if the (liability) cap fits…...barker -v- baxendale walker solicitors and another [2017] ewca civ...

winter 2018

hilldickinson.com

Pointers from recent cases on wrongful trading and misfeasance

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Trouble in paradise

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Get to grips with disclosure

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contentious business update

The negotiation and interpretation of liability caps in contracts are often fraught with difficulties but such clauses are important in terms of managing commercial risk and understanding potential liabilities. Clear drafting is required to ensure that all parties understand their obligations and exposure. In the recent case of Royal Devon and Exeter NHS Foundation Trust -v- ATOS IT Services UK Ltd [2017] EWCA Civ 2196, the Court of Appeal considered the meaning of a contractual limitation of liability clause in an I.T. contract.

If the (liability) cap fits…

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Welcome

contentious business update winter 2018

Newsletter content correct as at January 2018.

ContentsIf the liability cap fits…

Trouble in paradise

Pointers from cases on wrongful trading and misfeasance

Excessive directors’ remuneration and non-payment of dividends – unfair prejudice

Getting to grips with disclosure

Law in action – commercial benefits of enforcing employee covenants

Narrow interpretation litigation privilege

Tax evasion – guilty by way of association?

To deed or not to deed – eight reasons you need a partnership agreement

Forthcoming events 2018

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Limitation of liability clause and cap:Clause 8.1.2 of the contract contained a limitation of liability provision:

‘… the liability of either party for Defaults shall be limited as stated below:

(a) the liability of either party under the Contract for any one Default resulting in direct loss of or damage to tangible property of the other party or any series of connected Defaults resulting in or contributing to the loss of or damage to the tangible property of the other party shall not exceed the figure set out in schedule G;

(b) the aggregate liability of either party under the Contract for all Defaults, other than those governed by sub-clause 8.1.2 (a) above, shall not exceed the amount stated in schedule G to be the limit of such liability.’

The aggregate cap was drafted as follows:

‘Schedule G, Paragraph 9.2

The aggregate liability of [ATOS] in accordance with sub-clause 8.1.2 paragraph (b) shall not exceed:

9.2.1 for any claim arising in the first 12 months of the term of the Contract, the Total Contract Price as set out in section 1.1; or

9.2.2 for claims arising after the first 12 months of the Contract, the total Contract Charges paid in the 12 months prior to the date of that claim.’

FactsThe claimant, an NHS trust (the Trust), entered into a five year contract with ATOS IT Services UK Ltd (ATOS), an I.T. company, for the provision of an I.T. system which could provide an electronic document management and scanning facilities.

The system was supplied and the Trust was unhappy with it and raised issues regarding defects in the system in correspondence, which it claimed ATOS did not remedy, and eventually terminated the contract. The Trust claimed damages against ATOS under two broad heads:

1. for wasted expenditure incurred in reliance on ATOS’ promise to provide a functional system, including sums it paid to ATOS under the contract, sums incurred in purchasing hardware and software for the system; and

2. the costs of internal I.T. projects and health records staff of the Trust who would otherwise have been employed in other work.

The limitation of liability clause in the contract was raised as a defence to the claim.

Interpretation of the clauseThe difficulty with the wording of the clause related to the liability cap in Schedule G which could be interpreted as imposing two separate caps – the first based on the total contract price (a higher cap – £4.9 million) and the second based on the total contract charges (lower cap – £2.1 million) – which one should apply?

At first instance the High Court held that the liability cap imposed a single cap on liability, rather than two separate caps depending on which of the circumstances applied (either paragraph 9.2.1 or paragraph 9.2.2) which ATOS could rely on.

The trust appealed and the Court of Appeal held that two separate caps applied. For any default(s) occurring in the first year of the contract, ATOS’ liability was capped at the contract sum. For any default(s) occurring in subsequent years, ATOS’ liability was capped at a lower sum, namely the amount of the contract charges paid in the previous 12 months. Its reasoning was that:

1. The natural meaning of the words used accorded with business common sense. The result was a finding that there was two separate caps which was entirely consistent with commercial common sense. The work carried out by ATOS in the first year of the contract was different from the subsequent period as defaults could have very expensive consequences. In the subsequent years of the contract the consequences of default would be less expensive.

2. The phrase ‘aggregate liability’ at the beginning of paragraph 9.2 was not necessarily a pointer towards one cap on liability rather than two, as the judge at first instance had held. The phrase could equally well be interpreted to mean that the limit of liability was the aggregate of the sums set out in paragraphs 9.2.1 and 9.2.2.

3. The word ‘or’ at the end of paragraph 9.2.1 could be construed either disjunctively or conjunctively.

What would the position have been if there were defaults in both periods? The Court of Appeal considered the issue and indicated that ATOS’ liability for defaults in the first year was capped at the contract sum (£4.9 million) and for subsequent defaults it was capped at the amount of the contract charges (£2.1 million) paid in the relevant 12-month period, so recovery could be made subject to both caps.

CommentWhilst traditionally a restrictive approach to interpreting exclusion and limitation clauses has been taken by the courts, more recently there has been an increasing willingness to recognise that parties to commercial contracts are entitled to apportion the risk of loss as they see fit and that provisions that limit or exclude liability are in essence no different from other terms and must be construed in the same way.

What are the points to take away from this decision?

1. Take care when considering the inclusion of a total cap on liability.

2. Is the drafting sufficiently unambiguous? Is it capable of alternative interpretations?

3. Consider whether the clause makes commercial common sense, what is the natural and ordinary meaning of the words used? As this is the approach that is most likely to be applied in interpreting it.

For further information on this topic, please contact

Moya Clifford [email protected]

Welcome to the winter edition of Hill Dickinson’s contentious business update. The aim of this publication is to provide an informative, readily understandable summary of recent legal developments that may impact on your organisation.

We look at interesting cases on contractual limitation of liability clause and liability cap in an I.T contract and issues around litigation privilege in internal investigations.

Directors remuneration is in the spotlight with a decision on the circumstances when payment of excessive remuneration to directors may be unfairly prejudicial to minority shareholders. We look at issues around this and directors of companies need to ensure that remuneration is fair and justified, especially where a ompany decides not to declare a dividend.

