UK: England and Wales: auditors' liability and the ex turpi causa principle [a belated posting]

Several months ago the Court of Appeal gave judgment in Moore Stephens (a firm) v Stone & Rolls Ltd [2008] EWCA Civ 644 and it would appear from recent reports in the legal press that an appeal to the House of Lords will be made. The case required the Court of Appeal to consider the operation of the ex turpi causa non oritur actio principle (no cause of action may be founded on an illegal act) in the context of a negligence claim brought by the liquidators of a company (Stone & Rolls) against a company's auditors (Moore Stephens). 

The liquidators argued that the auditors had failed, during the course of several audits, to identify the fraud of Mr. Stojevic (the directing mind and will of the company). Mr. Stojevic fraudulently obtained, through the company, money from various banks. One of these banks sued the company and Mr. Stojevic and was awarded damages against Mr. Stojevic and the company. The company was unable to pay and entered liquidation. The auditors denied negligence and applied for the action to be struck out on the basis that the claim was barred by the ex turpi causa principle. The first instance judge declined to strike out the claim (see [2007] EWHC 1826 (Comm)). 

The Court of Appeal held that the liquidators' claim was barred by the ex turpi causa principle and struck out the claim. The court rejected the argument that the company was the victim of fraud and attributed Mr. Stojevic's actions to the company. There was not, the court unanimously agreed, any room for discretion in the application of the ex turpi causa principle because, as Lord Goff observed in Tinsley v Milligan [1994] AC 340 at 355B: "...the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other".  The court also rejected the argument that the ex turpi causa principle did not apply where the claim was based on the commission of a fraud where the prevention of that fraud was "the very thing" that the defendants had undertaken to do. In this regard, Rimer LJ observed (at para. [109]):

There is ... no support in the authorities that we were shown for the proposition that if "the very thing" from which the defendant owed a duty to save the claimant harmless is, or includes, the commission of a criminal offence, the public policy defence based on the ex turpi causa principle will be overridden so as to enable the bringing of the claim that relies on the claimant's illegality".

Note: The case has been reported here in the Law Society Gazette.

Postscript (2 Sep 2008): The House of Lords Judicial Office informs me: "[the] petition for leave was presented on 18 July 2008 ... and we would hope to get a decision on leave before the end of November this year". 

UK: DBERR consultation on the creation of a UK wide companies registry

DBERR has published a consultation paper concerning its proposal to integrate the Northern Ireland Registry of Companies with Companies House to create a single UK Registry of Companies. According to the consultation paper:

In practical terms the merger would mean that customers would be able to refer to one Register only for registration and information relating to UK companies. It would also mean that all UK customers had access to the same products and services at the same price. The system would operate in much the same way as Companies House currently works with Scotland. The Registrar for Northern Ireland would be retained, and would be an appointee of the Secretary of State for BERR, as is the case for England and Wales and for Scotland; in practice the Northern Ireland Registrar would report to the Chief Executive of Companies House. The office in Belfast would remain, but would use systems, hardware, processes and have corporate standards in common with Companies House. Registry operations in Northern Ireland would be maintained with no detrimental impact upon customers, but the existing company data would be migrated to give customers full UK information on companies. There would be a common fee structure, and customers would have the benefit of common filing and search services covering the whole of the UK. There would be an exercise to value and transfer (if applicable) relevant assets and liabilities".

UK: England and Wales: relieving directors from liability in respect of unlawfully paid dividends

In HMRC Commissioners v Holland (Ch.D., Deputy Judge Cawson QC, 24 June 2008) the judge had before him applications under Section 212 of the Insolvency Act (1986) relating to 42 separate companies. One of the questions considered was whether a director could be relieved from liability under Section 727 of the Companies Act (1985) in respect of the payment of unlawful dividends. In this regard, Deputy Judge Cawson QC observed:

"The headnote to Re Loquitur [Ltd., IRC v Richmond [2005] 2 BCLC 442] suggests that the case decides that there is no jurisdiction to grant relief under Section 727 CA 1985 where, as a result of directors failing to exercise proper skill and care a dividend is paid that renders the company insolvent or potentially insolvent. However, I consider  that this reads too much into Etherton J's judgment ... Whilst the Court will, necessarily, be most reluctant to grant relief under Section 727 when an officer/shareholder has benefited at the expense of the creditors by reason of the payment of the dividend, I consider that the Court does retain a discretion to relieve at least when, as in the present case, the director has not directly benefited from the payment of the dividend" (para. [224])

Notes: 

[1] The decision is not yet available on BAILII but a copy of the transcript is available on the Lawtel subscription service (the Lawtel staff have not yet prepared a summary). Update (29 Sept 2008): the decision is now on BAILII - click here. 

