While the Christmas party is a great opportunity for staff to socialise together and celebrate their achievements over the past year, and for employers to thank them for the work they do, it is important to remember that employers owe their employees certain obligations, even outside work, when they have organised the event themselves.
Employees should be aware that their conduct during the party must comply with normal standards and must not breach workplace equal treatment and anti-harassment policies. Employers can be vicariously liable for their employees' behaviour at such functions, so it is important to be able to show that all reasonable steps have been taken to prevent behaviour that could give rise to such a claim. This includes making staff aware of the appropriate policies regarding conduct at work events and providing adequate training.
In order to prevent what should be a happy occasion from leading to recriminations or worse, an employer should take certain basic steps. Here are some of the more important ones:
- Try to make sure the date of any work event does not coincide with the dates of religious festivals;
- Carry out a risk assessment – this should include the venue and, in particular, the possible risks associated with serving alcohol. Making sure employees can get home safely is important, so consider hiring transport or providing taxis solely for this purpose if necessary. Ensure soft drinks are provided as an alternative to alcoholic drinks and that individual dietary requirements are catered for;
- Ensure that, if employees' partners are invited, there is no discrimination with regard to who is included. Ensure also that reasonable adjustments are made to allow any disabled employee or partner to attend and that any employees absent on maternity leave or because of long-term sickness are included;
- Where possible, make sure that the arrangements accommodate the requirements of employees of different religions;
- Ensure that employees understand the difference between 'banter' and behaviour that could be considered to infringe the dignity of any person present. You may wish to appoint event supervisors to oversee the function, to whom staff can report any problems. If unwanted behaviour is observed, act quickly to prevent it from reoccurring and take prompt action if a complaint is received;
- Make sure that employees who are expected to attend work the next day understand that absence through over-indulgence is likely to be regarded as a disciplinary matter; and
- Make sure employees are aware that any illegal acts will not be tolerated.
The biggest problems that are likely to arise are that inappropriate behaviour may occur, especially if alcohol flows too freely, and that there may be conduct which members of a particular faith find objectionable.
Your firm's contract of employment will probably deal with most or all of these issues. However, it is sensible to have a separate policy on what is expected of employees at workplace social events and to remind them of its contents in advance of any function.
For advice on any aspect of employee behaviour or contracts of employment, contact us.
Workplace disciplinary proceedings must always be thorough and fair, but that is all the more the case where an employee is accused of dishonesty. An Employment Tribunal (ET) succinctly made that point in awarding substantial damages to an employee who was accused of making a fraudulent expenses claim.
The policy of the company for which the man worked was that only expenses that had been incurred wholly, exclusively and necessarily for business purposes could be claimed by employees. External HR consultants were engaged to investigate after he was alleged to have lodged an expenses claim in respect of a pub meal attended by himself, his girlfriend, a friend of hers and his line manager. The latter was the principal witness against him in the disciplinary proceedings.
There were a range of factual disputes as to what was and was not said during and after the meal and as to whether the pub’s bill was in respect of two people or four. However, the line manager’s account was ultimately accepted and the man was dismissed on grounds of gross misconduct. He was found to have submitted a fraudulent expenses claim in knowing breach of the company’s policy.
In upholding his unfair dismissal claim, the ET noted that the gravity of the allegation mandated careful critical analysis of all the evidence. Although the investigation was diligently performed, the company’s managing director, who took the decision to dismiss the man, ignored a number of inconsistencies in the line manager’s account. On any reasonable analysis of the evidence, the latter’s testimony was unreliable.
The ET made a total 50 per cent deduction from the man’s compensation to reflect his own share of responsibility for his dismissal and the chance that, had a fair procedure been followed, he could have been fairly dismissed. Nevertheless, his award came to £24,749, made up of a basic award of £734, £7,000 in respect of three months’ notice pay and £17,015 by way of compensation.
Increases in the value of your main or only home are exempt from Capital Gains Tax (CGT) – but proving that a property is your principal private residence (PPR) can be far from easy and that is why taking legal advice on the issue is always wise. The point was made by the case of a woman who sold a flat at a £270,000 profit but failed to establish that she was entitled to the exemption.