With the introduction of the Criminal Finances Act 2017 which makes companies and partnerships criminally liable if they fail to prevent ‘associated persons’ from facilitating tax evasion, we examine how the offence is committed and what “reasonable procedures” organisations need to have in place to avoid falling foul of the legislation.

Our ‘Law in Action’ section gives practical advice with a focus this time on the commercial benefits to employers of enforcing employee covenants, which can be quite topical at this time of year when there is generally more movement in the employment market.

We examine some useful pointers for individuals setting up in partnership.

We look at the recent Court of Appeal guidance on advice on tax avoidance schemes where it has held that solicitors advising on a scheme designed to avoid tax should have given their client a specific warning of a significant risk that the scheme might fail to deliver the hoped for tax advantages. This remains a hot topic at present given recent reports of such schemes failing to provide the tax advantages envisioned.

Finally, a selection of recent cases on wrongful trading and misfeasance by directors is reviewed.

We do hope that you find this edition of Hill Dickinson’s contentious business update to be of interest and helpful to you. If you have any enquiries or feedback, please do not hesitate to contact our editor:

Moya Clifford [email protected]

The total contract price was £4.9 million. The contract charges were £2.8 million in year one and £2.1 million for years two to five. There was therefore a significant difference in the amount of the liability cap depending on which mechanism for calculation applied.

The Trust accepted that the contract contained a limitation of liability clause (and cap) but argued that it was ambiguous and uncertain and accordingly unenforceable. ATOS’ position was that the claim was subject to the liability cap which significantly impacted on the level of damages that the Trust could claim. The issue for the court was one of pure contract interpretation – what precisely did the clause mean?

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Documents leaked by the BBC in the so-called ‘Paradise Papers’ at the end of 2017 has focused attention upon tax avoidance schemes. There is an increased demand from individuals who have chosen to protect their money in both domestic and off-shore schemes to review past advice they have received and seek further assistance from advisers specialising in such schemes. A recent Court of Appeal decision helps open the door further to challenge past advice.

The recent Court of Appeal decision in Barker -v- Baxendale Walker Solicitors and another [2017] EWCA Civ 2056 provides useful assistance to investors in terms of the quality of the advice they can expect to receive. Specifically, it addresses whether a solicitor should inform their client of the risk that the court may arrive at a different interpretation from the one which they have advised.

BackgroundThe claimant was the majority shareholder in a company. The principal defendant was a firm of solicitors which specialised in tax planning.

In 1998 the claimant decided that he wished to sell the company. He sought tax planning advice from the defendant firm to reduce his exposure to capital gains tax and inheritance tax. The defendant firm recommended that the claimant use a type of employee benefits and shares trust (EBT) as a tax-efficient vehicle in respect to the proceeds of sale from his shares to the claimant and his family.

The relevant legislation in respect to inheritance tax exemption through an EBT is section 28 of the Inheritance Tax Act 1984 (ITA 1984). The ITA 1984 is ambiguous as to the precise point at which the existence of a ‘connection’ will render a transfer liable for tax.

The EBT was subsequently set up and the company was sold. The claimant received approximately £12 million in cash and shares in the purchase, of which around £5.8 million went into the sub-trust, which had been created in favour of the claimant’s family so that his contribution would be ring-fenced. Such provision, in theory, ensured that the claimant would not need to access the assets in the EBT in his lifetime, whilst after his death, his children would receive benefits free of tax.

HMRC’s investigationIn 2005, HMRC commenced formal investigations into the EBT and the sale of the company, specifically whether any capital gains tax should have been paid by the claimant.

In 2010, following detailed investigations, HMRC informed the claimant that it intended to make assessments and confirmed that the tax exemption did not apply, because the EBT did not exclude the claimant’s family as beneficiaries after his death. In essence, HMRC took a different interpretation of the ITA 1984 than the defendant firm and duly pursued the claimant for unpaid tax and interest.

In 2013, following further legal and financial advice that the HMRC’s interpretation was probably correct, the claimant settled with the HMRC for circa £11.3 million.

The negligence claimThereafter, the claimant issued professional negligence proceedings against the defendant firm.

At first instance, the High Court dismissed the claim. Roth J decided that it was not appropriate for a solicitor to provide a specific warning about the risk of a post-death exclusion construction by the HMRC. However, he held that the defendant should have clarified to the claimant that since the usage of the EBT was a tax avoidance scheme there was a distinct possibility that it could be challenged in legal proceedings. In failing to set out this risk, the defendant had breached its duty of care. However, the judge ultimately decided that the provision of such a ‘general health warning’, would not, in any event, have stopped the claimant from proceeding with the arrangement. As such, the case failed on the basis of causation. The claimant appealed the decision to the Court of Appeal.

The Court of Appeal allowed the appeal and overturned the decision of the High Court. There was a substantial risk that the EBT arrangement would not produce the promised tax advantages it was designed to deliver, as a result of the post-death exclusion construction which was central to its being. Whilst the defendants were held not to have been negligent for their construction and interpretative view of section 28(4) ITA 1984, the court held that a reasonably competent solicitor ought to have provided the claimant with a specific warning of the risk that:

1. their advice may be incorrect;

2. the EBT might fail to produce the tax advantages it was designed for; and

3. that a subsequent dispute should be envisaged given the likelihood that the scheme would be scrutinised and challenged due to the size of monies involved.

Asplin LJ confirmed the following principles:

• The question of whether there was a significant risk that the EBT would fail to deliver the tax advantages envisaged, was to be determined by the court applying the standard of the reasonably competent solicitor.

• Whether a solicitor is in breach of his/her duty by failing to explain a risk that a court may arrive at a different interpretation of legislation is fact-sensitive.

• Important elements considered were the aggressive nature of the tax avoidance scheme, the potential benefits of the scheme (some of which appeared too good to be true), the quantum of potential tax avoidance and the defendants’ fee (in the region of £2.4million). Due to the amount at stake, and the very nature of the arrangement, it should have been obvious to the solicitor that there was a real risk HMRC would take issue with the post-death exclusion point at some stage.

Trouble in paradise

• It was deemed irrelevant that the defendant had no knowledge of whether, if warned of a risk, the claimant would have taken a different course of action.

