Directors’ disqualification/// unusual recent cases

Blog by Gordon Hollerin.

Most directors’ disqualification cases concern an application for the disqualification of an individual who has acted inappropriately in his duties as director of a company. However, two unusual recent cases widen the range of disqualification actions usually seen in the UK courts.

Wood v Mistry (10 July 2012)///

Facts of the case

The liquidators of a group of companies successfully brought disqualification proceedings in the English High Court against the companies’ former liquidator under the Company Directors Disqualification Act 1986. The case is unusual in that the proceedings were initiated by liquidators (rather than the Secretary of State) and were against a former liquidator rather than a director.

The subsequent liquidators of the companies initiated disqualification proceedings against Mr Mistry who they claimed had, while acting as liquidator, dishonestly diverted funds from the companies for his own financial benefit, paid invoices that he knew to be fraudulent and failed to recover sums from third parties for the benefit of the companies.

Judgement

The judge said that the court should make a disqualification order against a liquidator only where “serious misconduct” was established. He rejected the defence submission that the liquidators must have a financial interest in the disqualification order being made, and noted that the purpose of disqualification is essentially for the protection of the public, and a liquidator’s functions include the consideration of criminal or civil sanctions in respect of misconduct.

The judge was satisfied that Mr Mistry’s conduct had been “grossly improper” and granted a 12-year disqualification order.

Comment

It is worth noting that where a liquidator pursues disqualification proceedings, there is no financial gain for the insolvent company’s creditors. Therefore, before making an application, a liquidator may wish to obtain confirmation of support from the company’s creditors including funding in appropriate cases.

Cunningham v HM Advocate (16 May 2012)///

Facts of the case

Mr Cunningham was appealing against a conviction by a jury in Edinburgh Sheriff Court for contravening a twelve year directors’ disqualification order made in 1999 by being concerned in the management of a company in 2003 and 2004.

As the original disqualification order contained the condition that Mr Cunningham could not be a director or take part in the promotion, formation or management of a company “without the leave of the court”, it was submitted on behalf of Mr Cunningham that it was for the prosecution to establish by corroborated evidence that leave had not been granted, and that as this had not been established the prosecution must fail.

Judgement

The appeal court held that if Mr Cunningham had received leave from a court to act in contravention of his disqualification order, this could easily be proved by him and that the onus was on him to establish that leave had been granted. For this reason, the defence submission was not well-founded and was rejected. Proceedings were continued for an appeal against sentence.

Comment

The facts of these cases are unusual. Nevertheless, the two judgements do provide useful guidance on the court’s approach and highlight the serious consequences of engaging in fraudulent activities or acting in contravention of a disqualification order.

Remember the Pre Action Requirements (PARs) come into force today (1st August 2012)

Therefore, before serving notice in terms of section 14 of the Housing (Scotland) Act 2001, Registered Social Landlords (RSLs) must be able to demonstrate that they have;

  1. Given clear information about the tenancy agreement and the unpaid rent or other financial obligations;
  2. Made reasonable efforts to give help and advice on eligibility for housing benefit and other types of financial assistance;
  3. Given information about sources of assistance for debt advice;
  4. Made reasonable efforts to agree with the tenant a reasonable plan for money due and future payment of the rental charge;
  5. Considered the likely result of any application for housing benefit that has not yet been decided;
  6. Considered other steps the tenant is taking which are likely to result in payment within a reasonable time;
  7. Considered whether the tenant is complying with the terms of an agreed plan for the money due and continuing to pay the rental charge; and
  8. Encouraged the tenant to contact their local authority to advise of their housing situation.

RSLs must meet the PARs for all notices of any proceedings involving rent arrears which are served on a tenant and any qualifying occupiers from today. The PARs do not apply in cases where landlords have served a notice on a tenant or qualifying occupiers before 1st August 2012 and which is in force on the date that court action is raised.

If you require further information or advice on PARs, please contact Nadia Sirc or Fiona McLeod in our Recoveries Department.

Validity of administration appointments – Law now settled?