The one-bedroom flat was bought for £630,000 and sold for £900,000 five months later. The woman did not notify HM Revenue and Customs (HMRC) of that gain on the basis that the flat was her PPR throughout her period of ownership and that no CGT was therefore payable. HMRC took a different view and assessed her for £52,656 in CGT. She also received a penalty of £14,217.
In rejecting her appeal against those demands, the First-tier Tribunal (FTT) noted that the flat had been sparsely furnished and that utility bills for the property were never transferred into her name. She owned a larger property nearby which would have been a more convenient home for her and her husband and which she had used as her correspondence address. She had also claimed PPR relief on the subsequent sale of that property for £2.3 million.
HMRC had failed to establish that her sole purpose in buying the flat was to sell it on at a handsome profit. There was, however, a complete absence of evidence that she ever occupied it. Even had she done so, such occupation would have lacked the necessary degree of permanence or continuity to render the property her PPR.
Entering into property transactions without expert legal advice is always a hostage to fortune. A restaurateur found that out after he was dishonestly induced to enter into an illegal sub-lease of commercial premises by a businessman whom he trusted as a friend.
Following a series of informal meetings, the restaurateur agreed to take a sub-lease of the premises from the businessman. A written agreement was drafted, although not by a qualified solicitor. There were two somewhat different versions of the agreement in existence, one of them signed, the other not. The signed version was replete with handwritten additions, sowing further confusion as to what had in fact been agreed.
The restaurateur launched proceedings against the businessman after the landlord found out that the premises had been illegally sublet and took possession of them. In upholding his claim, the High Court found that he had been induced to enter into the agreement by the businessman’s deliberate misrepresentation that he had obtained the landlord’s consent to subletting the premises.
The businessman had also falsely led the restaurateur to believe that the underlying lease, which was due to expire in under five years, had 16 years to run. The Court found that, had he known that the businessman’s representations were untrue, the restaurateur would have walked away and never entered into the agreement. The businessman was ordered to pay him £91,532 in damages, that sum representing the full extent of his losses and expenses arising from the agreement.
When a company is taken over by another, its employees may have mixed feelings, but the legal position is clear – they must shift their loyalties to the new owner. Two men who found themselves in exactly that position were hit hard in the pocket after maintaining their attachment to the old guard.
The men worked for a transport and logistics company in which they each had a 5 per cent shareholding. After a purchaser acquired the remaining 90 per cent of the shares, they retained their stakes in the company and continued in their employment under new management for about two years.
They eventually exercised put options, requiring the purchaser to buy their shares at their fair value. Under the terms of agreements signed at the time of the takeover, that would have had the effect of automatically terminating their employment on three months’ notice. However, after they were instead dismissed on grounds of alleged gross misconduct, they launched proceedings.
The company contended that they were guilty of a number of material breaches of their employment contracts and that their dismissals were justified. They responded with claims that the sole motive for sacking them was to avoid the purchaser’s contractual obligation to pay them a fair price for their shares.
In ruling on the matter, the High Court found that the men were aware of accounting irregularities in the company’s affairs prior to the buy-out and that it was in the grip of a cash-flow crisis. Unbeknown to the purchaser and the company’s directors, they had shared highly confidential information concerning the company with a former shareholder, who was the father of one of them. Notwithstanding the change in ownership, their loyalties had remained firmly with the company’s former management, rather than with their employer.
Rejecting their wrongful dismissal claims, the Court found that their breaches of the confidentiality obligations that they owed to the company were serious and went to the heart of the employer/employee relationship. On the basis that they could no longer be trusted, the company was entitled to dismiss them. As defaulting shareholders, they were also entitled to only a nominal price for their shares.
Can the reason for an employee's dismissal ever be other than that given in good faith by the decision-maker appointed by the employer? The Supreme Court has answered that burning question in a test case concerning a whistleblower who was sacked on the basis of performance concerns trumped up by her dishonest line manager.
The Royal Mail worker was a whistleblower, having made protected disclosures under Section 43A of the Employment Rights Act 1996 (ERA). Her line manager’s response was to pretend that her performance was inadequate. Bullying which the worker suffered at the line manager’s hands resulted in her being signed off work, suffering from work-related stress, anxiety and depression.
