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".

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: Scotland: does a dissolved partnership have a continuing legal personality?

The Scottish High Court of Justiciary, Scotland's supreme criminal court, has considered some interesting points regarding partnerships under Scots law and the Partnership Act (1890). In Balmer and others v Her Majesty's Advocate 2008 HCJAC 44, the court was required to consider whether a partnership continued to exist as a legal person after its dissolution. Lord Eassie delivered the court's opinion and held that "the dissolved partnership does not have any continuing legal personality following dissolution" (para. [83]). As a result, an indictment against a dissolved partnership was held incompetent.

Notes:

[1] Section 4(2) of the Partnership Act (1890) provides that "In Scotland a firm is a legal person distinct from the partners of whom it is composed".  Under English law the general partnership does not have a separate legal personality; however, in W Stevenson & Sons (A Partnership) and Anor v R [2008] EWCA Crim 273 (noted in this earlier post), Phillips LCJ stated (para. [30]):

In as much as business activities are conducted in the name of a partnership and the partnership has identifiable assets that are distinct from the personal assets of each partner there is no reason why a partnership should not be treated for the purposes of the criminal law as a separate entity from the partners who are members of it".

[2] The case has been reported on the BBC news website here, where the following comments of Solicitor-General Frank Mulholland QC are noted: "The prosecution of a dissolved partnership was previously unknown in Scots law. Today's decision of the Appeal Court has clarified the law in relation to the liability of a dissolved partnership for alleged crimes that occurred prior to it being dissolved. The Appeal Court has held that criminal liability does not rest with the former firm in its firm name".

 

UK: Scotland: unfair prejudice, implied terms and the affairs of the company

An interesting judgment was handed down yesterday by Lord Glennie in Scotland's Court of Session (Outer House). The case - Gowanbrae Properties Ltd., a petition of [2008] CSOH 106 - concerned a petition presented under Section 994 of the Companies Act (2006) (the unfair prejudice remedy, formerly Section 459 of the Companies Act (1985)). The case deserves attention because of Lord Glennie's comments on the width of the remedy and also because it provides a good illustration of the difficulties associated with determining whether prejudice has been suffered by a shareholder qua shareholder.

The petitioner held redeemable preference shares in the company. At the time that the preference shares were created, the company's articles were amended to provide for the redemption of the preference shares on a specified date: the day on which a certificate of practical completion was issued in respect of the development of a property owned by the company. The company's board decided not to proceed with the development of the property. The petitioner claimed that this prevented the redeeming of its shares and that this amounted to the conduct of the company's affairs in a manner unfairly prejudicial to its interests.

In order to bring their claim within Section 994, the petitioner argued that the directors' decision ended the basis on which the parties had entered into association; it was thus unfair, the petitioner argued, for it to be bound to continue as a shareholder in the company. Lord Glennie rejected this argument and the argument that a term should be implied requiring the company to achieve practical completion. His Lordship dismissed the petition and in the course of his judgment observed (at para. [20]):

If there is no obligation on the Company in terms of the implied term contended for by the petitioner, it must follow that the Company is free to make commercial decisions in its own interests. The directors owe a fiduciary duty to the Company and complaints can be made against them if, in breach of that duty, they have regard to extraneous matters, such as a desire to benefit some other company. The court will not lightly infer from surrounding circumstances the existence of an understanding to which the Company should be held in equity and which would prevent it from making decisions in its best interests..."

Lord Glennie also made the following interesting observations with regard to the petitioner's claim and the court's jurisdiction under Section 994 (at para. [22]):

The essence of that jurisdiction [Section 994] is that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner as a member of the company. The petitioner's claim, as was stressed repeatedly in argument, is based on the fact that it had an accrued right to payment ... It seems to me to be arguable that the prejudice which the petitioner has suffered, if it be prejudice, is as a seller of shares rather than as a member of the company. In response to this argument, I was referred on behalf of the petitioner to the case of Gamlestaden Fastigheter AB v Baltic Partners Limited [2007] 4 All ER 164. In that case a shareholder claimed under the Jersey equivalent of section 459 on the basis that he was a creditor, and would not have advanced sums to the company but for having been a shareholder. This, it was argued, illustrated the width of the jurisdiction. Those facts are, of course, the reverse of the present circumstances ..."

