6th April 2014  - Financial penalties

Tribunals will have the power to impose a financial penalty on losing employers of 50% of the value of the award, with a lower threshold of £100 and an upper limit of £5,000. It is not automatic. 

Employment Law in 2014: What to Expect - Discrimination

6th April 2014 - Discrimination

Abolition of discrimination questionnaires – the procedure by which an individual is able to obtain information from his or her employer about discrimination, and then subsequently use that information as evidence at an employment tribunal hearing. 

Employment Law in 2014: What to Expect - Flexible working

6th April 2014 - Flexible working

The right to request flexible working is extended to all employees with 26 weeks’ service, and not just those employees who have children or are carers. The statutory procedure for dealing with flexible working requests is replaced with a duty to deal with requests in a reasonable manner. 

Employment Law in 2014: What to Expect - ACAS

6th April 2014 - ACAS

Introduction of mandatory conciliation – the Enterprise and Regulatory Reform Act 2013 makes it a requirement that claimants must lodge details of their proposed employment tribunal claim with ACAS before initiating proceedings. ACAS will offer pre-claim early conciliation with a conciliation officer for a period of one month. 

Employment Law in 2014: What to Expect - Statutory Maternity, Paternity and Adoption Pay

6th April 2014

Statutory maternity, paternity and adoption pay increases from £136.78 to £138.18 per week.

Employment Law in 2014: What to Expect - Pensions

1st April 2014 - Pensions

The time period for employers to auto-enroll eligible jobholders into a qualifying pension scheme increases from one month to 6 weeks. 

Employment Law in 2014: What to expect - TUPE

31st January 2014 - TUPE

The Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 (SI 2014/16) makes changes to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE). 

The key changes which will come into effect are as follows:

• Clarification that where there is a service provision change, the activities carried out post-transfer must be “fundamentally or essentially the same” as those activities carried out pre-transfer.

• A change in location of the workforce post-transfer can be an economic, technical or organisational reason entailing changes in the workforce. This prevents a genuine place of work redundancy from being automatically unfair. 

• The obligation to provide employee liability information to the transferee will be extended from 14 to 28 days before the transfer. 

• Micro-businesses (less than 10 employees) will be allowed to inform and consult directly with affected employees, where there is no recognised union or existing appropriate employee representatives.

• Collective agreements - transferees may renegotiate terms derived from collective agreements one year after the transfer, provided the changes are no less favourable to the employee. In addition, a transferee will not be affected by any subsequent variations or new collective agreements relating to the transferor following the transfer.

The Trade Union and Labour Relations (Consolidation) Act 1992 will be amended to make clear that consultation on collective redundancies can start before the transfer provided the transferor and transferee agree and the transferee has carried out meaningful consultation.

Buying and Selling Businesses – Changes to the Employment Rules

There is some good news for those buying and selling businesses – the Government is easing some aspects of the ‘TUPE’ employment protection legislation that applies on the transfer of a business although the Government is not going so far as some business campaigners had hoped. 

What is changing? 

The changes relate mainly to redundancies and altering employees’ terms and conditions.  

From 31 January 2014 it will be easier for in-coming employers to have a dialogue with the out-going employer’s staff about possible redundancies. Crucially, time spent by the new employer consulting with the old employer’s staff before the transfer takes effect will count towards the requirement  to consult employee representatives about redundancies – if the old employer agrees and all the safeguards are met. 

The law is also being altered so that it will be less risky in future to make staff redundant where the new employer wants to relocate the acquired operation.

The TUPE legislation is also triggered when there is a change in the contractor providing services as well as on a more conventional sale of a business.  Despite intense lobbying from some business representatives, a switch in service provider  (for example, on an out-sourcing or  re-tendering exercise) will still be covered by TUPE but only where the services provided are fundamentally the same post transfer, bringing the legislation in line with recent case law.                                     

The law is being amended in other ways, which are intended to widen the circumstances where in-coming employers can make changes to employees’ terms and conditions, including those derived from collective agreements. 

What will be the impact?

The headline change, facilitating in-coming employer consultation about redundancies before a transfer takes place, is likely to cut some of the risk associated with many transfers. 