[2] The provision in Section 727 of the Companies Act (1985) permitting the court to grant relief is found in Section 1157 of the Companies Act (2006), which comes into force on 1 October 2008.

Europe: update on company and financial services law developments

A useful update on European developments in company and financial services law has been published here by the Joint Brussels Office of the Law Societies of England and Wales, Scotland and Northern Ireland.

UK: England and Wales: winding-up in the public interest

Section 124A of the Insolvency Act (1986) provides the Secretary of State for the Department of Business, Enterprise and Regulatory Reform with the power to petition the court for the winding-up of a company where this is “expedient in the public interest”. In considering the Secretary of State’s application, the court must satisfy itself that it is “just and equitable” for the company to be wound-up.

In a recent case - Re Tag World Services Ltd. and Club Labourse Travel Ltd. (Ch.D., Robert Englehart QC, 30 July 2008) - the Secretary of State petitioned for the winding-up of two companies both of which were subsidiaries of the same parent company.  The petition for one of these (Tag World) was granted (there was clear evidence of deceptive marketing practices).  It was argued for the Secretary of State that the second company (Club Labourse) should also be wound-up because it was inextricably linked with the first company and tarnished by its behaviour (although there was no evidence that it had acted wrongfully or disreputably).  The trial judge rejected this argument and observed (at para. [51]) that it would be wrong to wind-up the second company in the absence of any complaints against it. 

Notes: 

[1] The judgment is not yet available on BAILII but it has appeared on the Lawtel subscription service.  Update (24 September 2008): the judgment is now available on BAILII - click here. 

[2] For an earlier earlier post concerning Section 124A, click here.

UK: England and Wales: collective action recommendations

The Civil Justice Council has published a report titled "Improving Access to Justice through Collective Actions - Developing a More Efficient and Effective Procedure for Collective Actions: a Series of Recommendations to the Lord Chancellor". Amongst the recommendations - which concern civil procedure in England and Wales - are the following:

• A generic collective action should be introduced. Individual and discrete collective actions could also properly be introduced in the wider civil context i.e., before the CAT or the Employment Tribunal to complement the generic civil collective action. 
• Collective claims should be capable of being brought by a wide range of representative parties: individual representative claimants or defendants, designated bodies, and ad hoc bodies. 
• No collective claim should be permitted to proceed unless it is certified by the court as being suitable to proceed as such. Certification should be subject to a strict certification procedure. 

UK: England and Wales: CPR r 71.2 and the director of a corporate director

Part 71 of the Civil Procedure Rules contains rules which, to quote from Rule 71.1, "provide for a judgment debtor to be required to attend court to provide information, for the purpose of enabling a judgment creditor to enforce a judgment or order against him". Rule 71.2 provides that a judgment creditor may apply to the court for an order requiring an officer of a company or other corporation to attend court to provide information. Where that officer is a corporate director, does Rule 71.2 apply to the directors of the corporate director? It does not according to a unanimous Court of Appeal in Masri v Consolidated Contractors International Co SAL and others (No 4) [2008] EWCA Civ 876.

In the course of his judgment, Sir Anthony Clarke MR observed (para. [20]):

[It is argued] that, unless 'officer' is construed as including a director of a corporate director of the judgment debtor, companies will ensure that, so far as possible, they have corporate entities and not natural persons as directors. I very much doubt whether such a construction would be likely to have that effect. In any event, although I can see that it might be desirable for the rule to be widened to include such a case, I am not persuaded that 'officer' of the judgment debtor in the rule in its present form can properly be construed so as to include an officer of a corporate director of the judgment debtor".