Another employee (the decision-maker) was appointed to consider whether the worker should be dismissed. She was, due to her condition, unable to present her case so that the decision-maker, who acted entirely in good faith, had no reason to doubt the truthfulness of material which had been fabricated by the line manager. The worker was dismissed on grounds of inadequate performance.
In rejecting her claim of automatic unfair dismissal under Section 103A of the Act, an Employment Tribunal found that the decision-maker had held a genuine belief that her performance was inadequate and that, therefore, was the reason for her dismissal. That ruling was reversed by the Employment Appeal Tribunal but subsequently reaffirmed by the Court of Appeal.
In upholding the worker’s challenge to the latter decision, the Supreme Court ruled that, where the real reason said to justify a dismissal is hidden behind an invented reason, it is incumbent on judges to penetrate through the invention. The Court concluded that, if a person in the hierarchy of responsibility above an employee decides that she should be dismissed for one reason, but hides it behind an invented reason which the decision-maker adopts in good faith, the reason for the dismissal is the hidden reason rather than the invented reason.
The Court noted that, although the case raised an apparent issue of general importance, the facts of the matter were extreme. Instances of dismissal decisions being taken in good faith, not just for a wrong reason but for a reason dishonestly constructed by an employee’s line manager, would not be common. The outcome of the case clearly accorded with Parliament’s intention that, where the real reason for a dismissal is whistleblowing, the automatic consequence should be a finding of unfair dismissal.
Scientific views on the environmental impact of incineration plants and other waste processing facilities may differ widely but, as a Court of Appeal decision showed, judges are not in the business of second-guessing expert decision-makers.
The case concerned an environmental permit granted by the Environment Agency (EA) to the operator of an incinerator which was capable of recovering energy from about 585,000 tonnes of non-hazardous waste annually. Development consent had previously been granted for the plant, the construction of which was viewed as a nationally important infrastructure project.
A local campaign group argued that the permit was issued on the factually incorrect and scientifically erroneous basis that measures adopted for dealing with emissions from ash generated by the incinerator would prevent the discharge of heavy metals into surface water. It was submitted that there was a real risk of pollutants finding their way into drinking water supplies.
The EA and the operator conceded that there was an error in a document which provided information in support of the permit application. EA scientists, however, were adamant that there was no pollution risk and that any contaminated water would be successfully contained in a sealed system. The group’s judicial review challenge to the permit was rejected by a judge.
In dismissing the group’s appeal against that outcome, the Court found that the error had not affected the decision to issue the permit. Although there was a fundamental difference of opinion between experts as to the risks of surface water contamination, the EA’s conclusions were neither irrational nor based on incorrect science. The EA was entitled to a margin of appreciation in the exercise of its expert judgment and it was not the Court’s role to substitute its views for those of EA scientists.
The right to privacy is increasingly powerful, but basic fairness demands that those who wish to litigate must at least be willing to disclose their names and addresses. The High Court made the point in striking out a so-called ‘right to be forgotten’ claim which a businessman had sought to pursue against Google under a cloak of anonymity.
The businessman objected that a post which gave details of a criminal conviction in his past could be found on the internet via Google. The conviction being spent under the Rehabilitation of Offenders Act 1974, he claimed that its continued publication amounted to defamation, malicious falsehood and a breach of data protection principles.
Given the sensitive nature of his claim, and the risk that its purpose might in part be frustrated were he to be publicly identified, he was granted permission to bring the proceedings anonymously, using the cypher ‘ABC’. He was, however, ordered to disclose his full name and address to Google and to the Court. After he failed to comply with that requirement and subsequent orders to similar effect, his claim was automatically struck out.
Dismissing his application for relief against that sanction, the Court noted that it is obvious that those on the receiving end of litigation are entitled to know by whom they are being sued. It was hard to conceive of any circumstances in which civil litigation could proceed fairly in the absence of such identification.
The businessman had made numerous attempts to avoid his obligation to identify himself and his approach to judicial orders and directions could properly be viewed as abusive. To permit him to proceed with his claim whilst continuing to hide his identity would also breach Google’s human right to a fair hearing. The Court’s decision meant that his claim remained struck out.
Directors are bound to faithfully pursue the bests interests of the companies they serve. The High Court emphasised that point in ruling that a former director of a pub company was justifiably removed from office after acquiring an interest in a potentially rival hostelry.