However, the changes intended to make it easier to implement post-transfer changes to terms and conditions tread a sometimes tortuous path between reform and complying with overriding European Community law. As a result, there is likely to be substantial satellite litigation testing the new law. The changes, therefore, do little to reduce the need for in-coming and outgoing employers to rely, where they can, on warranties and indemnities to meet their business needs. 

Further advice

For further advice on the practical implications of the new TUPE law, please contact FWJ

Developments in Employment Law 2013: An Overview

2013 was a year that kept employment lawyers and HR professionals on their toes with a number of significant developments. The purpose of this article is to give an overview of those key changes. In future reports we will be examining the most noteworthy in further detail.

February kicked off the year with a rise in the cap for unfair dismissal compensation (the “compensatory award”) to £74,200. In most cases, this is the maximum amount the Tribunal can award taking into account the loss suffered by an employee, such as for lost wages. There is a second element to an unfair dismissal award called the basic award, this is a statutory calculation and is currently capped at £13,500, From July 29th, an additional cap was added to compensatory awards so that the maximum compensatory award for unfair dismissal is now the lower of £74,200 or 52 weeks' pay. The cap does not apply to dismissals in relation to whistleblowing, for certain health and safety reasons or where there is unlawful discrimination. This new development should make it easier for employers to quantify the actual value of a claim, particularly as most employees do not earn anything close to £74,200 per year. However Compromise Agreements Ltd, a London based law firm, has sought a judicial review of the one year salary cap claiming that it indirectly discriminates against older people. The argument is that older people are more likely to be unemployed for longer than one year, so the cap restricts their access to justice. We are awaiting an outcome on this.

On March 8th, unpaid parental leave rose from 13 to 18 weeks. This means that any employee who is the parent of a child under the age of 5 may take up to 18 weeks’ unpaid parental leave up until the child’s 5th birthday. The right also applies to adopted children. For those children who are disabled, the right extends up until that child’s 18th birthday and remains unchanged from before.

Redundancy grabbed headlines last year, and not just because of the state of the economy. April 6th saw changes to collective consultation obligations. Previously where an employer was proposing to dismiss as redundant 100 or more employees within a 90 day period, the requirement was to consult for a minimum of 90 days before the first dismissal took effect. From April, the consultation period was reduced to 45 days. This is a significant benefit to employers. 

In May, employers were then thrown into confusion with the Employment Appeals Tribunal case of USDAW v Ethel Austin Ltd (in administration) and another case UKEAT/0547/12; 0548/12 (known as the “Woolworths case”). Section 188 (1) of the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”) states that the duty to consult applies only where 20 or more dismissals are proposed at one establishment. However, there is a discrepancy between TULRCA and the Collective Redundancies Directive which it purports to implement. The Directive contains no "establishment" requirement.  Consequently the Employment Appeals Tribunal held that, owing to the fact that TURLCA is incompatible with the Directive, the words "at one establishment" must be disregarded for the purposes of any collective redundancy exercise involving 20 or more employees. This is very bad news for employers. 

Previously an employer could avoid collective consultation obligations if it was not proposing to dismiss as redundant 20 or more employees at any one location, and each location could be shown to be a distinct entity. Now if an employer is proposing to dismiss as redundant 20 or more employees across their business as whole, no matter where their staff are located or how disparate, collective consultation will be triggered. 

The Government has been granted leave to appeal against this decision.

June saw a number of significant developments brought in by the Enterprise and Regulatory Reform Act 2013, most notably changes to whistleblowing protection. Employees had increasingly been using the Public Interest Disclosure Act 1998 (“PIDA”) to bring complaints against their employers about breaches to their own employment contracts, rather than reporting serious wrongdoing within their organisation. There was nothing specifically preventing this in the legislation, but it was not the original aim of PIDA. It is an attractive route for employees as whistleblowing claims do not have a compensatory cap nor does the 2 year qualifying employment period to bring a claim apply. In an effort to discourage this practice, PIDA has been amended to make clear that in order to obtain protection under the act, an individual must reasonably believe that a disclosure he or she makes is in the public interest. 