Note: For an earlier decision of Lord Glennie considering Section 994, see: West Coast Capital (Lios) Ltd. [2008] CSOH 72.

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: Scotland: Law Commission report on unincorporated associations

The Scottish Law Commission has published its report on unincorporated associations: see here (pdf) or here (html). The Commission has recommended, inter alia, that unincorporated associations meeting certain conditions should have legal personality attributed to them unless they elect otherwise. The Commission takes the view that its proposals require legislative action by the UK Parliament and a draft of the Unincorporated Associations (Scotland) Bill is included in its report.

Scotland: Directors' duties and unfair prejudice

The Court of Session has, today, declined to grant West Coast Capital (WCC) an interim interdict (injunction) which would have prevented Dobbies plc from proceeding with a rights issue.  WCC, a minority shareholder in Dobbies, presented a petition under Section 994 of the Companies Act (2006), alleging that the Dobbies directors (several of whom were officers or directors of Tesco plc and had been appointed last year when Tesco became a majority shareholder) had exercised their powers in Tesco's interests to the prejudice of the other shareholders and had failed to act fairly between Tesco and the other shareholders.  

Lord Glennie was not satisified that WCC had an arguable case.  His opinion is available here and it is important for several reasons:

[1] There is discussion of Section 171 and Section 172 of the Companies Act (2006).  Section 172 imposes a duty on company directors to promote the success of the company for the benefit of the shareholders as a whole.  In doing so, directors are required to have regard to various factors, including the impact of the company's operations on the community and the environment and the need to act fairly as between members of the company.  In Lord Glennie's view, Section 172 does "little more than set out the pre-existing law on the subject" (para. [21]).  Some may question that interpretation because Section 172 sets out, for the first time in companies legislation, certain factors that directors are required to consider. 

[2] There is the clear recognition that breaches of directors' duties can be unfairly prejudicial.  This point remains controversial.  Lord Glennie nevertheless observes: "... it is important to have in mind that fairness and unfairness (in the context of assessing whether conduct is "unfairly prejudicial") are not abstract concepts. They are used in the context of a commercial relationship, where the parties' rights and expectations are governed by contract, namely the articles of association, and, possibly, by other agreements or understandings, as well as by the fiduciary duties which directors owe to the company" (para. [19]).

The case has attracted widespread attention in the media because of the parties involved. See, e.g., The Scotsman, The Guardian and The Times.

Postscript (21 May 2008): The Guardian has reported that West Coast Capital has agreed to accept an offer from Tesco of £12 per share.

UK: Scotland: application for late registration of a charge declined

Lord Hodge, sitting in the Court of Session, Outer House, has declined an application for late registration of a charge under Section 420 of the Companies Act (1985): see Salvesen, Re Companies Act [2009] CSOH 161. The application had been made after the company had entered administration. In rejecting the application, Lord Hodge observed (para. [12]):

The onset of formal insolvency, as a general rule, fixes the position of creditors, who are ranked on the insolvent estate in accordance with their strict legal rights. From then on, the insolvency practitioner holds the company's assets for the benefit of the creditors in accordance with the rights which the general law gives them as to ranking. For the court thereafter to interfere with that ranking would be a serious step. I do not exclude the possibility in exceptional circumstances of the court allowing the late registration of a charge after formal insolvency had commenced, for example where a creditor had been the victim of fraud and especially if the perpetrator stood to gain in the insolvency through the invalidity of the charge. But in the absence of exceptional circumstances, I do not consider that it is just and equitable to interfere with the statutory ranking of creditors on insolvency".