Note: One of the changes being introduced by the Companies Act (2006) is the requirement that all companies must have at least one director who is a natural person (see Section 155, which is brought into force on 1 October 2008 by the Companies Act 2006 (Commencement No. 5, Transitional Provisions and Savings) Order 2007).

UK: England and Wales: unfair prejudice and directors' fiduciary duties

Interim post: Allegations concerning breaches of directors' fiduciary duties are often considered in the context of the unfair prejudice remedy (Section 994 of the Companies Act (2006), formerly Section 459 of the Companies Act (1985)). The recent High Court decision O'Donnell v Shanahan [2008] EWHC 1973 (Ch) provides a good example but the case is of particular interest because of the discussion of fiduciary duties. For example, the trial judge observes (at para. [212]):

Whilst the authorities make clear that, if a breach of the no conflict rule (and also the no-profit rule) is made out, it does not matter if the company (or trust or partnership) could not of itself have proceeded with the transaction, it does appear to me permissible to take into account when determining the scope of the directors' duties and in deciding whether 'there is a real sensible possibility of conflict' the inherent likelihood in fact of the company extending its existing scope of business into areas of business which might give rise to a conflict".

Notes:

[1] The judgment is not yet available on BAILII although it is available on Lawtel (for subscribers). The trial judge relied heavily upon the first instance decision Wilkinson v West Cost Capital & Ors [2005] EWHC 3009 (Ch). Update (28 August 2008): the decision is now available on BAILII - click here.

[2] The Companies Act (2006) has codified directors' fiduciary duties: see Part 10, Chapter 2 (and remember that the provisions within this Part have different implementation dates).  The O'Donnell case was concerned with the common law duties on which these codified duties are based. 

UK: England and Wales: members of the company?

In Southall Court v Buy your freehold Ltd & Ors [2008] EWLands LRX_124_2007 (available in PDF here), the England and Wales Land Tribunal considered a company law question: whether individuals had become members of a company in accordance with Section 22(2) of the Companies Act (1985). Section 22 - titled "definition of a member" - provides:

(1) The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members.

(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company".

The individuals in question had agreed to become members but their names had not been entered in the register of members because no such register existed. The Tribunal held that they had not become members of the company and with reference to several cases - Nicol’s case (1885) 29 Ch D 421, Re a Company [1986] BCLC 391 and National Westminster Bank v IRC [1995] 1AC 119 at 127B - stated that the requirements of Section 22(2) are cumulative. As a result, a claim notice under Section 79(5) of the Commonhold and Leasehold Reform Act (2002) was invalid.

Note: The equivalent provision of the Companies Act (2006) - Section 112 - is due to come into force on October 1, 2009.

UK: England and Wales: conflicts of interest and joint venturers

The High Court decision Daniels v Deville [2008] EWHC 1810 (Ch) contains some interesting points on the duties of joint venturers. The trial judge, Lindsay J., held that a participant in a joint venture owed an implied duty of good faith. The judge also held that an implied duty was owed under which no joint venture vehicle (or participant) should place itself (or himself) in a position in which its (or his) duties to the other joint venturers would conflict with its (or his) own interests.  This said, the judge proceeded to hold, on the basis of the facts before him, that these duties did not preclude the participators from competing with the joint venture.  Lindsay J. also declined to imply a duty under which the participators owed a duty to disclose to each other information concerning business opportunities of which they were aware and which were suitable for exploitation by the joint venture.  Lindsay J's discussion of these points is at paras. 114-118 of the judgment.

UK: England and Wales: security for costs and unlimited companies

Civil Procedure Rule 25.13 provides that the court may make an order for security for costs where, inter alia, "the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so". 

Does this Rule apply to unlimited companies or is it restricted to limited companies? This question has been considered by the Court of Appeal in Jirehouse Capital & Anor v Beller & Anor [2008] EWCA Civ 908, in which it was unanimously held that Rule 25.13 applies to unlimited and limited liability companies. Arden LJ observed (para. [19]):

CPR 25.13(2)(c) provides that the court may make orders for security against "companies", without distinction ... I do not accept the argument that to include unlimited companies is unprincipled".

