MITCHELL WILDE LLP

NEWSLETTER May 2007

Debt collection

Act Quickly or Count the Cost

When taking legal action for recovery of a debt, it is important to act promptly – and not just because of the risk associated with having a debtor that is in financial trouble.

In a recent case, a company sued another for non-payment of a debt more than a year after the adjudicator’s decision in a construction dispute. The judge hearing the case ruled in favour of the claimant company, but reduced its claim for interest due on the outstanding sum by 50 per cent for one year because of the delay in bringing the claim.

General

If You Have Doubt – Watch Out

A company (or person) that receives funds which they know to have been misappropriated can be liable to repay those sums to their rightful owner. In effect, any sum received which is believed to be misappropriated is held on trust for the rightful owner.

A recent case in which this principle was contested saw an on-line betting firm ordered to repay over £9m to a company which had its funds plundered by an employee to finance his gambling habit.

It should also be noted that where it is ‘just and equitable’, the court could order a contribution towards the loss to be made by a company’s directors and/or auditors. However, the circumstances in which such an order would be made are likely to be rare.

If you are in receipt of funds which you have reason to believe might be improperly obtained or the proceeds of crime, take advice immediately.

Data Protection Act – End of Transitional Arrangements

The Data Protection Act 1998 gives individuals the right to know what information is held about them. It provides a framework to ensure that personal data is handled properly.

Personal data is information which:

• is about a living person and affects that person’s privacy in the sense that the information has that person as its focus or is otherwise biographical in nature; and
• identifies a person, whether by itself or together with other information in the organisation’s possession or likely to come into its possession.

The Act applies not only to information held on computer but also to manual information, provided the paper data is organised into a ‘relevant filing system’. The latter is defined as information which is structured either by reference to the individual or to criteria relating to individuals and which is held in such a way that specific information relating to a particular individual is readily accessible.

When the Data Protection Act came into force in March 2000, a number of ‘transitional relief’ arrangements were included to give data controllers time to ensure that the way they handled personal information fully complied with the Act.

One such arrangement was that between 1 March 2000 and 23 October 2001, data which was recorded manually was exempt, except for health, education or public records. A second transitional relief arrangement applies to manually recorded data created prior to 24 October 1998. This is still not bound by most of the requirements of the first five principles of the Act and individuals do not currently have a general right to go to court to correct inaccurate personal information about them if this predates 24 October 1998. However, this exemption expires at midnight on 23 October 2007.

Whether or not this change in the law will affect your business depends on the nature of the paper records you hold which predate 24 October 1998 and how these have been filed and handled.

For individual advice on compliance with data protection issues, contact David Wilde.

For general guidance on responsibilities under the Data Protection Act and how to satisfy requests for personal data, see

http://www.ico.gov.uk/for_organisations.aspx.

Property

Landlocked Land – Lords Confirm No Right of Access

The House of Lords has confirmed the 2006 decision of the Court of Appeal that when a piece of land is landlocked (i.e. has no right of access over adjoining land so cannot be lawfully accessed by its owner), there is no automatic right to have a right of way ‘of necessity’ over adjoining land.

The case involved land which was bounded to the East and to the West by private land. To the North and South it was bounded by a piece of land and a highway respectively. Both of the latter pieces of land had been sold to the predecessor of the local authority which now owned them. The landlocked land had been retained by the original owner and the conveyance of the adjoining land which was sold did not reserve any right of access over it.

When the landlocked land was subsequently sold, the company that bought it sought to obtain a ruling that it should be granted a right of way to its property over the land to the North, which would be necessary for the land to be developed. The local authority had previously indicated that planning permission for access to the highway would not be granted.

In the view of the Court of Appeal, at the time the land was sold there had been no common intention that there should be a right of access across the land to the North. Accordingly a right of way of necessity should not be granted. The Lords confirmed this decision.

“This case illustrates the importance of not making assumptions – especially over things as critical as access to land,” says Mitchell Wilde LLP partner David Wilde. “You should always make sure that the essentials are in place before signing on the dotted line – relying on the courts to put things right after the event is a very risky strategy.”

Tax

Industry Backs Budget Challenge

The recent Budget, which proposed changes to the system of Industrial Buildings Allowances (IBAs), faces a challenge from an unexpected quarter. The Finance Act 2007 will contain provisions which abolish IBAs without retaining ‘grandfathering’ provisions which would allow claims already made to continue.

