Corporate & Commercial Spring Update

Welcome to the quarterly legal update service provided by the corporate and commercial team at Mundays LLP.

We hope this service provides you with commercially useful information relevant to your business. If you require more detail on any particular topic please contact a member of the team shown at the bottom of this page.

For other updates please click here

In this season’s update:

Case Law Update:

Upcoming Company Law Changes:

AIM Markets:

International Update:

Useful Business Links:

Case Law Update

Contractual Termination does not override a common law claim

The Court of Appeal has recently ruled that should a party terminate a contract under a termination provision of that contract it may also be able to claim loss for repudiatory breach. Repudiatory breach occurs when a party breaches an agreement in a manner that is sufficiently serious to entitle the other party to treat the contract as immediately terminated.

The case in question centred around a shipyard that was building vessels for a customer and failed to deliver these vessels in accordance with the contract. The customer, on discovering that the shipyard could not deliver the vessels on time, in accordance with the contract, served termination notices on the shipyard and requested repayment of instalments already paid. The customer also claimed damages for the "loss of bargain" due to the non-delivery. The court ruled that even though the contracts were terminated under the contractual provisions the customer had a right to claim damages for this loss of bargain.

The court paid particular attention to the fact that the termination provision under the contract did not replace the common law right to sue for the loss of bargain. Additionally, due to the fluctuation in price of a vessel between the date of the contract and the date it would have been delivered, it would have been strange if the customer would have given up its rights to sue for the extra costs in obtaining a vessel on short notice, opting only to reclaim its instalments under the contract.

As such, when customers, manufacturers and suppliers are drafting contracts they should pay particular attention to termination provisions and expressly state that common law remedies are being excluded, if this is agreed. However, it is important to note that expressly excluding common law remedies has yet to be tested in court and it remains unclear if this express exclusion will be effective enough.

Directors liable even though inactive

The recent case of Lexi Holdings (in administration) v. Luqman and Others has found that the inactivity of two of Lexi Holdings’ non-executive directors made them liable for a fraud committed on the company by another director.

Between October 2002 and November 2006 a director of Lexi Holdings dishonestly misappropriated by fraud £59,607,498 from the company.

It was concluded that although the two non-executive directors did not remove the money from the company themselves, their responsibility as directors should have obliged them to take action to prevent the fraudulent actions of the dishonest first director. This first director had a previous conviction and was noted to have had a bad character. He created a fictitious director’s loan account and granted loans from Lexi Holdings to himself in contravention of the Companies Act 1985. As the two non-executive directors were aware of his previous convictions and were aware of this transfer of funds it was their duty as directors to attempt to put a stop to his breaches. Following an appeal the non-executive directors were liable for £41,968,294 and £39,968,988 which had been claimed against them by the administrator of Lexi Holdings.

Failure to terminate a contract immediately upon breach proves costly

A supplier of pre-paid phone cards had an agreement with one of its retailers whereby the supplier was to provide a guarantee at the beginning of each year to the retailer from the supplier’s parent company. The guarantee was to state that the supplier had sufficient capital to continue its operations under the agreement for the forthcoming year. The supplier failed to provide this guarantee on 24 December 2003, however the retailer continued to perform the contract. A "no-waiver" clause existed in the contract stating that no delay in enforcing any provisions of the contract (eg. terminating for the breach) would be deemed to waive the contract or any of its provisions. The retailer finally served notice of termination in December 2004 and argued that even though it had continued to perform the contract it had not lost its right to terminate the contract for the breach on 24 December 2003.

The court concluded that by performing the contract without protesting about the breach the retailer had abandoned its right to terminate the contract for the supplier’s breach. The contract did not specify that performance following a breach would not affect a party’s right to terminate. It remains unclear if a contract can ever exclude a party’s affirmation of the contract whilst retaining its right to terminate for a breach.

The case suggests that if you intend to terminate for a breach under a contract this must be done swiftly or you may lose that right entirely. As the supplier was allowed subsequently to claim for damages due to the retailer’s early termination, this performance of the contract may also lead to increased costs.