• If the construction is clear, the threshold of ‘significant risk’ will likely not be met and, therefore, a solicitor will not be required to explain the risks involved to satisfy his/her duty of care.

• It is possible to be negligent, simply by failing to set out the risks involved, even if a solicitor has deployed a correct construction of a legislative provision.

• There will be an enhanced duty upon a solicitor to explain the risks, if litigation upon the point is on foot.

• The position taken by other advisers at the time was deemed irrelevant.

Comment The case demonstrates key lessons:

1. Beware artificial transactions – the case supports the Tribunal’s established position that it will be reluctant to uphold artificial transactions which have been specifically designed to frustrate tax legislation.

2. Commercial considerations – solicitors should be aware of relevant commercial considerations and likely risks when providing advice, including the likelihood of HMRC’s likely interest in large amounts of money, held in schemes, whose underlying purpose is to defeat relevant tax legislation and advise accordingly.

3. Other advisers irrelevant – the courts are increasingly dismissing arguments that other advisers may have agreed with the advice of a defendant firm, particularly in non-medical cases.

4. Limitation – historic arrangements from the 1990s can be subject to challenge by HMRC and the risk of a large tax bill, interest surcharges and penalties. Primary limitation is likely to have already expired and you may be left with the shortened 3 year secondary limitation period. The judge at first instance found that the date of knowledge, for the purposes of limitation, was the date of HMRC’s contention relating to section 28 IHTA and/or the advice that the contention might have merit. People wanting to claim need to act quickly and probably before the amount they need to pay has crystalised with HMRC.

5. Health warnings – the decision is extremely helpful for claimant investors who have suffered losses despite having sought legal advice at the outset in that it opens the door for claims relating to non-negligent wrong advice. There is now a clear expectation upon lawyers to provide sufficient health warnings with their advice, where circumstance demands it.

If you are affected by any of the issues raised in this article, or require any further advice or assistance in pursuing claims of professional negligence, please contact

Fiona Parry [email protected]

Jonathan Scally [email protected]



This article highlights recent examples of how the court has considered these duties in the context of applications by liquidators or administrators of insolvent companies where allegations against directors of misfeasance (under section 212 of the Insolvency Act 1986) and wrongful trading (sections 214/246ZB of the Insolvency Act 1986) have been made.

Wrongful tradingDirectors of a company can be held liable to make a contribution to the assets of that company if the company enters insolvent liquidation or administration, and the directors continued to trade the company and incur further credit after the point at which they ‘knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration’.

A liquidator must plead a specific date (or dates) and has a high threshold to establish this: ‘hindsight’ is far from sufficient. Directors have open to them the defence that they took every step to minimise potential loss to creditors under sections 214(3) or 246ZB of the Insolvency Act 1986. This is itself a high threshold.

In Ralls Builders Limited (in liquidation) [2016] EWHC 243 (Ch), the court held that the directors ought to have concluded six weeks prior to ceasing trading that the company could not have avoided insolvent liquidation. However, the court held that in this case it was possible that no overall increase in credit was caused. The liquidators contended that this did not permit new credit to be taken. The court held that the effect on creditors overall was the starting point, but not the only point to consider. The court decided that the test for use of the sections 214/246ZB(3) defence is not only that the steps taken were intended to reduce the net deficiency to creditors, but that risk of loss to ‘new’ creditors had to be minimised. In the unreported 2017 case of Nicholson -v- Fielding, it was held that the sections 214/246ZB(3) defence would not have succeeded as the evidence suggested that the steps taken to minimise the losses were at the expense of HMRC. The court would not have expunged liability using sections 214/246ZB(3) in either case.

The cases illustrate the importance, to both the company itself and its directors, of the need to get professional advice (from accountants and/or solicitors) so that directors can get a greater understanding of their duties and (possibly) more objective insight.

Misfeasance – directors’ remuneration and dividendsDirectors can be held to be misfeasant under section 212 of the Insolvency Act 1986 if they have misapplied monies or property or breached any fiduciary or other duties they have in relation to the company.

There is always the risk of conflict, or duties being breached, in advising on the remuneration of directors or persons connected to them: the court considered this in two cases in 2017. The intention behind payments in these cases appears to be relevant.

In PV Solar Solutions Limited (in liquidation) [2017] EWHC 3228 (Ch), the directors were aware in 2011-2012 that conditions within the trading sector of the company (installation of solar panels) were soon to deteriorate. The directors withdrew £750,800 in three tranches at times when the company was at least potentially insolvent, utilising an EFRBS scheme marketed as an effective form of tax avoidance. The company’s solvency position was at least uncertain upon the first withdrawal, and worse on the second and third withdrawals. The court ruled that the respondent directors were guilty of misfeasance and ordered repayment of the monies withdrawn.

In Global Corporate Ltd -v- Hale [2017] EWHC 2277, the director undertook substantial work for the company and received modest payments described as ‘dividend payments’. These payments were argued to be unlawful, as there were no distributable reserves to make dividend payments. Unusually, the court held that payments here were not dividends, ruling that no decisions were made on what the payments entailed until established whether there were distributable reserves. In previous

Pointers from recent cases on wrongful trading and misfeasanceThere are two aspects of wrongful trading and misfeasance that are of interest (i) board directors (and those advising the board) must be aware of the duties that the directors are subject to in performing their role as directors and the liability that attaches to breach of those duties and (ii) companies may be affected by the wrongful trading/misfeasance of customers/suppliers which impacts on trading.

years, payments had been re-classified as salary. In such companies, it is more standard for payments to be classed as directors’ loans and then converted as required upon final accounts being prepared.

A number of factors assisted the defendant in Hale, and extreme caution should be placed on trying to rely on it to justify dividend payments.

Putting assets out of the reach of creditorsMarex Financial Ltd -v- Sevilleja Garcia [2017] EWHC 918 (Comm) potentially widens the scope for recovery that a judgment creditor has against an individual who procures non-payment of a debt by a corporate judgment debtor.