There was a previous requirement that any disclosure had to be made in good faith. In an effort to move away from focusing on the motivation of the individual making the disclosure, this requirement has been removed. Instead, compensation can be reduced by up to 25% where it can be shown that a disclosure was not made in good faith.

There are often genuine concerns from individuals that if they do “blow the whistle”, not only will they be unfairly targeted by their employer, but also picked on by their colleagues. From June, employers can now be held vicariously liable where their employees victimise a colleague because he or she made a protected disclosure. The employer will be deemed to have carried out these acts unless it can show that it took all reasonable steps to prevent the victimisation occurring. 

Also from June, employees no longer need the normal minimum qualifying service of 2 years to be able to claim unfair dismissal where the reason for dismissal is their political opinions or affiliation.

July brought in a whole host of changes, one of the most useful for employers is the introduction of pre-termination negotiations. The aim is to allow an employer and an employee to have confidential discussions; that is “off the record”, to end employment on mutually agreed terms without fear of reprisal in the Employment Tribunal. An employer may have a conversation with an employee about a performance or capability issue, without there being an existing dispute, and raise terms of proposed settlement. These conversations will not be admissible at a subsequent ordinary unfair dismissal hearing. There are a number of pitfalls to be aware of, such as these provisions do not apply to discrimination issues or automatic unfair dismissal (e.g. participation in trade unions activities) but it is nevertheless a useful tool for a manager when used correctly. 

July also marked a historic shift in the employment law landscape with the introduction of fees into the employment tribunal system. When the industrial tribunals were originally established the idea was that it would be informal, cost effective, anyone could represent him or herself and have access to justice. However, as the years have gone by, there is a strong perception that there are many vexatious litigants and the system itself is bogged down. The hope is that fees will encourage the use of alternative means of settlement, discourage unmeritous claims and provide a way of funding the tribunal system.

There are now two levels of claims. For level 1 claims, such as holiday and redundancy pay, the issue fee is £160 and the hearing fee is £230. For level 2 claims, which are the more complex such as discrimination and unfair dismissal, the issue fee is £250 and the hearing fee is £950. There are additional fees for the Employment Appeals Tribunal. There is a widespread remission system in place, so those receiving certain benefits or below a specified income threshold, will not have to pay. This may well apply to many claimants, as a significant number will be unemployed.

It is a little too early to ascertain whether the fee system will lead to a long-term decline in the number of employment claims, however early indications are that it has had an noticeable impact.  UNISON has launched a judicial challenge to the fee regime, and we will keep you posted on developments.

September heralded the introduction of a new type of employment relationship called “employee shareholder”. In return for shares within a company, employees give up some of their employment rights, most notably unfair dismissal (except in health and safety cases, automatically unfair cases, or where the dismissal is discriminatory) and the right to claim a statutory redundancy payment. The first £50,000 worth of shares (value at acquisition) is free from capital gains tax on disposal. So far, take up has been poor but it is hoped that it will appeal to start-ups and high growth businesses. 

October marked the annual increase in the national minimum wage. For workers who are aged 21 or over, the rate is £6.31 per hour. The youth rate for workers who are aged 18 but under 21 is £5.03 per hour. The young workers' rate, for those workers who are aged under 18 but who are no longer of compulsory school age, with apprentices excepted, the rate is £3.72 per hour. The apprentice rate, for apprentices who are aged under 19 and apprentices aged 19 or over but in the first year of their apprenticeship, the rate is £2.68 per hour.

The year concluded with the publication of the draft TUPE amendment regulations.

2013 has been an extremely busy year. In future articles will be exploring the issues raised here in more detail. We will also be looking at some important 2013 cases and their practical impact, such as the calculation of holiday pay and overtime, how to deal with holiday for those who are on long term sickness absence and the right to be accompanied at disciplinary /grievance hearings. 

If you would like assistance or further advice on any of the matters raised in this article, or any other employment issue, please contact Sally Bradshaw.   

Prepacks and reporting to creditors: What does the new SIP16 mean to you?