UK: Scotland: remedies for unfairly prejudicial conduct and the powers of the court

The Court of Session (Inner House) has today given its opinion in Li v Holouis Ltd [2009] CSIH 87. The principal issue before the court concerned the remedies available to the Sheriff court when granting relief for unfairly prejudicial conduct under Section 996 of the Companies Act (2006). Lord Carloway delivered the opinion of the court and, at paras. [14] and [15], stated:

Section 994 of the Companies Act 2006 provides, inter alia, that a shareholder can apply to the Court for relief in a situation where a company's affairs are being, or have been, conducted in a manner unfairly prejudicial to him. Section 996 allows the Court to "make such order as it thinks fit". It is recognised that this gives a court the "widest possible discretion" in the selecting the remedy (Wilson v Jaymarke Estates Ltd 2006 SCLR 510, Lord President (Cullen) at para [12]). However, this does not mean that the court can create new remedies, of a type which it otherwise has no power to grant. Thus, it can select from its armoury of competent remedies the one which it thinks appropriate to a given situation. Obvious examples will be orders for payment, ad factum praestandum and interdict. But, in the absence of an express statutory provision, a court cannot grant a remedy which it has no general power to grant.

The Sheriff Court has no jurisdiction to grant the remedy of reduction of documents (Dobie: Sheriff Court Practice, p 22, under reference to Donald v Donald 1913 SC 274). As distinct from the situation where a statute permits the Sheriff Court to "set aside" a decision or other matter as between the parties to a cause or where reduction ope exceptionis constitutes a defence, reduction of deeds can have a much wider effect. It can affect third parties, over which the Sheriff Court may have no general jurisdiction. In the case of heritable rights, any potential Sheriff Court jurisdiction may rest exclusively in another Sheriffdom. Hence, reduction has tended to be restricted to the Court of Session. It may be that this will change in the future (Report of the Scottish Civil Courts Review chapter 4, para 141, recommendation 29) but that is the law at present. The Sheriff's objections to it, however well reasoned in practical terms, cannot change that. In short, the Sheriff Court has no power to grant reduction in a petition under section 994".

Note: a glossary of Scottish legal terms is available here. 

UK: Scotland: winding-up unregistered companies

Lord Hodge, sitting in the Court of Session (Outer House) has ordered the winding-up, under Section 221 of the Insolvency Act (1986), of eleven companies registered overseas but with their principal place of business in Scotland: see HSBC Bank Plc, Re An Order To Wind Up Kirkbride Investments Ltd [2009] CSOH 147. With regard to the exercise of the court's discretion, Lord Hodge observed that the approach adopted by the English courts was appropriate in Scotland. He stated (para. [11]):

There is no recent Scots case law on this issue but I am satisfied that the approach of the English courts is appropriate and I recall that our courts have adopted that approach in applications which have not resulted in written opinions. In similar circumstances Lord Grieve in Inland Revenue Commissioners v Highland Engineering Limited 1975 SLT 203 relied on English case law in his interpretation of the provisions of the Companies Act 1948 in relation to the winding up of unregistered companies and observed that it was desirable that the courts in each jurisdiction should interpret a United Kingdom statute, such as the Companies Act, in the same way. In Marshall, Petitioner (1895) 22 R 697 the First Division used English authority to inform their interpretation of section 199 of the Companies Act 1862".

UK: Scotland: Law Commission to examine criminal liability of partnerships

The Scottish Law Commission has published its eighth programme of law reform (2010-2014): see here (pdf). One of the short-term projects identified is a review of the criminal liability of partnerships, about which the Commission notes:

Following a fire in a nursing home run by a partnership, the partnership was dissolved, and attempts to indict the dissolved partnership, and/or the members of it, in relation to the causes of the fire failed [see Balmer v Her Majesty's Advocate 2008 SCCR 765, 2008 SLT 799, [2008] HCJAC 44]. It is clear that the traditional concepts of the law of partnership do not fit easily into the modern regulatory structure within which many of these organisations operate. While we and the Law Commission for England and Wales investigated and proposed reforms of the general law of partnership in 2003 [here, pdf], we did not focus particularly on criminal liability. It is, however, an area in which the public might reasonably expect a greater degree of clarity than is currently provided by the law".