The claimant alleged that the defendant (the controller of two companies subject to a judgment in favour of the claimant, who had ‘asset stripped’ the companies after the claimant obtained judgment, before the claimant was able to obtain a freezing order) may be held liable in tort for inducement in procuring that the companies would not be able to satisfy the claimant’s judgment debt.

The court held that the claimant ‘had the better argument for the existence’ of this tort. Further, Marex held that the rule against reflective loss (i.e. that only the companies could sue, and not a third party, such as the claimant) does not apply ‘where the claimant sues for a defendant’s knowingly inducing and procuring a third party to act in wrongful violation of the claimant’s rights’.

It must be emphasised that Marex primarily considered jurisdiction issues, but the findings suggest that a judgment claimant may now have a direct action against an individual procuring the judgment debtor’s breach of the judgment.

The cases highlight the importance of directors knowing their duties and the remedies available where breach of duty can be established.

For more information on any of these issues, please contact

Richard Palmer [email protected]


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Unfair prejudice petitions

A shareholder in a company may petition the court for relief where the affairs of the company are being conducted in a manner that is unfairly prejudicial to the shareholder’s interests or where an actual or proposed act or omission of the company is or would be so prejudicial (s.994 Companies Act 2006 (Act)).

The unfairly prejudicial conduct must relate to the shareholder’s interest as a shareholder. This may include, amongst other things, exclusion from management, sufficiently serious mismanagement by the directors, failure to pay dividends as a result of excessive remuneration of the directors, diluting the minority’s shareholding or a failure to abide by the articles of association of the company.

The petitioner must show prejudice and unfairness for relief to be granted by the court. Prejudice typically arises if the economic value of the shareholder’s shares has significantly decreased or is put in jeopardy by the conduct of which the complaint is made. Unfairness is assessed objectively looking at the basis upon which the petitioner agreed to become a shareholder in the company.

If the court finds in favour of the petitioner, it has a wide discretion to make any order it considers appropriate to remedy the unfair prejudice. The most usual order requires other members of the company (or the company itself) to purchase the shares of the petitioning shareholder.

Re CF Booth Ltd

CF Booth Ltd (the company) was incorporated in 1949 to carry on the family scrap metal business. Over the years, the company diversified its offering and became one of the largest metal recycling businesses in Europe. The shareholders received substantial dividends until 1985. In 1986, the company suffered a loss and no dividends were declared. Following this bad year, the company returned to profitability but no further dividends were paid and, in 1987, the chairman confirmed his intention never to pay a dividend again (the no-dividend policy)

Until 2005, the directors of the company were paid £275,000. This increased to £400,000 in 2015 and to £820,000 in 2016. Between 2007 and 2015, the annual average salary was £1,579,000 and the directors (and their wives) received other perks, such as use of a fleet of luxury motor cars and a yacht.

Donald Booth, Charles Wilkinson and Jane Compton (petitioners) held 27.4% of the company’s shares between them. Clarence Booth and nine others held 65% of the shares and five of them were also directors (directors). The petitioners and respondents were all family members.

The petitioners had been unhappy with the directors’ decision not to pay dividends for many years and, individually, had raised complaints of unfair prejudice previously. In or around 1991, Donald Booth had rejected an offer by the directors to purchase his shareholding. In May 2012, the directors offered to purchase the shares of Charles Wilkinson and Jane Compton for £50,000. However, an accountant instructed by them had valued their shareholders between £843,359 and £1,125,142.

The petitioners claimed that they were being unfairly prejudiced by the directors’ excessive remuneration and the no-dividend policy (the Policy). They argued the policy was intended to enable the respondents’ side of the family to acquire their shares at a favourable price, the lack of dividends having a negative effect on value and encouraging them to sell at a lower price.

Excessive directors’ remuneration and non-payment of dividends – unfair prejudice

The respondents argued, amongst other things, that:

(a) there was no money available for dis-tribution because the directors were required to re-invest the profits in the company due to the working capital requirements of the business and the company’s £20 million overdraft; and

(b) the petition was an abuse of process because the petitioners had failed to follow the transfer provisions set out in the articles of association of the company and had delayed in issuing proceedings. The policy had existed for twenty five years and so the claims were ‘stale’ there being no limitation period under the Act.

Was the remuneration paid to the directors excessive?

In assessing remuneration paid to directors, the court will consider ‘whether, applying objective commercial criteria, the remuneration which [the respondent] took was within the bracket that executives carrying the responsibility and discharging the sort of duties that [the respondent] was, would expect to receive’ (Irvine -v- Irvine [2007]). ‘Reasonable remuneration’ will fall within a bracket; there is no single correct figure. In Re CF Booth Ltd, the judge considered evidence provided by the accountant

instructed by the petitioners and a paper published by Deloitte LLP on directors’ remuneration. He concluded that the remuneration paid to the directors far exceeded the amount that reasonable directors could have thought fair remuneration for the work they undertook.

Was the policy fair?

Dividend payments are controlled by the board of a company. It is for the directors to decide what part of the profits of the company shall be made available for distribution. Even where there are profits available for distribution, the directors may decide not to recommend a dividend providing their decision is compliant with their duties pursuant to the Act.The respondents argued that:

(a) the board considered dividends more than once a year;

(b) the profits were needed for the busi-ness (as referenced above);

(c) the purchase of the yacht and luxury cars was for business purposes.

The judge found all the above arguments difficult to reconcile with the excessive remuneration paid to the directors. There were profits available for distribution, but they were taken by the directors for themselves. Whilst the directors may have discussed dividends annually, there was only ever going to be one conclusion and that was not to declare a dividend. They had closed their minds to the concept of sharing profits with non-director members. As a consequence and overall, the policy was held to be unfair.

Was there an abuse of process?

Pursuant to the articles, the petitioners were required to sell their shareholding at whatever price the auditors deemed fair. Such price may have reflected the policy. The judge considered that if the petitioners established unfair prejudice in respect of the Policy, the petition could not be an abuse of process.

In respect of the respondents’ arguments that the Policy had existed for 25 years and were thus ‘stale’, the judge accepted that any remedy should be limited to a six year limitation period.

Was there unfair prejudice?