The new Statement of Insolvency Practice 16 (SIP 16) “Pre-packaged sales in administration” comes into force on 1 November 2013.

Insolvencypractitioners who negotiate sales of all or part of a distressed company’s business and assets with a proposed purchaser prior to their appointment, with a view to the sale being completed on or shortly after their appointment, will be familiar with the requirement to report on the terms of the sale to creditors: the first version of SIP16 has been effective since 1 January 2009. However unsecured creditors have continued to criticise the process of pre-packs and argue that the information about the sale is too little, too late. New SIP 16 aims to address some of this criticism.

The importance of complying with SIP 16 is well understood by insolvencypractitioners and the emphasis of new SIP 16 is to ensure that creditors and other interested parties retain confidence in the professionalism and independence of insolvency practitioners and the benefits of using the administration process. To ensure this independence, insolvency practitioners should take care not to advise the directors but recommend the directors obtain their own professional advice about the options facing a distressed company.

It is clear that the new SIP 16 is looking for greater transparency and accountability from insolvency practitioners in their notification to creditors and the administrators’ proposals. The list of information to be supplied to creditors has not substantially changed, however insolvency practitioners will be required now to analyse and evaluate the information. For example, what were the outcomes of any consultation with major creditors or any marketing activities?

To address a major concern voiced by creditors, there is considerable focus on the price paid for the business and assets and their valuation. The basis of the valuation and the reasons for adopting it must be given. Any discrepancy between the valuation and the sale price must be explained.

New SIP 16 also aims to accelerate the information process for the benefit of creditors. The present requirement to provide a detailed explanation and justification of the prepack sale has been given a new deadline of within 7 calendar days of the transaction. If this was not challenging enough, insolvency practitioners must add their confirmation that the intended statutory purpose can be achieved by the prepack sale and that the price is the best that could reasonably be obtained in all the circumstances. The increased transparency of the valuation process will be of great assistance to insolvencypractitioners in the making of these judgments.

More explanation has to be given for any gaps or delays in the information to creditors: if no marketing was done, a reason must be given. If the first notification is not given to creditors within 7 days of the sale, the reasons for such delay must be supplied.

The other common criticism of prepack sales, that the purchaser has been involved in the business being sold, is addressed by various additional disclosure requirements contained in the new SIP 16. The importance of the company’s directors obtaining their own independence advice throughout the sale process is emphasised in SIP 16.

The FWJ Insolvency team has considerable experience of prepack sales and can advise insolvency practitioners or purchasers on all aspects of any insolvency sale or creditors who have any concerns about the conduct of a business sale. FWJ can also advise the directors or former directors of a distressed business throughout all stages of any insolvencyprocess, upon any proposed sale or in connection with any investigations into their conduct as directors or claims against them.

Does Providing Professional Advice to a Limited Company put the Advisor at Risk?

The answer is generally no. Giving advice in a professional capacity to a limited company does not normally make someone a shadow director. However, you may be more at risk in certain situations - for example as an in-house lawyer or a financial adviser.

To minimise risk liability a person concerned should:

1. Ensure that all business decisions are properly taken by the board;

2. Ensure that any advice given does not take the form of a “dictat”;

3. Avoid taking control of the financial affairs of the company you are giving advice to;

4. Always make sure that minutes of board meetings reflect that decisions have been made by the board;

5. Always ensure the minutes reflect the capacity you are attending in (i.e. not as a director – for example as an advisor to the board).

There have been instances where management consultants have been disqualified and held to be de facto directors but the above should help avoid this situation arising.

What is meant by being involved in the “management” of a company?

The meaning has been interpreted extremely widely. There are no hard and fast rules as to what it means as every company is run differently. The courts look at matters on a case by case basis to determine whether a person’s role is effectively involved in the management of a business rather than that of an employee.

However, there are indicators that a person is acting beyond the remit of a mere “employee” and is effectively involved in the management of a business:

(i) Being a signatory on the company bank account;

(ii) Attending board meetings;

(iii) Being involved in strategic planning;

(iv) Being the “go to” person for customers and clients;

(v) Otherwise making decisions that no other person can make and/or having no one to account to.