UK: Supreme Court hears de facto director case

The Supreme Court begins hearing argument today in Holland v HMRC Commissioners: see here. The court will consider whether the director of a company which acted as a director of 42 companies was a de facto director of those 42 companies. The High Court ([2008] EWHC 2200 (Ch)) held that the director was a de facto director. The Court of Appeal ([2009] EWCA Civ 625) held that he was not.

UK: England and Wales: derivative claims under the Companies Act (2006)

The High Court gave judgment today in Stainer v Lee & Ors [2010] EWHC 1539 (Ch). Although only a first instance decision, it is nevertheless important because of the guidance it provides on the operation of the new statutory regime governing derivative claims under Chapter 1, Part 11, of the Companies Act (2006). There have been only a handful of reported cases so far and Stainer is of interest because permission to continue a derivative action was granted, subject to various conditions including one relating to costs. Two points of immediate interest are:

[1] Section 263 sets out the matters which the judge must consider in deciding whether to grant permission. In this regard, the trial judge observed (at para. [29]):

I consider that section 263(3) and (4) do not prescribe a particular standard of proof that has to be satisfied but rather require consideration of a range of factors to reach an overall view. In particular, under section 263(3)(b), as regards the hypothetical director acting in accordance with the section 172 duty, if the case seems very strong, it may be appropriate to continue it even if the likely level of recovery is not so large, since such a claim stands a good chance of provoking an early settlement or may indeed qualify for summary judgment. On the other hand, it may be in the interests of the Company to continue even a less strong case if the amount of potential recovery is very large".

[2] With regard to the claimant's costs, the trial judge observed (at para. [56]):

The Applicant seeks an indemnity for his costs, relying on Wallersteiner v Moir (No 2) [1975] 1 QB 373. I think that is clear authority that a shareholder who receives the sanction of the court to proceed with a derivative action should normally be indemnified as to his reasonable costs by the company for the benefit of which the action would accrue. But where the amount of likely recovery is presently uncertain, there is concern that his costs could become disproportionate. Accordingly, I place a ceiling on the costs for which I grant an indemnity for the future ...".

UK: England and Wales: the true and fair view

Judgment was given yesterday by the Court of Appeal in Macquarie Internationale Investments Ltd v Glencore UK Ltd [2010] EWCA Civ 697. The court upheld the trial judge's finding (at [2009] EWHC 2267 (Comm)) that there had been no breach of a warranty which provided that [a] audited accounts were prepared in accordance with accounting standards and a true and fair view of a company's assets and liability [b] a set of management accounts had been prepared in accordance with relevant accounting standards.

The decision is of interest because of what is said about the true and fair view; in this regard, Jackson LJ observed (paras. [51] and [52]):

... a joint opinion written by Mr Leonard Hoffmann QC and Ms Mary Arden in September 1983 has been highly influential and was relied upon by the judge in the present case. I recall that that joint opinion was in general circulation in the 1980s. It appears to have left an imprint on judicial thinking and on legal writing in subsequent decades. The essential thesis of Mr Hoffmann and Ms Arden was that the concept of "true and fair view" as used in the Companies Acts is an abstraction. It is for the courts to decide in any given case whether the accounts do give a true and fair view. However, in deciding this question the courts look for guidance to the ordinary practices of accountants and in particular to the standards published by the relevant professional body. These published standards not only guide accountants in the preparation of accounts but also mould the expectations of those who read or use the accounts. Therefore compliance with professional standards is prima facie evidence that the accounts present a true and fair view of the assets and liabilities of the company or the group. Deviation from accepted accounting principles is prima facie evidence that the accounts do not present a true and fair view of the assets and liabilities of the company or the group.

In subsequent decisions courts have treated compliance with published professional standards as strong evidence that the accounts in question did present a true and fair view: see Lloyd Cheyman & Co Ltd v Littlejohn & Co [1987] BCLC 303 at 313; Senate Electrical Wholesalers Ltd v STC Submarine Systems Ltd (20th December 1996, unreported) at page 20 of the transcript; Bairstow v Queen's Moat Houses plc (23rd July 1999) at pages 31-32 of the transcript and Revenue and Customs Commissioners v William Grant & Sons Distillers Ltd [2007] UKHL 15; [2007] 1 WLR 1448 at paragraphs 2 and 38".