As stated above, in order for an unfair prejudice petition to succeed, there must be both unfairness and prejudice. The judge considered that the directors had not acted in accordance with their statutory duties to:

(a) exercise the power to recommend or not recommend a dividend for the purposes for which the power was conferred (s.171(b) Act);

(b) reach a conclusion regarding the declaration of dividends that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its mem-bers as a whole (s.172 Act); and

(c) to exercise independent judgment (s.173 Act).

As a result of the directors’ actions, the petitioners were denied a return on their investments, the excessive remuneration had impacted negatively on the company’s balance sheet and the directors had taken the petitioners’ share of the profits.Accordingly, the court upheld the petition and ordered a purchase of the petitioners’ shares. The balance sheet was adjusted to reflect the element of the directors’ remuneration considered to be excessive. Despite the finding of unfair prejudice, a minority discount of one third of the value of the shares was applied to reflect a minority holding in a private company.

Comments

It is clear from the judgment that payment of excessive remuneration to directors may be unfairly prejudicial to minority shareholders. Directors of companies need to ensure that remuneration is fair and justified, especially if a company decides not to declare a dividend.

Another interesting point arising from this case is the limitation issue. Whilst delay may not bar an unfair prejudice petition in itself, it may decrease the value of any remedy available and, as such, an unfair prejudice petition should be pursued promptly.

If you are interested in this topic and would like to more know about unfair prejudice petitions, please contact

Kate [email protected]

The High Court has recently considered whether the payment of excessive remuneration to directors amounted to unfairly prejudicial conduct where the directors chose not to pay dividends to shareholders - Donald Booth, Charles Wilkinson and Jane Compton -v- Clarence Booth and others [2017] WHC 547 (Ch) (Re CF Booth Ltd).



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Bank Mellat -v- Her Majesty’s Treasury [2017] EWHC 2409 (Comm)In this case, Her Majesty’s Treasury (the Treasury) applied for the disclosure of documents relating to 2,500 banking transactions relied upon by Bank Mellat in its claim for damages arising from the Treasury’s introduction of the Financial Restrictions (Iran) Order 2009. The Treasury’s position was that that disclosure should be ordered in respect of 2,500 transactions relied on by the bank in order to properly test its claim. The bank submitted that disclosure on such a scale would be an extremely onerous and expensive task, was likely to take over one year at a cost of over £2 million, and that there should instead be disclosure of only 10% of the transactions in issue as a sample.

The court took a very pragmatic and reasonable approach to the matter and indicated that although the claim was a very substantial one, disclosure of all the transactions relied upon by Bank Mellat would be appropriate unless some fair sampling method could be devised. The court agreed with Bank Mellat’s proposal and ordered the disclosure of documents relating to only 10% of the transactions, selected at random to allow forensic accounting experts to review and consider whether such a sample size was sufficient for a valid extrapolation to be carried out.

It was accepted that after the forensic accounting experts’ review that a larger sample may need to be looked at and further disclosure given but the onerous nature of the disclosure exercise was appreciated and a logical approach taken to resolve it.

The case is a good example of the court using its existing powers to take a proactive and practical approach to dealing with what can be one of the most expensive and time-consuming aspects in any litigation.

Pilot scheme on disclosureIn late 2017, a new proposed disclosure pilot scheme was announced which is due to run for two years in the Business and Property Courts throughout England and Wales. The pilot came about after extensive consultation with court users including GC100 members. The changes to be implemented in the pilot are significant and recognise that the existing rules on disclosure which are based on paper disclosure are not generally fit for purpose in dealing with electronic data. The changes can be briefly summarised as follows:

1. Standard disclosure will no longer be the norm. Instead there will be a move to a more ‘reliance’-based system with ‘basic disclosure’ of key/limited documents (up to 500 pages) which are relied on by the disclosing party and are necessary for other parties to understand the case they have to meet, will be given with statements of case.

2. There will be a new menu for disclosure from which the court may order:

• no order for disclosure;

• limited disclosure (reliance-based plus any adverse documents aware of without the need for further search);

• request-led search-based disclosure (reliance-based disclosure plus specific disclosure);

• search-based disclosure excluding narrative documents (effectively standard disclosure); and

• search-based disclosure including narrative documents (Peruvian-Guano test-based disclosure).

3. The duties of the parties, and of their lawyers, in relation to disclosure will be expressly set out in the pilot scheme. These include a duty to cooperate with each other and assist the court over disclosure. They also include a duty to act honestly and to disclose known adverse documents.

4. A new disclosure review document will replace the existing electronic disclosure questionnaire.

5. Reasonableness and proportionality will be the overriding factors and the court will be much more probing and expect greater engagement from the parties at an earlier stage. The information that will be required to provide the court regarding the location and amount of data and documents at the case management conference will be much more extensive than at present.

6. It is envisaged that the court will give directions to reduce the burden and cost of disclosure which may include:

• limiting searches (custodians, dates, locations etc);

• requiring the use of data sampling, de-duplication techniques;

• directing the use of technology assisted review tools;

• orders for phased disclosure; and

• cost shifting orders.

Getting to grips with disclosureConcerns about the excessive costs, scale and complexity of disclosure in litigation have been ongoing for some time, driven mainly by the increase in electronic communications so that the volume of data that may fail to be disclosed in a litigated matter has vastly increased, often to unmanageable proportions. Two recent developments go some way to addressing these concerns:

The proposed scheme has not yet been reviewed and approved by the Civil Procedure Rules Committee and may still be subject to change. That review will take place after a general consultation and is due in April 2018. The pilot will not start until after that review has taken place and if successful, the existing rules on disclosure will be replaced.The changes are wide-ranging and will hopefully go some way to reducing parties’ legitimate complaints regarding disclosure whilst retaining the positive benefits of disclosure in this jurisdiction.If you would like any further information about either of these developments, please contact

Moya [email protected]

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A competitor poaching a team of employees can cause considerable disruption to a business and its plans. We have recently acted for a company that was faced with precisely that situation. One of our client’s employees instigated, with a competitor, a co-ordinated attempt to take a team of employees (the Employee Defendants) from a part of our client’s business. All the Employee Defendants resigned on the same day, but did not tell our client that they were going to a competitor. During their notice periods, some of the Employee Defendants made various requests for confidential information from our client.