Failure to specify details in invoice proves costly

A sub-contractor who installed cabling hired its employees out to a client at a daily rate of £650. The sub-contractor’s employees worked a 9 hour day whilst the client’s employees worked an 11 hour day. A disagreement ensued when the sub-contractor wanted to increase its rate. The client suggested that the sub-contractor decrease its rate as its employees worked for less time per day than the client’s employees. The invoices delivered to the client did not refer to the amount of hours to be worked during a day nor to an hourly rate. The sub-contractor sued the client for unpaid invoices and the client sued the sub-contractor for the amount it felt it was overcharged on the invoices that it had paid.

The court decided that, even though the client had claimed it had been overcharged, because it had paid an invoice following its claim, there was no basis to re-examine any invoices already paid.

Even though the invoices did not set out the specific hours to be worked in a day, the fact that only a daily rate was specified was found not to be contrary to any agreement or representation between the parties. Since no hourly rate was specified on the invoice the question arose of what was a "reasonable sum" that the sub-contractor was entitled to receive on its outstanding invoices with regard to the work completed? This was decided upon by the judge and the sub-contractor’s invoices were settled.

This case notes the requirement to ensure that the terms of an agreement are clear and that there is specific detail on invoices in order that both parties are aware of the costs for the goods and services that it is either acquiring or selling.

Failure to put an agreement in writing gives Calzaghe another "KO"

A sports promotion company had been promoting the fights of undefeated Joe Calzaghe and had orally agreed with him to promote one more fight. The promotion company also claimed that a second oral agreement had been entered into whereby it would promote all of Calzaghe’s future fights.

It was found that the promotions company had, for the last 10 years, put all its oral agreements down in writing subsequent to their formation. The failure to put the second oral agreement down on paper was deemed a complete departure from its normal practice and the judge found that no agreement actually existed. The company was thus not successful in claiming for the future proceeds of Calzaghe’s fights to which it claimed it was entitled.

This case highlights how important it is to enter into a written agreement as any future contracts not written down could not only be lost but, more importantly the client itself may also be lost, due to the ensuing dispute.

High rate of interest still due on incorrect invoice

A construction company carried out work for a government department but because the contract had to be performed in a hurry the terms of business were never precisely defined. The construction company invoiced the government department which failed to pay on time. The company stated that it was entitled to a statutory higher rate of interest on the non-payments and the government department claimed that, as the wrong amounts had been applied to calculate the principal sum on the invoices, it should not have to pay this interest.

It was concluded that on the facts the higher rate of interest was applicable and, even though the amount of the invoice was incorrect this did not permit the government department to withhold payment. In these circumstances, the law provided that where an incorrect amount including interest was paid any overpayment was to be repaid.

This case highlights the importance of reviewing invoices carefully and paying promptly and of course agreeing terms of business prior to a contract being performed.

Upcoming Company Law Changes

Non-Disclosure of Directors’ home addresses

It is expected that from 1 October 2009 the Companies (Disclosure of Address) Regulations 2009 an individual or company will be able to make an application to Companies House to prevent the public display of a director’s personal information, where he/it believes that there is a serious risk that an individual, or any person who lives with that individual, would be subjected to violence or intimidation as a result of them being a director of the company in question.

The most recent consultation has confirmed that when any application is made a statement must be attached setting out the grounds upon which that application has been made and that the risk of violence or intimidation must be considered a serious risk and not simply a likely risk.

The regulations also set out the situations when the personal information can be disclosed which includes to a number of specified public authorities and credit reference agencies.

These regulations are likely to become law on 1 October 2009. However until it is enacted they may be subject to final amendment by the department for Business, and Regulatory Reform ("BERR").

Clarification of trading disclosures

On 1 October 2008 the Companies (Trading Disclosures) Regulations 2008 came into force setting out where and when a company is required to display its registered name, office and company number. The places include (i) at its places of business and (ii) on its stationery and communications (which include letters and emails). The regulations also provide that the company’s books should be available to members on request within 5 days and what disclosures are required when a company becomes insolvent.

On 1 October 2009 it is anticipated that further regulations to amend the current regulations are to come into force clarifying two issues. Firstly if a liquidator, administrator or administrative receiver is appointed the company does not need to display its name at that insolvency practitioner’s place of business. Secondly, where every director of the company has applied to protect their personal information (as set out above) the company name need not be displayed at any place it carries on business.