UK: England and Wales: directors' liability for inaction

The High Court has today given judgment in Lexi Holdings v Luqman & Anor [2008] EWHC 1639 (Ch). The case concerned allegations of breach of duty made against several directors. It was argued that the inaction of these directors - including their failure to disclose to the board information known to them - had caused the losses resulting from the misappropriation of the company's assets by the managing director. The trial judge (Briggs J.) rejected this argument because causation could not be established but he nevertheless made some interesting points with regard to directors' duties.  In evaluating the claims Briggs J. considered the duties of directors (under the law before the codification of directors' duties in the Companies Act (2006)) and held that that the standard of care expected of directors is assessed using a dual objective/subject test. In this regard, Briggs J. observed (paras. [37] and [38]):

The objective test sets the basic standard. It is no excuse for a director to say that, in fact, she did not have the general knowledge, skill or experience reasonably to be expected of a person carrying out her appointed functions. The subjective test potentially raises the standard by reference to any greater general knowledge, skill or experience which the particular director actually has. To that analysis may be added the principle, established for example in Re City Equitable Fire Insurance Company Limited [1925] Ch 407 that, because of the essentially fiduciary nature of the office, a director is expected to apply to the management and custodianship of the company's property that same degree of care as she might reasonably be expected to apply in the management and custodianship of her own property".

Briggs J. then proceeded to consider the proper course of action for a director resigning from his/her position in circumstances where he/she is concerned about the conduct of the other directors.  The comments of Briggs J. in this regard are of particular interest because he recognised that resignation alone may not be a sufficient response (at para. [39]):

The fiduciary nature of the office also affects the question whether, and if so when, resignation may be an appropriate response by a director to circumstances coming to her attention. Prima facie a director who no longer wishes to perform her duties, or who finds it impossible to do so, may properly resign; see Re Galeforce Pleating Co Ltd [1999] 2 BCLC 704, at 716 c-d. But a director who wishes to retire may nonetheless be required to take steps to deal before departure with a pressing matter calling for attention, or to put her continuing colleagues on the board in possession of information known to her relevant to the matter in question, so as to enable them to deal with it. Exceptionally, a director may upon departure be obliged to put relevant information in the hands of the company's shareholders or other stakeholders, if not satisfied that continuing colleagues on the board have the inclination or the ability to deal with a matter of concern".

UK: Companies House - appeals against late filing penalties

The Companies House adjudicator, Dame Elizabeth Neville DBE QPM, has published her first report (for the period 1 August 2007 - 31 March 2008). One of the roles of the adjudicator is to hear appeals against late filing penalties imposed by Companies House (and upheld, internally, by the Senior Appeals Manager). In this regard, the following extracts from Dame Elizabeth's report are of interest (paras. 2.8 and 2.16):

There were seven cases where directors experienced some serious problem which delayed the submission of the accounts. These included bereavement, and illness. However, in none of these cases was the individual a sole director. All directors have equal responsibility to ensure that accounts are submitted on time. Where one director has primary responsibility for submitting accounts and some catastrophe overwhelms him or her, other directors must be prepared to step into the breach. It is apparent that some directors are that in name only, and are either unable or unwilling to act when it becomes necessary. 

I upheld one appeal. In this case, property developers had been the directors of a property management company. They had managed it so badly that Companies House had dissolved it. The residents of the property development were obliged to apply for the company to be reinstated because of restrictive covenants on their properties, incurring the late filing penalties of the previous directors. Whilst supporting the policy of Companies House that outstanding late filing penalties must stand when a dissolved company is reinstated, notwithstanding a change of directors, I considered the circumstances of this case to be exceptional as the residents had no choice but to reinstate the company, had been ill treated by the property developer, and had already incurred considerable expense".

Notes: 

[1] The directors' duty to file accounts with the registrar of companies is imposed by Section 441 of the Companies Act (2006). Note also Part 35 - "The Registrar of Companies" - of the Act. 