In BXL Services, an English High Court decision of 10 July 2012, Judge Purle has stated

Blog by Gordon Hollerin.

that it is now “settled law” that a failure by directors to notify the Company of their intention to appoint administrators does not result in the appointment being invalid

BXL is the latest in a series of High Court decisions, some of them reaching contradictory conclusions, on whether a failure to comply with the requirement for notice of intention to appoint administrators to be given by the directors to the Company itself and to various other parties set out in the Rules invalidated an administration appointment

In BXL Services the directors of a charitable company limited by guarantee resolved to appoint administrators. There was no floating charge holder. So there was no party entitled to appoint an administrative receiver or administrator and upon whom a notice of intention to appoint administrators had to be given in terms of the Act. The Rules also prescribe that other parties, including the Company itself, are to be given notice. This didn’t happen, no doubt because the directors regarded it as unnecessary to notify their Company when they were making the appointment.

In some previous cases such as National Westminster Bank v Msaada Group and Minmar (929) Ltd v Khalatschi such an omission had been held to be fatal to the appointment. However in a decision issued in May 2012 – Re Ceart Risk Services Ltd – Judge Arnold had considered the previous decisions and nonetheless decided that failure to give notice to the FSA (in circumstances where notice was required to be given to it) had not invalidated the appointment

Judge Purle in BXL Services described the judge’s decision in Ceart Risk Services as a choice to adopt a purposive rather than literal approach and went on to say that “it is that choice which must now be taken to settle the law at first instance”

The case decides that in these circumstances a Court can declare the administration appointment valid not that notice on the Company is not required. The decision will be welcomed by most but it remains the case that even where there is no floating charge holder it is appropriate for notice of intention to appoint to be given to the Company and any other party (such as the FSA) on whom notice might be prescribed in the circumstances”

Franchising in Scotland

Andrew Fraser

Blog by Andrew Fraser

New figures from the Natwest British Franchise Associate Survey 2012, show that franchising is now a major factor in business growth in Scotland and the rest of the UK and these numbers are set to keep on growing.

Franchising might be something that isn’t always immediately associated with helping your business grow, in fact when you hear the word ‘Franchise’ what do you think of? The latest Batman movie, an American sports team, McDonalds?

The term ‘franchising’ has been used to describe many different forms of business relationship. However, the form we are most concerned with, is what is called ‘business format franchising’ (If you answered McDonalds to the question above, you are thinking along the right lines!)

Put simply, ‘Business Format Franchising’ is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles that franchisee to run their own business following the processes, procedures and training set out by the Franchisor.

The Franchisor allows the franchisee to trade under the name of the franchisor and gives them a complete package containing all that the franchisee needs to run their business. In short, franchising let’s you set up and own a business simply by paying money for the right to do so.

It is an increasingly popular activity in Scotland and the UK more generally; here are some quick facts from the aforementioned NatWest British Franchise Association Survey 2012:

  • It contributes an estimated £800 million to the Scottish economy per year (and £13.4 billion to the UK economy as a whole).
  • There are over 500 franchise systems in operation in Scotland (929 in the UK altogether).
  • There are more than 2,000 individual franchise units in Scotland (40,100 franchise units in the UK).
  • There are an estimated 36,000 people employed in franchising in Scotland (594,000 in the UK)
  • 91% of franchisees claim to be profitable even during this time of economic uncertainty.
  • Relationships between franchisees and franchisors are healthy, with 90% reporting satisfaction in their dealings.
  • 4 in 5 franchises (81%) believe they have a competitive advantage (over other small businesses) as a result of running a franchised business.

All of this has grown from an industry that 20 years ago had a turnover of just over £5 billion, had 379 different brands and represented 18,300 franchisee outlets.

The importance of franchising is also being acknowledged by Scotland’s politicians, with David Kaye and Andy Fraser of Harper Macleod’s Franchising team recently invited to a dinner with MSPs at the Scottish Parliament to discuss the future of franchising in Scotland.

The MSPs, from the three major political parties, pledged to hold a parliamentary reception later this year after learning of the compelling advantages inherent in the franchising model, of the significant contribution franchising makes to the Scottish economy.

They were eager to hear more about the industry’s long-term sustainability, resilience and robustness throughout the economic downturn.

The focus of the briefing will be to increase the education and understanding of the strengths of franchising within both parliament and the business world, at a time when politicians from all parties are looking for ways to help the economy grow.

Brian Smart, director general of the British Franchise Association, said: “Franchising is a key component of the Scottish economy and I am hugely encouraged by the levels of appreciation, enthusiasm and commitment being shown towards the industry. If we can promote ethical franchising and educate people about its merits, together with the help of MSPs and Scottish business leaders, then the industry in Scotland will be well-placed to go from strength to strength.”