Our first step was to evaluate the quality of the available evidence (including a review of electronic documents (including company emails) found on the company computers used by the Employee Defendants) to ascertain the extent of the Employee Defendants’ wrongdoing.

Once we established the strength of the evidence against the Employee Defendants, we agreed a strategy with our client to have the maximum impact. We sought undertakings from the competitor and the Employee Defendants so our client was fully aware of how the dispute was going to play out and on the basis that if they were not provided that we would issue legal proceedings for interim injunctive relief, including the granting of a springboard injunction.

Whilst undoubtedly it is preferable for a client to have contractual restrictive covenants in their employees’ employment contracts, including non-compete, non-solicit, non-deal and non-poach covenants, springboard relief presents an opportunity to prevent the new competitor and employee defendants from gaining a competitive advantage even in the absence of such restrictions. In this case, only one of the defendants had such covenants in their employment contract.

Law in action – commercial benefits of enforcing employee covenantsIn this section we describe an interesting recent case we have been involved in, explaining the issues involved, how we handled it highlighting points of legal and practical interest.

We applied for interim injunctions on behalf of our client, arguing that there had been an unlawful team move providing the competitor with an ‘oven-ready’ team to launch a new office and to make use of our client’s confidential information. In such circumstances, a normal confidentiality injunction would not provide proper protection to our client, the former employer, because the confidential information has already been used, and would no longer be confidential. Springboard injunctions are designed to cancel out the unlawful advantage or head start that the employee(s) gain through misuse of the employer’s confidential information.

The competitor and Employee Defendants refused to provide the undertakings we sought and an application for interim injunctive relief was issued within a few days which was contested. In this case, we put forward two alternative forms of springboard relief: (i) an order that the employee defendants must not be employed, engaged or involved in the same business of our client, or in

any way assist any other defendant in such business; (ii) an order against the Employee Defendants, in the form of one of the Employee Defendants’ contractual restrictive covenants, including non-compete, non-solicit, non-deal and non-poach covenants.

The court found favour with (ii) and we successfully obtained an interim injunction against all defendants (competing company and Employee Defendants), which prevented the employees from soliciting and dealing with customers of our client. In respect of the competitor, we also obtained orders preventing it from inducing any breaches by the employee defendants’ contracts of employment with our client; and orders against all the defendants from misusing our client’s confidential information.

Having obtained the injunction, we used this to successfully obtain suitable undertakings from a second team of former employees who had also left to join the competitor’s business. The matter was listed for an expedited trial however, we were able to settle the claim on very favourable terms for our client.

The commercial benefits to our client were substantial:

1. our client was able to curtail its competitor’s illegal activity, impacting on the competitor’s ability to ambush our client’s business, giving our client the opportunity to implement contingency plans;

2. a clear message was given to its employees that it will take steps to enforce its covenants; and

3. our client was not significantly out of pocket as it recovered the majority of its legal costs from the competitor.

We were in a position to assist our client quickly and effectively with this issue and our client has commercially benefitted greatly from this action.

For further information about any of the issues raised above, please contact

Alex Smith. [email protected]


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The courts have continued a general approach of reducing the scope of privilege with litigation privilege being under scrutiny this time. In The Director of the Serious Fraud Office (SFO) -v- Eurasian Natural Resources Corporation Ltd (Eurasian) [2017] EWHC 1017 QB, the High Court has taken a narrow interpretation of what documents were covered by litigation privilege in the context of a fraud investigation by the SFO. The decision is an important one for companies carrying out internal investigations.

Facts

The SFO sought disclosure of certain categories of documents generated during investigations by solicitors and accountants into the activities of Eurasian. Disclosure was sought against the background of criminal investigations by the SFO involving allegations of fraud, bribery and corruption in Kazakhstan and Africa.Four categories of documents were identified which the SFO requested sight of:

1. Notes of evidence taken by Eurasian’s lawyers from individuals interviewed as part of the investigation. These documents were created before the SFO commenced its formal prosecution. Eurasian claimed that these documents were subject to litigation privilege and/or legal advice privilege. Eurasian’s position was that the dominant purpose of the interviews was to enable its lawyers to obtain relevant information and to provide advice in connection with anticipated adversarial (criminal) litigation.

2. Materials generated by forensic accountants engaged by Eurasian as part of their ‘books and records’ focusing on identifying controls and systems weaknesses and potential improvements. Eurasian claimed that these documents were subject to litigation privilege as the dominant purpose of the reports was to identify issues which could likely give rise to intervention and prosecution by the SFO.

The law of privilege – summary Briefly, privilege is a rule of evidence that entitles a party to withhold evidence (including documents) from production to a third party or the court. Once privilege has been established, the privilege is absolute, the court will not be called upon to exercise any discretion, whether on the grounds of public policy or otherwise to require disclosure. The fact that a privileged document may be relevant to a dispute is of no consequence; were it not relevant, it would be unnecessary to claim privilege at all. In litigation, the litigant’s entitlement is to withhold inspection of privileged documents although the obligation to include the documents in the list of documents remains.

There are different types of privilege – including legal advice privilege and litigation privilege.

Legal advice privilege applies to all communications passing between the client and its lawyers, acting in their professional capacity, in connection with the provision of legal advice. There is no need for litigation to be contemplated.

Communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation qualify for litigation privilege if, at the time of the communication in question, the following conditions are satisfied:

1. litigation is in progress or reasonably in contemplation;

2. the communications are made with the sole or dominant purpose of conducting that anticipated litigation; and

3. the litigation must be adversarial, not investigative or inquisitorial.

The Eurasian case was primarily concerned with litigation privilege and there is clearly scope for interpretation when assessing when litigation is in contemplation and the purpose for which documents are created.

FindingsThe High Court in the Eurasian case held that most of the documents sought by the SFO were not covered by litigation privilege. The basis for this was that a criminal or regulatory investigation was not felt to be the same as adversarial litigation and that there was no prospect of adversarial litigation at the time the documents were produced.

The following reasons were given:

1. Documents created before the SFO commenced its prosecution were not adversarial in nature as Eurasian did not reasonably contemplate a criminal prosecution, only a potential investigation. A distinction was drawn between investigations and prosecutions, the latter are adversarial litigation, the former are not.