What is a Director?

A “Director” is not generally defined in legislation, but relates to any person occupying the position of director by whatever name called. This can include senior managers, partners, trustees or governors. Conventionally, a director appointed to a company’s board and registered at Companies House is referred to as a De Jure director.

A director will always include non-executive directors who, although not having a role in the company’s day-to-day affairs, have identical responsibilities to the executive directors (i.e. the active directors) in respect of company affairs and duties under the Companies Acts.

Other individuals may also be defined as a director and therefore be subject to the same responsibilities and requirements of ordinary De Jure directors. These generally fall into one of two definitions, either a “Shadow Director” or a “De Facto Director”.

“Shadow Directors” are specifically included within the definition of a director by statute, which describes such persons as, “a person in accordance with whose directions or instructions the directors of a company are accustomed to act,” although this excludes roles where the directors acted in reliance of an individual acting in a professional capacity (e.g. an accountant). “De Facto Directors” are not generally defined by the legislation but are well recognised in common law as comprising those individuals who act as a director even though not validly appointed as so.

“Help: my client’s gone bust!”

We all have a pretty good idea of what this phrase means, but what are the most common types of insolvency that you might meet among your clients? As someone who is owed money by a client who has ‘gone bust’, what does this mean for your business and what can you do?

Types of insolvency

There are a number of possible insolvency procedures that may apply if a business has ‘gone bust’. If your client is a company or a limited liability partnership (it has “Limited”, “Ltd”, “PLC” or “LLP” at the end of its name) the most likely occurrence is that it has entered administration,  liquidation or a company voluntary arrangement. If your client is a sole trader or partnership, the insolvency more commonly will be that of an individual, such as bankruptcy.

So many different terms for what can seem to be the same thing; but each procedure means something different for the business and its creditors. Depending on the first procedure entered into, it is possible that a business may move between insolvency procedures over time. Some common types of insolvency are:

• Administration is a ‘rescue based’ procedure: the primary statutory purpose is to rescue the business as a going concern. This may be done by the administrator taking over the trading of the business and/ or by selling the valuable part of the business and its assets to a new owner to raise money for creditors. The administrator is under a duty to consider the interests of the all the creditors when making any decisions about the company or its assets.
• Liquidation is a ‘terminal’ procedure: the business is being wound up, the assets realised for the best possible price and the proceeds distributed to creditors. A company may enter liquidation voluntarily upon the resolutions of its shareholders and creditors (company voluntary liquidation, “CVL”) or compulsorily by the order of the court upon a creditor’s petition (compulsory liquidation, “CL”). In CVL, these resolutions will include the appointment of a liquidator. The Official Receiver is often first appointed liquidator in CL but may later be replaced by an Insolvency Practitioner (“IP”) from a specialist firm. You may also come across a members’ voluntary liquidation (“MVL”), which whilst terminal is a solvent procedure.
• A company voluntary arrangement (“CVA”) is a contractual arrangement between the company and its creditors for the payment of the company’s debts (or an agreed part) over an agreed period of time. A supervisor is appointed to monitor the company’s performance of the terms of the CVA.
• Bankruptcy is the terminal procedure for individuals and, as for corporate entities, can be commenced voluntarily by the debtor or by order of the court on the application of the creditor. A trustee in bankruptcy, possibly or initially the Official Receiver, is appointed in respect of the bankrupt’s assets and affairs. Individuals may also agree individual voluntary arrangements with their creditors, as with companies this is a contractual commitment to pay debts over time.

Notification and next steps

You may first become aware that a client is in difficulty from the client itself. If this is the case, ask who the IP appointed is, in order that you can inform them of your interest as creditor. However, the administrator, liquidator or trustee will be examining the records of the business to identify creditors and will contact you on his appointment. This notification will tell you what type of insolvency procedure applies or is being proposed (for example a CVL or CVA) and what is your entitlement to vote.

If there is an intended insolvency and you have an entitlement to vote for or against it, the notification will include a proxy form for voting purposes and a proof of debt form. The value of your vote will reflect the amount of the debt you say you are owed. Be aware that there are strict deadlines for responding to these notices. You may also have the ability to vote at different stages during an insolvency process.