Lydia Kelly and others v Upper Clyde Shipbuilders

Fergus Thomson

The case of Lydia Kelly and others v Upper Clyde Shipbuilders marks the first decision from a civil jury in the Court of Session following the radical procedural changes arising from the June 2012 appeal decisions of Thomson and Hamilton.

John Kelly died aged 82 as a result of mesothelioma arising from his asbestos exposure at work. His death came months after diagnosis.

Guidance was given to the jury by the trial judge, Lady Clark, on a range of figures they might consider for loss of society awards for the deceased’s widow and adult children.

The range suggested for the widow was £40,000-£80,000. The range suggested for the children was £15,000-£35,000. It was made clear to the jury that the range was just for guidance and fundamentally it was a matter for them what was awarded.

The jury’s award for the widow was £45,500, towards the bottom of the suggested range. The award for the adult children of £25,000 was in the middle of the suggested range.

In this case the jury seems to have been prepared to follow the trial judge’s guidance.

Enforcement of a residential standard security – pre action requirements

Blog by Jacqui Fraser

Accord Mortgages Limited (”AML”) sought to enforce their rights under a standard security granted by the now deceased debtor, by means of a calling-up notice. The property had been used for residential purposes during the debtor’s lifetime; however after her death the property remained vacant, and was as such at the date of enforcement.

Facts of the case///

As a preliminary issue, the court was required to consider whether AML was entitled to simply seek a declarator, or whether they were required to proceed under section 24 of the 1970 Act and provide evidence to the effect that they had complied with the pre-action requirements under section 24A.

The crux of the issue was one of time, with regards to the phrase “used to any extent for residential purposes”, under section 20(2A).

The judgement///

Essentially, it was held that the relevant period for the enforcement of a creditor’s rights by means of a calling-up notice, is the time of enforcement. Therefore it was inconsequential that the property had, at one point in time, been used for residential purposes, or that it may be used for the same purpose in the future. At the time of enforcement the property was not being occupied by anyone, therefore it could not be classified as “residential”.

Comment///

Consequently, in seeking to enforce their rights under a standard security by means of a calling-up notice, a creditor must first consider the use to which the subjects of the standard security are being put at the time he wishes to exercise his available remedies.

Just issued: interesting new case on gratuitous alienations

Blog by Gordon Hollerin, Partner in the Banking & Finance team

The administrators of Questway Limited had been appointed by its directors, after another company in its group with which it had cross guarantees had been put into administration by assignees of Anglo Irish Bank. The group owned around 120 properties and had borrowings of £20 million. Following their appointment the administrators discovered, that three months beforehand, Questway had transferred £90,000 to a director personally. On the same day there had been a number of other transactions. Mr Pelosi, who controlled the companies and was described by the judge as a shadow director, had withdrawn £9,000 from Questway’s account but had also transferred from his personal account into Questway’s account two payments of £45,000 and £53,500

The Questway administrators sued the director for repayment of the sum paid to him of £90,000, which they said was a gratuitous alienation challengeable under section 242 of the Insolvency Act

The director’s defence was that Mr Pelosi had transferred the sum into Questway’s account in error and that the overall effect of the transactions was that Mr Pelosi was repaying a series of 20 loans made in cash by the director to Mr Pelosi over a period of 14 months. The director said that no interest was due on the loans and there were no agreed repayment terms. He had no receipts but Mr Pelosi gave evidence supporting the director’s statements.

Lord Hodge did not accept the evidence of the director or of Mr Pelosi, which he found to be neither credible nor reliable. He said that when the money reached Questway’s account it was Questway’s property and so the transfer of £90,000 from that account to the director was a gratuitous alienation. He ordered the director to repay £90,000, plus interest, to the administrators

This case illustrates that, in appropriate circumstances the Courts, will strike down payments made to personal accounts from the account of a company which later goes into insolvency, even in the face of an alternative explanation from not only the recipient but also from the person who was the original source of the funds. As a side issue this case also shows the speed with which the Scottish Courts can deal with these cases with a period of only six months between commencement of the action and the decision being issued.

http://www.scotcourts.gov.uk/opinions/2012CSOH107.html