[2] In July 2008, Companies House published revised guidance on late filing penalty appeals: see here. 

[3] All limited companies in England, Wales and Scotland are registered at Companies House, an executive agency of the Department for Business, Enterprise and Regulatory Reform. There are over 2,000,000 registered companies. There is a Registrar for England and Wales and another for Scotland. For information about incorporating a company, see here. 

UK: England and Wales: the Companies Act (2006): the statutory derivative action

In Franbar Holdings Ltd v Patel and others [2008] EWHC 1534 (Ch), the High Court considered the operation of the statutory derivative action introduced by Part 11 of the Companies Act (2006). This is one of the first reported cases concerning the operation of the statutory derivative action. Although not a full trial of the various claims, Franbar is nevertheless important because it provides (a) clarification regarding ratification and (b) insights concerning the relationship between the new statutory derivative action and the unfair prejudice remedy in Section 994.

In Franbar the trial judge (Mr William Trower QC, sitting as a Deputy Judge of the High Court) had before him several applications including a petition under Section 994 of the Companies Act (2006) and an application to continue a derivative action.  Section 261(1) of the 2006 Act requires a member bringing a derivative action to seek the court's permission to continue the action. Section 263 sets out the circumstances in which permission should be given and, in subsection 2, provides that permission must be refused if the court is satisfied:

(a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or
(b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company, or
(c) where the cause of action arises from an act or omission that has already occurred, that the act or omission— (i) was authorised by the company before it occurred, or (ii) has been ratified by the company since it occurred.

The judge did not consider head (b) because the allegations concerned past conduct.  With regard to head (a) - referring to the duty imposed on company directors - the trial judge identified several factors  which the hypothetical director would take into account including:

• The prospects of success
  
• The disruption which would result if the proceedings continued
  
• The cost of the proceedings
  
• Any damage to the company's reputation and business if the action failed

With regard to head (c) - authorisation or ratification - the trial judge considered Section 239 which governs ratification by the shareholders of a director's acts. Section 239 provides that a resolution proposed at a meeting will only be passed if the necessary majority is obtained excluding the votes of the director (if a shareholder) and any shareholder connected with him (on the latter, see Section 252). It was argued that Section 239 had replaced the principle that directors' acts cannot be ratified where they constitute a fraud on the minority and the wrongdoers are in control of the company. 

The trial judge rejected this argument, relying upon Section 239(7) which provides that the framework for ratification in Section 239 "does not affect any other enactment or rule of law imposing additional requirements for valid ratification or any rule of law as to acts that are incapable of being ratified by the company". In the judge's opinion (at para. [45]):

...the [following] words of Sir Richard Baggalay ... in North-West Transportation v Beatty (1887) 12 App Cas 589, 594, describing the circumstances in which a company cannot ratify breaches of duty by its directors, remain good law:

"... provided such affirmance or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it"

It follows that, where the question of ratification arises in the context of an application to continue a derivative claim, the question which the court must still ask itself is whether the ratification has the effect that the claimant is being improperly prevented from bringing the claim on behalf of the company ... That may still be the case where the new connected person provisions are not satisfied, but there is still actual wrongdoer control pursuant to which there has been a diversion of assets to persons associated with the wrongdoer, albeit not connected in the sense for which provision is made by section 239(4)". 

The judge also considered Section 263(3), which specifies several factors to be considered when determining whether permission should be given, including factor (f): "whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company". The trial judge observed that where an act or omission gives rise to a claim for unfair prejudice (under Section 994) against a member and a claim for breach of duty against a director, Section 263(3)(f) is engaged. He also held that the adequacy of the remedy in (f) was a relevant consideration.  

The trial judge's decision was that permission should not be given for the derivative action to proceed. Although he found that there was substance in some of the complaints made, further work was needed to establish a clear claim of breach of duty.  For this reason it was open to a hypothetical director to decline to proceed with the derivative action. The judge also attached significant weight to the fact that the shareholder bringing the derivative action would be able to gain what it wanted through its separate Section 994 petition and shareholder action. 