The company ran a real ale pub which operated on wafer-thin margins. After four of its shareholders voted to remove the fifth from his office as a director, he launched proceedings under Section 994 of the Companies Act 2006 on the basis that his position as a minority shareholder had been unfairly prejudiced.
He argued that his legitimate expectation to be involved in managing the company had been ignored, and sought an order requiring the other shareholders to buy out his shares in the company at a price to be fixed by the Court. He also sought compensation for the loss of his office as a director.
In dismissing his claim, the Court noted that, prior to his removal, he had acquired an interest in another pub nearby. His co-shareholders had not consented to him taking that step and were anxious that the other pub would attract away the company’s customers, rendering it financially unviable.
The Court found overwhelming evidence that the other pub could directly affect the company’s business by diluting its trade. The man’s involvement with the potentially competing business was in manifest conflict with the duties he owed to the company. As he had not behaved reasonably, his removal from office was justified and he had suffered no unfair prejudice.
Workplace personality clashes are sadly common but a perception that an employee is difficult to work with is not enough to justify his or her dismissal. A college found that out to its cost after an Employment Tribunal (ET) ordered it to pay more than £60,000 in compensation to one of its former lecturers.
In finding that the woman’s inappropriate behaviour was a primary cause of a breakdown in personal relationships within her department, the college noted that three of her colleagues had cited her conduct as a factor which contributed to their decisions to resign. Many perceived her behaviour as challenging and she was dismissed on the basis that her behaviour had destroyed the relationship of trust and confidence that should exist between an employer and employee.
In ruling on her unfair dismissal claim, the ET noted the college’s concern about the sheer volume of complaints against her and the heavy resource implications of dealing with them. On the basis that many of her colleagues viewed her as a difficult person to work with, the college was also anxious about the prospect of further resignations.
In upholding her complaint, however, the ET found that the procedure followed by the college was fundamentally unfair and was from the outset aimed at justifying her dismissal. She had been given no opportunity to answer unparticularised allegations and there had been no inquiry as to whether they were in fact justified. An unfair assumption had been made that she had in every instance been at fault.
After she lodged a formal grievance, complaining of, amongst other things, failures of management, the college did not investigate. She had been suspended for eight months, pending investigation of unsubstantiated allegations, and her extended absence had led to a hardening of attitudes against her return. The ET ruled that she was in no way to blame for her dismissal and awarded her a total of £62,940 in damages. That included sums in respect of holiday and notice pay.
Those who publish grossly offensive, indecent, obscene or menacing material on the internet commit a criminal offence – but what about those who post a hyperlink to such material? The High Court addressed that issue in an important test case.
The case concerned a woman who performed grossly offensive, anti-Semitic songs at a far-right event. She was not responsible for posting a video of her performance on YouTube, but published a hyperlink on her blog which took internet users directly to the footage. Her subsequent conviction by magistrates of offences under the Communications Act 2003 was upheld by the Crown Court.
In rejecting her judicial review challenge to that outcome, the High Court found that, as a matter of common sense, the woman was guilty as charged. With a view to widening public distribution of the offensive material, she had provided internet users with a direct signpost to her performance of her own songs. By publishing the hyperlink, she created an interface between two websites, which ensured the conveyance of the footage from one to the other. The Act was directed at preventing the public communication network being used as a means of disseminating grossly offensive material, and that was precisely what she had done.
The woman had also been found guilty of an offence under the Act in relation to another video which she posted directly onto YouTube. In challenging that conviction, she argued that she had sent the footage to an inanimate object – YouTube’s server, which is located in a Californian bunker. There having been no communication of the material to any living person, it was submitted that there was no offence.
In rejecting that argument, the Court found that the fact that the message had been sent to YouTube’s server, rather than the woman’s next-door neighbour, was legally irrelevant. On a true interpretation of the Act, her offence was complete when she sent the footage and it did not have to be viewed by anyone. She had in any event always wanted the video to be seen by other people and they were her intended recipients.
A property’s location within a conservation area is often presented as a selling point by estate agents, but the designation brings with it heavy legal responsibilities. A flat owner found that out to his cost after installing a PVC bay window without planning permission.