As noted above it is expected that these regulations will become law on 1 October 2009 however they are still subject to any amendments by BERR.

Details of a company’s shares are to be delivered to the Registrar of Companies from 1 October 2009

The Companies (Shares and Share Capital) Order 2009 is expected to become law, implementing parts of the Companies Act 2006, on 1 October 2009.

From 1 October 2009 companies will be required to deliver a statement of capital containing, for each class of the company’s shares, prescribed particulars of the rights attaching to the shares in certain circumstances. It also requires the company to send a current statement of capital to any of its members on request.

If the company allots a new class of shares particulars of the rights attached to these shares must also be sent to Companies House. The information that will be required is set out in section 555 of the Companies Act 2006.

Where a private company makes a payment out of capital for the redemption or purchase of its own shares a prescribed form will be required to be signed by a director of the company under section 714 of the Companies Act 2006.

AIM Market

Subscription period for rights issues reduced to 10 working days

On 10 February 2009 the Financial Services Authority introduced new sections to the UK Listing Authority’s Listing Rules that permit a minimum subscription period of 10 days (previously 21 days) for companies making a rights issue. The London Stock Exchange has also reflected this change in its AIM Rules. Although the subscription period has been reduced, the requirement to publish a full prospectus has not been changed.

Under the current economic climate, companies are looking for a variety of ways to strengthen their balance sheet and to refinance debt in order to avoid breaching banking covenants. A number of companies have undertaken rights issues in 2009 whilst others have turned to placings and open offers in order to strengthen their balance sheets.

International Update

Holders of German Shares obliged to file for insolvency

On 1 November 2008 German company and insolvency law was extended to require shareholders of a German company (a GmbH company) to file for insolvency of that company in certain circumstances. This obligation applies to shareholders even if they are not resident within Germany.

Shareholders could be obliged to file for insolvency of the German company if:-

  1. it is unable to discharge a significant part of its due liabilities or is over indebted;
  2. its managing directors do not retire in accordance with German company rules or the Company is deemed to lack management; and
  3. the shareholder has knowledge of the situation.

If this is an issue the Mundays team are happy to recommend law firms in Germany that can provide advice on this issue. Mundays is a member of the network of law firms and further information about is available by clicking here.

Useful Business Links

Fraud Risk Management: A Guide to Good Risk Management

The Chartered Institute of Management Accountants have updated their fraud risk management guide, which provides information to businesses to help prevent fraud in their daily activities. The full guide can be accessed at: http://www.cimaglobal.com/cps/rde/xchg/live/root.xsl/30381.htm.

Office of Fair Trading publishes advice to assist businesses to avoid scammers

As part of "Scams Awareness Month" the OFT has published new advice for businesses to help them recognise scams. It is anticipated that scams can cost a small business approximately £800 a year.

Scams highlighted by the OFT include "free" listings in business directories but which result in a business paying for repeat entries; businesses unwittingly agreeing to pay for adverts in bogus "charitable" publications; and companies being tricked into ordering unwanted and over-priced office supplies.

The OFT has advised businesses to designate specific employees to deal with purchase of goods and services; never to rush into legally binding contracts over the phone, to carry out thorough research on any goods and services being offered to them and to find out full details of any supplier, including their phone number and contact name and address before agreeing to place an order.

Full details of the OFT’s advice can be found at http://www.oft.gov.uk\businessscams.

File your Employer Annual Return online and get a £75 bonus

Employers with fewer than 15 employees are encouraged to file their 2008/2009 employer annual return online and receive a £75 tax free payment in the process. Further details can be found at http://nds.coi.gov.uk\content\detail.asp?ReleaseID=396367&NewsAreaID=2.

New £250 million fund for London Business

The Royal Bank of Scotland has launched the RBS London SME Fund committing £250 million of lending available for viable business propositions in London. RBS intend to provide not only traditional lending procedures but advice on managing business capital and cash flow.

Further details can be found at http://www.rbs.co.uk/downloads/business/new_initiatives.pdf.

Contacts

Neale Andrews at neale.andrews@mundays.co.uk
Tel: 01932 590 570

Chris Saunders at chris.saunders@mundays.co.uk
Tel 01932 590 640

 

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