Notes:

[a] The Franbar judgment has not yet appeared on BAILII although it is available on Lawtel (for subscribers only). A summary has, however, been provided here by the ICLR as part of its free WLR(D) service. This summary - which focuses on the issues surrounding ratification - will be removed if, as is likely, Franbar is reported in one of the ICLR series of law reports. Update (22 September 2008): the judgment is now available on BAILII - click here.

[b] Separate sections of the 2006 Act deal with derivative proceedings in Scotland: see Part 11, Chapter 2.

UK: England and Wales: an investment company?

Judgment was given earlier this week in Dawsongroup Plc v Revenue & Customs [2010] EWHC 1061 (Ch). The case concerned a company - Dawsongroup plc - the holding company for a group of companies carrying on the business of renting trucks, trailers, buses, coaches and other specialist equipment. The company undertook two activities: [1] providing services to the subsidiary companies (including banking, financial, legal and IT services) and [2] holding the shares of the subsidiary companies and arranging the affairs of the group (which included the disposal and acquisition of companies, the general control of the subsidiaries to ensure the maintenance of their value, and receiving income from the subsidiaries in the form of dividends).

Last year, in the First-tier Tribunal (Tax) (see [2009] UKFTT 137 (TC)) it was held that the company was not an investment company, defined by Section 130 of the Income and Corporation Taxes Act (1988) as "any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom...". As such, the company was unable to deduct certain expenditure under Section 75 of the 1988 Act when calculating its profits for corporation tax purposes.

The company appealed. Mann J. heard the appeal and held that the company was an investment company although, for other reasons, the disputed expenditure was not deductible. In holding that the company was an investment company, Mann J. held that the First-tier Tribunal judge had incorrectly decided that the company's exercise of control over the subsidiaries was a trading activity. HMRC argued that the company's investment activity was ancillary to its main trading activity of providing services. Mann J rejected this argument because it failed to describe the company's raison d'être and the overall picture of its functions. He instead found that the company was "primarily a holding company ... which also happens to provide services to the rest of the group ... its main activity is being a holding company with a degree of real control over the rest of the group" (para. [39]).

England and Wales: law reform - corporate criminal liability and company charges

The Law Commission has published its 10th Programme of Law Reform. There is some very brief discussion of the law relating to corporate criminal liability, about which the Law Commission states it will publish a consultation paper in October 2009. The Commission also notes that its proposals on company charges have not yet been accepted in principle by the Government.

England and Wales: the financial ombudsman and English law

Today the Court of Appeal delivered an important decision concerning the operation of the Financial Ombudsman Scheme (FOS). In Heather Moor & Edgecomb Ltd, R (on the application of) v Financial Ombudsman Service & Anor [2008] EWCA Civ 642 the court considered, inter alia, the operation of Section 228(2) of the Financial Services and Markets Act (2000). Section 228(2) provides that "[a] complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case".  One of the arguments made was that Section 228 required the Ombudsman to determine complaints in accordance with English law.  The Court of Appeal rejected this argument; Stanley Burnton LJ observed (para. [36]):

If I confine myself to the wording of section 228 and the other relevant provisions of the 2000 Act, in my judgment they do not require the Ombudsman to determine a complaint in accordance with the common law. If section 228 had simply provided that a complaint is to be determined by the ombudsman, it would have been implicit that it was to be determined in accordance with the law apart from that section. But Parliament did not so provide. The words "by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case" in section 228 are inappropriate and unnecessary if what Parliament intended was a determination in accordance with the law apart from section 228".

Of interest, too, is what Rix LJ said with regard to the operation of the FOS (at para. [87]-[88]):

...it is possible to see in the "fair and reasonable" jurisdiction of the ombudsman the source not merely of an alternative dispute resolution service but of an important new source of law. That "fair and reasonable" jurisdiction may be flexible and (subject to judicial review) for the ombudsman and not for the courts to discern: nevertheless, these are concepts long familiar to English law, and, given the legal and industry background to which the scheme rules bid the ombudsman to have regard, it is hard to think that the parties to complaints submitted to the ombudsman's jurisdiction will find themselves in unrecognised country".