2. The documents were created for the purpose of avoiding an investigation, which is not the same as for the purpose of a defence in a criminal prosecution brought against Eurasian (i.e.the documents failed to meet the ‘dominant purpose’ condition for litigation privilege).

3. Some of the documents were created for the purpose of generating reports that would eventually be shared with the SFO. Given the expectation that the SFO would want to verify that the reports were thorough and accurate, Eurasian knew that it could not refuse access to the underlying documents. Accordingly, there could be no privilege in documents that were created for the purpose of sharing with the SFO.

Narrow interpretation of litigation privilegeWe have previously reported on the restrictive approach to legal advice privilege adopted in Three Rivers District Council and others -v- Governor and Company of the Bank of England (No 5) [2003] EWCA Civ 474 by the Court of Appeal. That case established that only communications made between those authorised by a corporate client to seek legal advice on its behalf and its lawyers fell within the scope of legal advice privilege. All communications within a corporate entity, even where geared to generating information needed by lawyers to provide legal advice sought, fell outside the scope of legal advice privilege and could only be protected if they fell within the wider litigation privilege.

3. Documents indicating or containing factual evidence presented by the lead partner at Eurasian’s lawyers to Eurasian’s Corporate Governance Committee and board after the SFO investigation had begun. Five particular documents were identified and Eurasian’s primary case was that these documents were subject to legal advice privilege or in the alternative litigation privilege.

4. The final category, comprised the documents at category 2 above or correspondence relating to those documents. Eurasian claimed that these documents were covered by litigation privilege in the same way as the documents in category 2 above.

Where next?The case produced a narrow interpretation of litigation privilege and Eurasian are appealing the decision (current timing is that the appeal is to be heard in July 2018 with the Law Society seeking permission to intervene in the proceedings) but in the meantime, the case has profound implications for corporate internal investigations. Businesses contemplating internal investigations need to proceed on the basis that any reports or findings of the investigation (or other related documents) may well be disclosable to regulators, enforcement agencies or other parties. Undoubtedly, once the scope of litigation privilege has been narrowed as here, there will be parties who will seek more widespread disclosure.We will report further on this important issue when the appeal decision becomes available. For more information on this issue, please contact

Moya [email protected]


The scope of the CFA 2017 is wide-reaching and is something which all companies need to be aware of as liability can extend to situations where the company itself was not involved in the tax evasion or where it was not even aware it was taking place. Liability, therefore, essentially arises by way of association and it may be easy for a company to be unwittingly caught by the provisions of the Act and face severe sanctions as a result which include a conviction and unlimited fines.

Who are ‘Associated Persons’?A company commits an offence if:

• a person commits a UK tax evasion facilitation offence; and

• that person commits the offence in the capacity of a person associated with the company.

For these purposes, a person associated with the company includes:

• an employee, acting in the course of their employment with the company;

• an agent, acting in their capacity as an agent for the company; or

• any person who performs services in their capacity as a service provider for the company.

Offence not limited to UK tax evasionThe scope of the Criminal Finances Act also extends to foreign tax evasion and a company is guilty of an offence if an ‘associated person’ commits a foreign tax evasion offence being conduct which:

• amounts to an offence under the law of a foreign country;

• relates to a breach of a duty to a tax imposed under the law of that country;

• would be regarded by UK courts as amounting to knowingly being concerned in, or in taking steps with a view to, tax evasion.

DefencesThe sole defence for both the UK and foreign tax evasion offence is for a company to show that it had ‘reasonable procedures’ in place to prevent the facilitation of tax evasion or that it was reasonable, in the circumstances, not to have any such procedures in place. Obviously the next question is, what is meant by ‘reasonable procedures’?

What steps should a company be taking?The scope of the CFA 2017 is therefore wide and a company can be caught in any number of ways. Companies must therefore ensure that they have strong and effective policies and systems in place.

HMRC have published six key principles which companies should consider and following this guidance when implementing policies would put a company in a good position to then rely on the ‘reasonable procedures’ defence.

The six key principles are set out below along with some suggestions for steps which a company could take to protect itself:

1. Risk assessment – assess the nature and extent of exposure. What business is carried out? What markets does the company operate in and what risks do these present? Is the company involved in a specific sector or transactions which give rise to higher risks of tax evasion? The company must put itself in the position of its employees, agents and suppliers – do they have a motive to facilitate tax evasion along with the opportunity and the means? It is important to document this risk assessment and keep it under review.

Tax evasion – guilty by way of association?2017 saw the introduction of the Criminal Finances Act 2017 (CFA 2017) which makes companies and partnerships criminally liable if they fail to prevent ‘associated persons’ from facilitating tax evasion. In its simplest form, tax evasion occurs where an individual or a company avoids its tax liability by, for example, deliberately failing to declare income or by falsifying expenses. It is therefore any offence which cheats the public purse out of revenue.

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2. Proportionality of risk-based prevention procedures – reasonable prevention procedures should be proportionate to the risks a company faces highlighted by the risk assessment process. Does the size of the company, along with the nature and complexity of the business, justify the prevention procedures being put in place? Is more required to be done? Do the prevention procedures satisfy the risks identified?

3. Top level commitment – senior management should be fully committed to the prevention of tax evasion and in implementing the procedures put in place. Formal statements from senior managers could be published to express a zero tolerance stance on the facilitation of tax evasion, confirming what the company’s prevention procedures are and highlighting the ramifications for anyone not adhering to the prevention procedures.

4. Due diligence – apply due diligence procedures, taking an appropriate and risk-based approach, in respect of persons who perform services on behalf of the company, in order to mitigate risks which have been identified. Do specific parts of the company need to be scrutinised due to an increased risk of tax evasion? Do old procedures need to be updated which may have been tailored to a different type of risk?

5. Communication – communicate the prevention procedures throughout the company and ensure that employees understand what is expected of them. An internal training programme could be rolled out focusing on the key themes to be supplemented by a staff handbook and formal tax evasion policy. Establish a means by which representatives of an organisation can communicate in confidence in order to raise concerns and establish a nominated representative as the first port of call to deal with questions or concerns. External communication of prevention procedures is also important as this could act as a deterrent for those who may seek to use the company as a vehicle for tax evasion.