After any insolvency appointment, you will only be entitled to share in any money realised by the IP (a “dividend”) if you have submitted a proof debt form which then will be used to establish the amount of your claim. When you receive a notice of intended dividend, note again the specific deadlines for returning the requested information in order to have a share in the dividend.

Be aware that the interval between being notified of an insolvency procedure commencing and being notified of an intended dividend can be extensive. As a creditor you are entitled to regular periodic reports on the progress of the conduct of the procedure and the likelihood of any dividend.

Creditor claims

The primary concern when a client ‘goes bust’ is how are you going to get paid.

There are well established rules for the ordering of different types of creditor claims in an insolvency. Unsecured creditors, typically including suppliers such as you, rank lowest in the order of payment and will only share in a dividend after all other categories of creditor have been paid in full. Amongst all unsecured creditors, everyone will have the same proportion of debt paid; for example if the dividend is ‘5 pence in the pound’, you will receive 5 pence for every pound you are owed.

This dividend can be disappointing. Your recoveries may be enhanced if you have a guarantee in respect of the client’s payments that you can enforce; if you can set off any amounts you owe the client against the amount you are claiming, but note there are special rules relating to set off in insolvency or if you hold deposits that you can apply against outstanding payments. 

If a company is in administration, one thing you cannot do is start or continue legal proceedings for the payment of any debts.

Some further thoughts

Does your contract with the client continue in insolvency? Liquidation automatically terminates a contract, but look at what your contract provides in respect of other insolvency events.

If you are supplying staff who are crucial to the continuation of a business in administration you may find that the administrators are willing to continue paying for them during the administration, but not for the period before. If the administrators sell the business, you may be able to negotiate with the purchaser that they take over your contract with the client and whether they would be willing to pay for any arrears.

Do you have insurance for bad debts that you can claim under?

What happens to your contract with the worker? Are you still required to pay the worker or the worker’s tax or national insurance contributions even if you are not paid by the client? (Note that the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (‘the Regulations’) prohibit you from withholding payment from temporary workers you supply to clients on the basis that your client has not paid you, so this option will only be available if the workers are entitled to and have ‘opted out’ of the Regulations.) Does the worker receive benefits such as on-site accommodation, if this is withdrawn, do you have any further responsibilities?

All IP’s conduct is governed by the laws of the relevant insolvency procedure and the rules of their regulatory body. If, however, you have any concerns about any IP’s conduct of a matter, as a creditor you may be able to require the conduct to be investigated.

Any questions?

If you have received notification that a client has ‘gone bust’ and are unsure what to do next or need any assistance with any claim against an insolvent business, please feel free to contact someone in Francis Wilks and Jones LLP’s insolvency team.

 

The Importance of a Shareholders’ Agreement

Year on year many small limited companies are successfully set up by family members, friends and former colleagues with great business ideas, yet for some such happy beginnings may not last. Disputes may arise shortly after the company’s birth or many years after, often as a result of changes in the strategy and management of the company.  Ranging from the differing or competing business interests of individual shareholders to the implementation of a contentious dividend policy creating an contentious salary disparity between shareholders, these disputes can have serious financial implications and can cause irrevocable damage to a small business.  Despite this fact, the drafting of a shareholders’ agreement, the pre-nup of the corporate variety, is often way down the to-do list when individuals decide to start-up a company.  Ironically, a well drafted and structured shareholders’ agreement can provide a company and its shareholders with the very protection and flexibility it needs to flourish and grow in a dispute free environment.

At FWJ, we are seeing an increasing number of boardroom disputes or disgruntled shareholders as businesses face ongoing difficult trading conditions.  These conflicts between directors and/or shareholders can seriously destabilise a business by distracting valuable management time away from the essentials of attracting customers, delivering the product and maintaining cashflow. We can, of course, assist parties in progressing a claim against a business partner, be it a co-director, another shareholder or as an investor against a single director or the entire board, or by helping parties arrive at a satisfactory settlement of any such dispute, but these actions can be slow, divisive and expensive.  As with your domestic arrangements, forward planning is the answer. So what is the best preventive treatment?