The ground-floor window only required planning consent because the flat lay within a conservation area. After the local authority issued an enforcement notice requiring the owner to remedy the breach of planning control, he complained that about 90 per cent of front-facing windows fitted to other nearby properties were made of PVC but that no similar action had been taken against other homeowners.
In allowing his appeal against the notice, a government planning inspector found that the window’s installation did not materially affect the building's external appearance. In doing so, the inspector defined the ‘building’ under consideration as the block of three terraced houses of which the man’s flat formed part. He noted that all of the ground-floor windows across the whole block were made of PVC.
In upholding the council’s challenge to the inspector’s decision, however, the High Court noted that, in common parlance, each house in a terrace is considered a building. The inspector had given no adequate reasons for his somewhat surprising conclusion that the relevant ‘building’ consisted of the whole terrace.
The inspector was required to focus solely on the visual impact that the window had on the building and the prevalence of PVC windows elsewhere in the conservation area was thus legally irrelevant. The inspector's decision was quashed and the Secretary of State for Housing, Communities and Local Government was directed to reconsider the matter in the light of the Court’s ruling.
Every disabled employee is entitled to have reasonable adjustments made for them so that they are not disadvantaged in going about their work. In a case on point, an ME and chronic fatigue syndrome sufferer who could not meet the requirements of her employer's attendance policy won tens of thousands of pounds in compensation.
The occupational therapist’s disability meant that she was more likely to need periods of sick leave than other employees. Her NHS trust employer responded by making an adjustment to its sickness absence management policy whereby she could have five periods of sickness absence annually, instead of the standard three afforded to other personnel.
The adjustment was kept in place, apparently successfully, for four years before it was abruptly removed. Whilst other adjustments were made, including a reduction in the woman’s working hours, she was unable to meet the attendance requirements and was ultimately dismissed.
Her complaints of discrimination and a failure to make reasonable adjustments were subsequently upheld by an Employment Tribunal (ET), as was her claim of unfair dismissal, although the ET ruled that there was a 50 per cent chance that she would have been dismissed within four months in any event. She was awarded substantial damages, including a basic award of over £10,000, more than £30,000 for future loss of earnings and £24,500 for injury to her health and feelings.
In rejecting the trust’s challenge to that outcome, the Employment Appeal Tribunal could find no fault in either the ET’s calculation of her award or its properly reasoned conclusion that the abrupt withdrawal of an adjustment that had worked well for years was unjustified and that her dismissal was thus unfair.
Can the marketing clout of famous sports personalities, musicians and other so-called ‘influencers’ be measured by the level of their social media exposure? Yes, it can, the High Court has ruled in a case concerning a football shirts contract.
A sportswear company had an exclusive contract with a Premiership football club in respect of the manufacture and sale of replica team shirts. As the end of the contractual term approached, the club entered into negotiations with a rival manufacturer which it proposed to appoint in the company’s place.
The rival manufacturer offered the club £30 million per season, plus a percentage of profits on sales achieved. It undertook that the shirts would be sold in not less than 6,000 stores worldwide and that its marketing campaign would feature global superstar influencers of the calibre of basketball player Lebron James, tennis champion Serena Williams, and top-selling recording artist Drake.
Under the contract, the company had a right to have its deal with the club renewed if it made a matching offer. The club, however, took the view that the company’s offer was less favourable than that of the rival manufacturer. The company’s response was to launch proceedings on the basis that the club was contractually bound to accept its offer.
In dismissing the company’s claim, the Court found that the calibre of the influencers named in the rival manufacturer’s offer could be empirically calculated by reference to their social media exposure. It noted that appearances on social media can be counted and that various repeatable methods of valuing them are in widespread use.
The company’s counter-offer was less favourable to the club, in terms of marketing, because it did not match the rival manufacturer’s commitment to use the services of influencers of the calibre of the three identified celebrities. The club was thus not obliged to enter into a new contract with the company.
Pleas of poverty are commonplace in divorce cases, but family judges are well able to discern whether they are true or false. In one case, a property developer who fell heavily into arrears on maintenance payments to his ex-wife was ruled in contempt of court and warned to expect punishment.