The allowances are claimed over 25 years, so recent qualifying expenditure which was expected to lead to tax relief over a number of years will no longer do so. In practice, this is similar to introducing retrospective taxation. This is of particular importance to the hotel industry, which relies on the claims as part of its justification for investment decisions.

Trade bodies in the hotel industry are said to be considering a legal challenge to the new tax law on the basis that it infringes Article 1 of the First Protocol of the European Convention on Human Rights, which states that ‘every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law’. The argument is that the effective retrospection of the change in tax law infringes this clause of the Convention.

Says David Wilde, “Whilst such a challenge is ongoing, it might be advisable to take steps to make sure the IBA is calculated and the necessary records are retained to justify a claim should the courts agree with the legal challenge.”

IP

Patent Case Means Business Certainty

One of the problems in patent disputes in this country is that in some circumstances the ‘final decision’ on the validity of a patent will be taken by the national court and in some circumstances it will be taken by the European Patent Office (EPO).

This causes particular problems when there is a decision made by one authority which is then considered, and possibly reversed, by the other. Recently, such a case was considered by the Court of Appeal. At issue were the damages due for the infringement of a patent for flooring as a result of a UK court ruling. The patent was ruled valid in the UK and this decision has been referred to the EPO. The companies ordered to pay the damages argued that payment should be delayed pending the EPO’s decision.

The Court’s decision was that the payment of the damages could not be countermanded because of the challenge to the patent in the EPO. It would be unfair for the businesses involved to have an extended period of uncertainty. Jacob LJ concluded that “where a final decision has been made on a fair contest between the parties, that should stand as the final answer between them.”

For businesses reliant on their IP this decision means that if they are involved in a challenge in respect of a patent, they should ensure that they muster their evidence and present the best possible case at the first hurdle.

Mind Your IP

The UK Intellectual Property Office (previously known as the Patent Office) has launched a campaign to make small businesses aware of intellectual property (IP) issues, claiming that many firms lose out financially because they fail to protect their IP.

It has published two new information booklets offering advice to small firms. A free IP e-newsletter is also on offer. These can be obtained from the Intellectual Property Office website at http://www.ipo.gov.uk/.

Says David Wilde, “IP can be of enormous value in today’s economy and firms should take all necessary steps to protect it and to ensure their IP ownership cannot be questioned. If your business depends on unique processes, inventions, designs or technologies for its success, or you have invested in creating brands, contact us to see what steps can be taken to protect your IP assets.”

Company Law

Danger Lurks in the Shadows

Companies are increasingly making use of non-executive directors and external advisors who are not formally appointed as directors to their board but who act, in effect, as directors of the company.

It is not always appreciated by non-executive appointees that where a person acts as a director – in the sense that their instructions or directions are normally acted upon by the company – they are for some purposes in the same legal position as ‘proper’ directors of the company. People in this position are known as ‘shadow directors’.

Unfortunately for such people, danger lurks in shadow directorships because the main way in which their position resembles that of actual directors is that they can share the civil liabilities of other directors in the event of a corporate insolvency. This may lead to them being required to contribute funds to pay creditors of the company if it becomes insolvent. They also face the possibility of being disqualified from acting as a director by the Department of Trade and Industry where their conduct warrants such a ruling.

If you are asked to be a non-executive director or to participate at the decision-making level of a company’s management as a consultant or advisor, take care, especially if the company is in financial difficulty.

Recently, a shadow director of a company was ordered to repay over £850,000 plus compound interest after the company with which he was involved went into insolvent liquidation.

“If you are operating at a senior level in the company and are in effect ‘part of the team’, you may be at risk, even though your name is not on the letterhead,” says David Wilde. “Ignorance of one’s responsibilities is no defence.”

Contract Law 

Doing Your Best Isn’t Reasonable

A recent decision of the commercial court confirms that doing your best isn’t reasonable – or, more correctly, that to make reasonable endeavours to do something is not the same as making your best endeavours to do it.

The case concerned a contractual dispute between two companies, one of which was buying a business from the other. The dispute involved the interpretation of the phrase ‘reasonable endeavours’ in relation to a contract, with a third company, which was to be transferred between the two companies following the sale.