When setting up a new business, or becoming involved as a new director or shareholder-investor of an existing business it is always best practice to record in writing the internal agreements that will govern the relationship between you: how are the decision making powers divided between you?  How are they challenged?  How can you replace a director or shareholder?  How do you get your value out of the company in future? No-one wishes to appear to be uncommitted or planning for failure, but time and again, these questions, if not thought about and the parties’ agreements recorded, will have the capacity to cripple a business if they occur at a later stage.  As financial pressures on a company or its directors or members increase, so these issues become more prominent.  There is no need to wait until a problem actually occurs; would your company benefit from an interim health-check?  A full, open discussion between all the relevant parties may be difficult at the outset, but could result in a robust organisation containing committed and confident members who trust each other and are motivated to maintain their investment of time, money or skills for the greater benefit of the company and its trading counterparties.

If you are about to enter into a new or significant commercial relationship or, as a financier, you are looking at taking on a new client, or simply as part of your regular client audit, ask if they have adapted their articles to reflect how the business is intended to run in reality, rather than just adopting the statutory Model Articles or some company incorporation agent’s standard form that does not take into account this company’s specific circumstances or needs.  Is there an agreement between the shareholders governing the scope of shareholder influence and control of the distribution of the company assets either on an ongoing basis or on a sale or break up?  From a financier’s objective, would you be more attracted to a business where the owners and management demonstrated in their business plan and constitutional documents that they were well prepared and forward-looking in their housekeeping as well as their commercial thinking?

FWJ’s Shareholders and Directors Advice team can assist your company, or your client,
in developing structural documents such as modified articles of association or shareholder agreements suitable for your business needs. It is recognised that further capital outlay, at this difficult time, may not be attractive, but our experience of dealing with disputes where no prior agreements are in place indicates that there is merit in making this investment. Whilst having a shareholders’ agreement is not the complete inoculation against the problem, such an agreement, properly drafted, can help structure discussions between parties and assist in the effective negotiation of a pragmatic solution to enable the company to survive the difficult market conditions.

For more information on  the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact Andy Wilks  0207 841 0390.

Directors' Duties – The Basics and the Risks

Directors' duties were codified by Part 10 of the Companies Act 2006:

1. Chapter 1 of Part 10 (sections 154-169) sets out the laws relating to company Directors (appointment, register and removal).
2. Chapter 2 of Part 10 (sections 170-180) sets out the statutory duties on Directors.

The provisions of the Act extend to all Directors, including shadow Directors (being those who are not appointed Directors but whose decisions the company follows) and de facto Directors (those who act as Directors although they have not been formally registered as a Director at Companies House).

The main statutory duties of a Director under the Companies Act 2006 are as follows: 

1.         Section 171 – Duty to act within powers – Directors should not exceed the powers conferred on them by the company’s Articles of Association nor should the Company exceed (at the Director’s direction) what it is allowed to do in its Memorandum of Association.

2.         Section 172 – Duty to promote the success of the company – a Director must act in the best interests of the company and for the benefit of its Shareholders having regard to the likely consequences of any decision. This includes considering the interests of employees, business relationships with suppliers, customers and others, the impact on the community and environment, maintaining the reputation of the company and acting fairly between members of the company. 

3.         Section 173 – Duty to exercise independent judgement – As the company is a completely separate entity, its Directors must consider all decisions independently from their own interests, any professional advice received or any third party influences.  Directors have a duty to personally consider whether each decision taken is in the company’s best interests, rather than just relying on third party advice or influence as authority for their subsequent decisions. 

4.         Section 174 – Duty to exercise reasonable skill and care and diligence – Directors should act in a manner that any reasonably skilled Director would generally act in their particular area of management.  Directors should attend board meetings (or as many as reasonably possible) to ensure good corporate governance and supervision of their fellow Directors and to ensure the correct management of the company’s affairs.   Ignorance of decisions taken and lack of participation is often the catalyst for Director disqualification proceedings where Directors fail to act on information they ought reasonably to have been aware. 