Following the end of the couple’s long marriage, the sale of two properties, including the matrimonial home, was ordered with a view to providing the wife with around £950,000. The husband was also ordered to transfer to her £2 million and to pay her £10,000 a month in maintenance pending her receipt of that sum. He was later refused permission to appeal against those and other orders.
The wife launched further proceedings after the husband fell £117,500 behind on the maintenance payments. His response was that his business had fallen on hard times and that he simply could not afford to pay them. However, following a hearing, the High Court was satisfied so that it was sure that he at all times had the means to make the payments when they fell due.
The Court noted that he had received around £100,000 from the sale of watches and more than £40,000 from his share of a development property. He had throughout been renting a flat in a prime location at a cost of £8,100 a month. The evidence established that he had placed the wife at the bottom of his list of priorities and could have paid her maintenance had he wanted to.
Other defaults on the husband’s part included his failure to pay anything towards the mortgage on the matrimonial home, thus diluting its equity to the point where it was effectively worthless. A finding of contempt carries a maximum penalty of two years’ imprisonment or an unlimited fine. The Court, however, adjourned sentencing the husband so as to give him an opportunity to put in evidence concerning his current financial position. The Court would also consider his application to vary the maintenance payments downwards.
Managing an employee’s return to work after a long period of sickness absence can be a highly sensitive matter. A case in which a visually impaired nurse was awarded more than £30,000 in damages serves as an instructive illustration of how it should not be done.
The nurse, who was agreed to be disabled, was on sick leave for over two years before she was dismissed without notice. Her NHS trust employer’s attempts to redeploy her had been abandoned on the basis that there was no reasonable prospect of her returning to work as a nurse or in any clinical capacity.
In upholding her complaints of unfair dismissal and disability discrimination, an Employment Tribunal (ET) noted that there was no dispute that her dismissal amounted to unfavourable treatment. The reason for her dismissal was her long-term sickness absence, which arose as a consequence of her disability.
The ET found that reasonable adjustments that the trust could have made in order to ease her return to work included extending the redeployment process for a further period and providing suitable lighting, specialist computer software, training and a dedicated work station. Some adjustments had been offered, but occupational health reports supported her case that, had more been done, she would have been able to return to work in a suitable role, at least on a trial basis.
The trust’s plea that her dismissal was justified by the legitimate aims of promoting fair and consistent employment policies and prioritising patient care were rejected. She had not been a cost burden on the trust, given that the latter part of her sick leave was unpaid, and her dismissal was inconsistent with the trust’s own policy, in that she was willing and able to return to work. She was awarded a total of £32,709 in compensation, including £13,000 for injury to her feelings.
Restrictions on the use to which land can be put do not always stand the test of time and that is why the law permits their discharge or modification. In a case on point, the Upper Tribunal (UT) opened the way for construction of new homes on a site which had hitherto been protected from development.
The 1.83-hectare site was on the rural edge of a village. It was subject to a planning agreement, dated 1984, whereby the executors of the estate of a previous owner had consented to restrictions on its future development. They had done so as a quid pro quo after consent was granted for a house-building project on other land held by the estate. The agreement with the local authority forbade construction of any permanent non-agricultural buildings on the site.
The current owners of the site had, following an appeal to a planning inspector, been granted outline consent to build 30 new homes on it,12 of them affordable. However, the council – which had opposed the development contrary to the advice of its own planning officers – refused to waive the terms of the agreement, with the result that the development could not proceed. Faced by that impasse, the owners applied to the UT under Section 84(1) of the Law of Property Act 1925 for an order discharging or modifying the agreement.
In ruling on the matter, the UT noted that circumstances on the ground had changed greatly since 1984. The area had a pressing need for more new homes, especially social housing, and the proposed development would be a reasonable use of the site. It would positively benefit the local community and the building restriction was no longer of any substantial value or advantage to the council. The agreement was modified so as to enable the development to be brought to fruition.
The good reputation of lawyers and other professionals is the whole basis of their livelihoods and, if they are subjected to unjustified press criticism, it is only right that compensation is paid. In a case on point, a leading criminal barrister won libel damages from two national newspapers.