The contract was not transferred and the vendor company brought a suit alleging that the purchaser had not met its obligations because it had not used reasonable steps to ensure the contract was transferred.

The court, however, considered that ‘reasonable endeavours’ did not mean that all reasonable courses of action had to be taken. If that were the case, there would be no difference between ‘reasonable endeavours’ and ‘best endeavours’, a term also used in legal agreements in some circumstances. In the court’s view, a ‘reasonable endeavours’ clause must be less stringent than a ‘best endeavours’ clause and such a term will normally be satisfied if a reasonable course is taken. The exception would be if the clause sets out specifically what steps should be taken, in which case compliance will only be achieved if all the specified steps are carried out.

Says Paul Mitchell, “If something is very important, the phrase to use is ‘best endeavours’, which will require a higher standard of effort on the part of the other party to the contract to ensure that the desired end is achieved.”

We can assist you in negotiating all commercial agreements.

Competition Law

OFT Consults on More Effective Redress

The Office of Fair Trading (OFT) has issued a discussion paper, entitled ‘Private actions in competition law: Effective redress for consumers and business’, on how to make redress for consumers and businesses for breaches of competition law more effective.

The OFT is mindful that consumers, particularly small and medium-sized businesses, face a number of practical problems which make them reluctant to take private action to enforce their rights under the law. Businesses harmed by cartels and other anti–competitive practices should be better placed to recover their losses and address the competitive disadvantage they may have suffered from infringements. The OFT believes that a more effective system of redress for breaches of competition law will also promote greater compliance.

The consultation paper can be found at http://www.oft.gov.uk/shared_oft/reports/comp_policy/oft916.pdf.

Insolvency

Director Counts Cost of Absence of Written Agreement

Directors often advance their own money into the companies they direct, either as seed-corn capital or to tide the company over cash flow shortages. Where the company subsequently becomes insolvent, such cash injections normally rank equally with other creditors and in that case should receive the same treatment as the debts due to creditors in general.

In such circumstances, a director who repays money they have advanced is creating a ‘preference’ over other creditors and may be ordered to repay the amounts withdrawn from the company.

Recently, a director of a pub company was ordered to repay £28,000 which had been paid into it when it was unprofitable and in financial difficulties. The pub was sold and the director’s loan repaid. He also authorised a payment of £5,000 to his co-director. Three months later, the pub company commenced a company voluntary arrangement (CVA). The administrator supervising the CVA entered into negotiations to recover the amounts and discussions were held between the administrator and the director at which the director was asked if he would be prepared to settle the claim against him for between £5,000 and £10,000. He made an offer to repay £5,000, but no formal agreement was made. In the absence of an agreement, the administrator was given leave by the court to claim the entire sum which had been paid to the director in preference to the other creditors plus the £5,000 paid preferentially to his co-director.

Says Paul Mitchell, “Insolvencies typically involve a great deal of horse-trading and negotiation. Whilst it is important for directors of companies facing insolvency to make sure that their behaviour is proper, it is also important to make sure that any agreements with administrators, receivers or liquidators after an insolvency are evidenced in writing.”

Licensing

Cigarette Ban – What a Fag!

Publicans, restaurateurs and hoteliers may well be quietly thanking their lucky stars over the smoking ban, which commences in England on 1 July 2007. They will no longer have to meet the cost of cleaning ashtrays, clearing up cigarette butts and the more frequent cleaning of soft furnishings that smoking necessitates. However, just to prove every silver lining comes with a cloud, new legislation is proposed which will allow local councils to require licensees to be responsible for cleaning the pavements adjacent to their premises for up to 100 metres. The new legislation is expected to be introduced to coincide with the introduction of the smoking ban.

If the local authority sees the amount of litter as constituting a nuisance, it will be able to issue a ‘Street Litter Control Notice’ to compel licensees to clean the street near their premises. Cigarette butts are seen as a particular problem with some kinds of pavement.

As a first step, the provision of adequate numbers of litter bins in areas used by smokers must be a sensible precaution.

IT

Web Criminals Use New Approach

Although the days of spam emails containing viruses are not past, the move over the years from amateur virus-writers to those motivated by commercial gain has been relentless. The purpose of most ‘malware’ (software such as Trojans, which are planted on a computer without the owner’s knowledge and which seek to obtain information or use the machine for its own purposes) written today is financial gain. Often this is some form of theft or fraud, which is made possible by successfully planting the illegitimate software in an insufficiently protected machine.