Guernsey: New Companies Legislation

New companies legislation is being introduced in Guernsey. The January 2008 Billet D'État (the order paper for Guernsey's Parliament) included the draft text of the new Act, titled the Companies (Guernsey) Law 2008. The Act was published in volumes two and three of the legislation Billet D'État. The Act does not become law until it has received the approval of The Queen in Council. This is likely to take place within the next few months in order that the Act can come into force in July.

Consultation on the new Act began in 2005, when a green paper was published. The new Act updates the Companies (Guernsey) Laws 1994 to 1996 and in content it borrows from other jurisdictions including New Zealand, the Cayman Islands, the UK, Scotland and Jersey. For further information, click here.

Company law reform is proving popular in the Crown dependencies. The Isle of Man introduced a new Companies Act in 2006 (about which see: overview and the Act).

---
Postscript: On 7 May, the Companies (Guernsey) Law 2008 was approved by the Queen in Council (see here).

Postscript 2: See this post for a further update (June 2008) and a link to the most recent consolidated version of the legislation.

UK: Scotland: fiduciary duties and the non-executive director

The Court of Session (Inner House) has considered the scope of a non-executive director's fiduciary duties in Commonwealth Oil and Gas Co. Ltd. v Baxter [2009] CSIH 75. This is an important decision because there are few recent cases considering non-executive directors' duties. Their Lordships held that the non-executive director owed the same duties to the company as its executive directors. The decision will be of interest in England and other jurisdictions, not least because their Lordships discussed a broader conceptual question: are fiduciary duties proscriptive or prescriptive?

Scotland: Non-executive directors' fiduciary duties

Shortly before Christmas, Lord Reed gave his opinion in Commonwealth Oil & Gas Company Ltd v Baxter & Anor [2007] ScotCS CSOH198. This important decision deserves attention in and beyond Scotland for several reasons:

(1) it is one of the most important Scottish company law decisions of recent years

(2) it sends a clear message that the holding of directorial office should not be assumed lightly

(3) Lord Reed states that non-executive directors are subject to the same fiduciary duties as executive directors.

Postscript (24 April 2008): It has been reported that Mr Baxter, the non-executive director whose actions were found in breach of fiduciary duty, is to appeal.

UK: Scotland: shareholder indemnification and leave to bring derivative proceedings

In Wishart v Castlecroft Securities Ltd. [2009] CSIH 65 the court granted leave for a shareholder to bring derivative proceedings under Part 11, Chapter 2, of the Companies Act (2006) and subsequently held that the company should indemnify the petitioning shareholder in respect of the costs reasonably incurred in seeking such leave. In Wishart v Castlecroft Securities Ltd. [2010] CSIH 2, published earlier this week but dated 25 November 2009, Lord Reed: [1] explained the juridical basis on which the Scottish courts are able to make such an order regarding indemnification and [2] stressed the desirability of Scottish shareholders being placed in the same position as their counterparts in England and Wales (at paras. [4] and [5]):

The logic of derivative proceedings, as explained in the earlier opinion of the court, is that the proceedings are brought by the member on behalf of the Company. In those circumstances, the member falls within the scope of the principle that "representative persons are entitled to the costs necessarily incurred in the interests of their constituents" (Gibson v Caddall's Trustees (1895) 22R 889 at page 893 per Lord McLaren). Where leave to bring derivative proceedings is granted, that principle applies to the application for leave as well as to the derivative proceedings themselves. It follows that the member ought ordinarily to be indemnified by the company in respect of the expense incurred in relation to the application for leave.

We also note that, as explained in the earlier opinion, one of the objectives of the legislation introducing the requirement that leave be obtained was to achieve consistency in company law throughout the United Kingdom. In England and Wales, provision is made by the Civil Procedure Rules for the court to order the company for whose benefit a derivative claim is brought to indemnify the claimant against liability for costs incurred in the permission application as well as in the derivative action (Rule 19.9E). It is undesirable, against that background, that the legislation should be applied in Scotland in a manner which makes it more difficult in practice for a shareholder to bring derivative proceedings".