6. Monitoring and review – keep the prevention procedures under review and make improvements where necessary. Has the business or the market in which the company operates changed in any way? Do the procedures need to be updated as a result? Have the procedures been followed, have they been successful or do they need to be updated?

Tax evasion is a particularly hot topic at the moment following the publication of the Paradise Papers in 2017 and the seemingly extensive use of offshore investment funds. With the new Criminal Finances Act 2017 also recently coming into force, the practices and procedures of UK companies are likely to be under increased scrutiny – both at home and abroad – to ensure that they are assisting in the fight against tax evasion.

For more information about this issue or for assistance in preparing documents or procedures to assist your business comply with the requirements under the Criminal Finances Act 2017, please contact

James [email protected]



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At a very early stage in a business’ life, even before any money is made, it is possible that a partnership has already been formed. Most likely it will be a ‘partnership at will’ under the Partnership Act 1890 (the Act).

There is a very broad definition of “partnership” under the Act:

• more than one person

• carrying on business together

• with a view to profit.

If there is any dispute in the future, without any agreement setting out the precise terms relating to how the partners will deal with each other, the default provisions in the Act will automatically apply to dictate the relationship between the partners. Those default provisions may be far from what the partners actually want, they include:

1. Equal contributions in capital, profits and losses. This may be fine, but what if one partner has invested (or subsequently invests) more than the others in time or money? Unless there is an agreement as to what should happen in those circumstances, that partner will not get a share of the profits that reflects their larger investment. Should a higher level of investment give that partner a casting vote or right of veto that prevents them from being defeated by a simple majority of the other partners in decisions affecting the partnership business?

2. All partners may take part in management of business. There is no such thing as a ‘silent partner’ or ‘sleeping partner’. Unless there is an agreement to the contrary, all partners get a vote. If you have invested, you have a say – subject to being overruled by the majority. It is also worth considering whether there should be a list of issues on which decisions are required to be unanimous rather than by majority, for example decisions to require the partners to put in more capital, vary the profit shares, admit a new partner, buy or sell premises or open a new office.

3. No partner is entitled to remuneration for acting in the partnership business; they are only entitled to an (equal) share in the profits. This may not be suitable if one partner is doing more work/introducing more business than the others and wants to be rewarded for that or is engaged full-time working in the business while others only work part-time.

4. Dissolution is always a threat. Any partner may end the partnership at any time. This can be particularly problematic if there is a dispute and one partner uses the threat of dissolution as a lever. It may not be a good time to bring the relationship to an end, for example if the project for which the partnership was established has not reached its conclusion. There is no way for a disenchanted partner to retire other than to dissolve the partnership, unless it is agreed otherwise (when the partnership is set up or at a later date).

5. There is no power for the majority to expel an individual partner unless that has been expressly agreed between them. This can be a game changer for the business. If one partner underperforms or there is misconduct the only option to remove them would be to dissolve the partnership. If there is an otherwise successful business this may not be what the other partners want at all and can decimate the goodwill that the business has built up over time.

6. Similar problems can arise if, for example, one of the partners is affected by long term illness. There should be a mechanism in an agreement by which that partner is allowed to retire without dissolving the partnership. It is also useful to incorporate some succession planning in the partnership agreement if it is intended to continue indefinitely. Age discrimination law complicates the

The start of a new venture, particularly a joint one, is an exciting time. Often the formalities of how the business should best be set up are forgotten in the heady rush of getting the business off the ground. No-one wants to consider what might happen if times are tough or there is a falling out between the individuals involved. Many new joint ventures run along without any written agreement between the individuals governing initial financial contributions and profit shares in the business. Partnerships in which some partners provide the money and others provide the time present particular problems.

To deed or not to deed – eight reasons you need a partnership agreement

issue (and it is beyond the scope of this article to deal with that), but should the partnership agreement try to oblige partners to retire at a specified age?

7. There are limited restrictions on the future conduct of partners after they have left the partnership unless agreed to in writing. If there is an agreement in place, more onerous restrictions can be placed on exiting partners, for example to prevent the leaver setting up in competition or poaching customers or staff of the business. It is also possible to provide for the majority of partners to put a leaving partner on ‘garden leave’ if it is expressly provided for in an agreement.

8. Every partner is jointly liable with the others for debts and obligations incurred whilst a partner. If there is misconduct by one partner that leads to an obligation for the business, there is no automatic right for the other partners to pass that liability on to the partner who has behaved wrongly.

Similar (although not identical) considerations can apply to all forms of joint enterprise, whether it is a partnership, a limited liability partnership (LLP), or a limited company. It is always best to consider at the outset what the aims of the business are and what the responsibilities of the individuals taking part in the business should be and record them, whether by signing up to a partnership agreement; or a members agreement (for an LLP); or a shareholders’ agreement (for a limited company). Spending a little bit of time on this issue at the outset can avoid the potential for real trouble in the longer run.

Nina Ferris [email protected]


Forthcoming events for 2018:


The information and any commentary contained in this newsletter are for general purposes only and do not constitute legal or any other type of professional advice. We do not accept and, to the extent permitted by law, exclude liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this newsletter. Whilst every effort has been made when producing this newsletter, no liability is accepted for any error or omission. If you have a particular query or issue, we would strongly advise you to contact a member of the dispute resolution team, who will be happy to provide specific advice, rather than relying on the information or comments in this newsletter.

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About Hill DickinsonThe Hill Dickinson Group offers a comprehensive range of legal services from offices in Manchester, Liverpool, London, Leeds, Piraeus, Singapore, Monaco and Hong Kong. Collectively the firms have more than 1050 people including 190 partners and legal directors.

If you would like to know more about us, or any other services we provide please visit our website or contact:

Geraldine Ryan Head of Commercial Litigation [email protected] +44 (0)161 817 7288

Fiona Parry Partner [email protected] +44 (0)151 600 8528

Editorial contact:

Moya Clifford Professional Support Lawyer [email protected] +44 (0)161 817 7254

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