Having regularly updated anti-virus software, a good firewall and anti-spyware solutions must now be regarded as mandatory. However, as well as having good technical solutions, it is sensible to consider, in particular, limiting the websites you or your staff visit. Nowadays, the favourite way for a malware provider to gain access to PCs is to do so by injecting their code into a legitimate website in the hope that users of the website will download it without knowing they have. This is a huge problem as is illustrated by the fact that Internet security specialists Sophos have recently reported that in the month of April alone they found 245,790 web pages hosting malicious code.

The security threat presented by access to the Internet is significant. Businesses should ensure they have a high-quality technical solution to ward against potential attack, but in addition should consider their Internet usage policies and steps they could take to isolate critical or sensitive data.

Environment

WEEE – Take Back Date Approaching

From 1 July 2007 any distributor – i.e. a retailer or wholesaler – supplying new Electrical and Electronic Equipment (EEE) must play an active role in meeting the aims of the Waste Electrical and Electronic Equipment (WEEE) Regulations, which came into force on 2 January 2007.

The WEEE Regulations apply to EEE which falls within the 10 product categories listed in the WEEE Directive. These are:

1. Large household appliances;
2. Small household appliances;
3. IT & Telecommunications equipment;
4. Consumer equipment;
5. Lighting equipment;
6. Electrical and electronic tools;
7. Toys, leisure and sports equipment;
8. Medical devices;
9. Monitoring and control instruments; and
10. Automatic dispensers.

From 1 July, any distributor of EEE (irrespective of the way it is sold) who has not joined the Distributor Take Back Scheme will have to offer free in-store take back of household WEEE from customers purchasing a new, like-for-like product. There are no exemptions for SMEs under the Directive. In addition, distributors have an obligation to provide householders with information on the options available to them for the free return of WEEE and on the environmental benefits which result from its separate collection.

If you would like advice on your responsibilities under the WEEE Regulations, please contact David Wilde.

The Department of Trade and Industry has useful guidance notes which can be found at http://www.dti.gov.uk/files/file38209.pdf.

Employment Law

Expired Disciplinary Warnings

A further case has illustrated that employers cannot place reliance on a disciplinary warning that has expired, either in disciplinary proceedings or to justify dismissal.

In Airbus UK Ltd. v Webb, the Employment Appeal Tribunal (EAT) has ruled that a Tribunal is ‘obliged, and not merely entitled, to ignore expired warnings’.

Mr Webb worked for Airbus as an aircraft fitter. In July 2004 he was dismissed for gross misconduct after he was found washing his car when he should have been working. He appealed against the decision to dismiss him and the disciplinary action was reduced to the lesser sanction of a final written warning which would remain on his record for 12 months.

Three weeks after the written warning expired, Mr Webb and four other employees were caught in the locker area, watching television, outside their normal break time. All five were found guilty of gross misconduct. Mr Webb was dismissed but the other four employees received final warnings because they had no prior disciplinary record.

Mr Webb claimed that he had been unfairly dismissed. The Employment Tribunal (ET) took into account the decision of the Scottish Court of Session in Diosynth Ltd. v Thomson in which the Court had ruled that the employee was entitled to assume that a similar warning meant what it said and that it would cease to have any effect after one year. The ET held that as Mr Webb would not have been dismissed had he not been given a previous warning, it followed that his dismissal was unfair.

Airbus appealed against the ET’s decision and lost. However, the EAT confessed to having some difficulty in deciding whether or not the ET is obliged to ignore past warnings that have expired, but judged on balance that it is. The EAT went on to suggest that although the ACAS Code of Practice on Disciplinary and Grievance Procedures suggests that final warnings should normally expire after 12 months, this need not always be the case. A longer time limit might be appropriate if the nature of the misconduct justifies it.

We can advise you to ensure that the time limits for disciplinary warnings fit the particular circumstances and that your policies and procedures allow you to issue an extended warning where this is deemed necessary.

Consultation on the Administration of Additional Paternity Leave and Pay

The Government has published a consultation paper on its proposals for the administration of the extension of Additional Paternity Leave and Pay.