The offending articles concerned the circumstances in which a sportsman had been acquitted of an affray charge following a trial which attracted a great deal of public interest. They alleged that the barrister was reasonably suspected of professional negligence in respect of decisions she had made prior to the trial and that the prosecution had thereby not been properly mounted.
After she launched defamation proceedings, the High Court was told that those criticisms were entirely unjustified. The true position was that she had only briefly been involved in the case and had played no part in selecting charges or in deciding whether another sportsman should also be prosecuted. Due to a diary clash, she had bowed out from the case five months prior to the trial.
Having risen through the profession to become a QC, the barrister had appeared for the Crown in a string of high-profile trials. As a self-employed barrister, her good judgment and competence were two of her most important attributes and the false allegations had caused her considerable distress, striking at the very heart of her professional character. In the circumstances, the publishers of both newspapers agreed to pay her damages and legal costs in settlement of her claim.
One of the more draconian powers wielded by judges is to order compulsory winding up of companies that operate contrary to the public interest. However, the High Court ruled in a guideline case that two companies in the business of assisting their clients to avoid paying non-domestic rates (NDRs) do not fall into that category.
The companies operate a scheme whereby they establish single purpose vehicles (SPVs) in order to take leases of vacant commercial properties from their owners. That has the effect of shifting liability to pay NDRs from the owners – the companies’ clients – to the SPVs. The SPVs are themselves subsequently relieved of such liabilities by being placed into members’ voluntary liquidation.
The Secretary of State for Business, Energy and Industrial Strategy petitioned the Court under Section 124A of the Insolvency Act 1986, seeking orders compulsorily winding up both companies. It was submitted that their business models subverted the purpose of liquidations and that such misuse of the insolvency legislation demonstrated a lack of commercial probity.
In ruling on the matter, the Court acknowledged that the relevant arrangements were engineered solely to achieve a situation where the companies were able to obtain fees and their clients to avoid NDRs. The leases were artificial in the sense that they were not the product of arms-length negotiations, contained non-commercial terms and had no purpose other than to achieve those objectives.
In dismissing the applications, however, the Court noted that the Secretary of State did not contend that the incorporation of the SPVs, the grant of the leases or the entry into members’ voluntary liquidation were contrary to any specific provision of the insolvency legislation. Each transaction in the chain was legally genuine and effective and could not be viewed as a sham. The members’ voluntary liquidation genuinely involved the collection in and realisation of assets by liquidators with a view to distributing proceeds to members once all liabilities had been discharged.
The Court acknowledged that there was room for disagreement as to the ethics of the companies’ business methods. It could not, however, be said that to devise and implement a lawful scheme to avoid business rates is itself lacking in commercial probity or otherwise contrary to the public interest.
Whilst the schemes had revenue consequences for local authorities, there was no evidence that they caused harm to individual members of the public. As a matter of general principle, it was perfectly proper for companies as artificial constructs to be incorporated with a view to obtaining a fiscal advantage.
Directors who do not fully understand the complex duties they owe to the companies they serve expose themselves to a risk of personal liability. That was certainly so in the case of two honest businessmen who unwittingly made unlawful distributions from their company’s reserves prior to its insolvency.
When it entered liquidation, the company owed over £1.7 million to HM Revenue and Customs. Its two directors – who owned 80 per cent of its shares – had some years previously entered into profit extraction schemes whereby the company’s reserves were stripped out, principally via employee benefit trusts (EBTs), with an ultimate view to distributing them to shareholders.
After the company’s liquidators launched proceedings, the High Court noted that one of the former directors had testified that he saw no distinction between what was right for the shareholders and what was right for the company. The purpose of the EBTs was to make withdrawals from the company’s capital reserves in a tax-efficient manner for the benefit of shareholders.
Non-shareholder employees received no benefit and none of the distributions were reasonably incidental to the carrying on of the company’s business. They were not supported by board resolutions or minutes recording that the company’s overall financial position had been considered. The required formalities not having been complied with, the distributions were unlawful and void. The Court’s ruling opened the way for the liquidators to seek repayment of the sums so distributed for the benefit of the company’s creditors.
The Court acknowledged that its decision might appear harsh to the former directors, who were found to have acted honestly. Having failed to take independent legal advice, they had been seduced by the prospect of tax-free distributions into taking a risk they did not entirely understand.