5.         Section 175 – Duty to avoid conflicts of interest - Directors must avoid situations where they have or could have a direct or indirect interest that conflicts or may conflict with the interests of the company.  Where a conflict of interest may exist, the Director must ensure that the company’s interests prevail and a common way to avoid issues over conflicts is to disclose all matters to the board of Directors so that the company (acting through its Directors) can make a decision with all the facts in front of them (see Section 177 below).  This may mean that conflicted Directors do not participate in decisions where their conflict of interest exists.   

6.         Section 176 – Duty not to accept benefits from third parties – This section extends Section 175 as Directors must not prioritise their own interests above that of the company's when dealing with company business and property and must not, for example, make a secret profit from any undisclosed and unauthorised transaction or divert work away from the company for their own benefit. Any benefits obtained in this way may have to be accounted for to the company.  Furthermore, Directors should not accept loans or the benefit of guarantees from the company.  This duty can quite often overlap with a Director’s duty to promote the success of the company (Section 172 above). 

7.         Section 177 – Duty to declare the nature and extent of any interest in a proposed transaction or arrangement – Directors must disclose all interests in relation to all transactions (eg property, information, shares held etc) irrespective of whether or not the company could take advantage of it.  Directors should again obtain board and Shareholders approval, where required, before steps are taken.  Again, this extends the other duties in Sections 171 to 176.

8.         Insolvency - Whilst a Director is generally under a duty to act in the best interests of the company and its Shareholders, the moment the company is deemed to be insolvent, they are under a legal duty to protect the interests of the creditors instead of the Shareholders and the company must then function for the primary purpose of getting the best return for creditors. 

Risks Faced by Directors for Breach of their Fiduciary Duties

We list below the main claims for personal liability faced by Directors.

1.         Wrongful Trading - This is when a Director continues to trade or enter into contracts after he/she knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation.

2.         Fraudulent Trading - This is when the Director carries on business with the intention to defraud creditors or for any other fraudulent purpose, eg taking deposits for orders they know the company cannot fulfil or entering into contracts when the Director knows there are insufficient funds to conclude the contract.

3.         Misfeasance - This is a breach of the fiduciary duties of care owed by a Director, as detailed above, e.g. wrongly taking out money from the company, using company money for matters not associated with company business or directing payment to associated parties.  Such a claim is normally issued to seek recovery of the losses arising from the misfeasance from the Director(s).

4.         Preferences – This applies where Directors make payments or transfer assets to one creditor (or a group of creditors) in preference to the remaining creditors.  Whilst such a claim would be issued against the Director personally, a liquidator or administrator can seek to reclaim such monies as a preference transaction from the recipient directly (together with their legal costs, if necessary).

5.         Transactions at an undervalue - Where the company transfers assets for significantly less than their market value, the undervalue amount can be reclaimed by a liquidator or administrator in a similar manner to a preference transaction. 

6.         Voidable transactions – This is another antecedent transaction (i.e. one occurring pre-insolvency) which allows the reclamation or setting aside of any transaction carried out between the date of the presentation of a winding-up petition and the final winding-up order.  This includes share transfers. 

7.         Transactions defrauding creditors – This provision applies to both companies and individuals where a transaction at an undervalue has occurred where it can be demonstrated to have occurred with the intention of putting such assets beyond the reach of creditors.  Directors can be liable under this section where they transfer company assets, either to a third party or for their own benefit.  This provision enables the Court to set aside the transaction, make a compensatory award or any other order deemed appropriate to protect the interests of the prejudiced creditor(s).

8.         Director Disqualification – A Director can be disqualified from acting in the promotion, formation or management of a limited company where it can be established that the Director’s conduct evidences them to be unfit to act as a Director.  The grounds of disqualification are very wide and unrestricted, in a similar manner to claims for misfeasance (see above).  It should be noted that, following disqualification, there is a statutory provision enabling disqualified Directors to seek leave to act as a Director of a specified company(s).

For more information, please feel free to contact Partner Andy Wilks Shareholder Disputes team on 0207 841 0390.