Tea and cookies

Should the law demand the impossible?  

Today the law on cookies changes [1].

Cookies are small files downloaded to a user’s computer or phone when they visit a website or use an online service. Most are completely harmless, and many are essential to the operation of the site, or improve the user experience by, for example, recognising you when you return.

The new law, based on a change to the underlying European directive, requires the user’s explicit consent before a cookie can be transferred to his or her computer. But how is that to work? Government advice confirms that relying on the site terms and conditions is not enough; nor can you rely on the user having set the browser to accept cookies, as that is not specific enough. You must actually ask and get informed, explicit consent.

Easy enough, perhaps, if you have a site that requires people to register or log in; you can get their consent as part of that process. But what about a straightforward information website? The ICO guidance offers a few possibilities, but none of them is satisfactory. Use of pop-ups, for instance, is defeated by users with pop-up blockers. Banners are technically difficult to implement and take up precious space on the site. Demanding consents will put people off using your site, and may drive them to competitors who do not comply. A small business with a website hosted on its ISP’s servers often does not have any facility for the necessary technical measures, or for storing users’ consents. It will simply have to stop using cookies (including inspecting cookies provided by other sites). Many small businesses use ready-made website packages or authoring software and will have no idea whether their sites use cookies; they may have to spend money finding out.

Technically, the exchange of cookie information happens as soon as a website has been accessed – before any information has been displayed. How do you get consent without displaying any text? How do you check if a user has consented to inspection of the cookie on his computer without inspecting the cookie?

The ICO has said that it will not rigorously enforce the new law in the first year, allowing businesses time to comply. That in itself is unsatisfactory – either the law is in force or it isn’t. The regulations were only published three weeks ago.

But the main concern is that it is impossible to comply fully with the regulations. It is this sort of legislative mess that brings business regulation into disrepute, and encourages the impression of thoughtless legislation from Brussels.

The other change made by the regulations is to introduce a new power for the ICO to fine businesses up to £500,000 for breach of the rules. No surprise there.

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[1] Privacy and Electronic Communications (EC Directive) (Amendment) Regulations 2011 which amend regulation 6 of the Privacy and Electronic Communications (EC Directive) Regulations 2003

Avoiding the Gotchas

Pitfalls in the execution of documents

I am strongly against the law introducing traps for the unwary by insisting on formalities you couldn’t comply with without detailed knowledge of the law. I’m also against documents being invalidated by minor errors in execution, which leads to injustice for innocent parties.

One such trap is section 44(6) of the Companies Act 2006, which did not exist in the 1985 Act. It says that if a document is executed by several companies, each signatory must sign separately for each company. A completely pointless formality, in my view. If, say, a pension scheme deed has to be executed by all 58 companies in a group, all with the same directors, why shouldn’t it be expressed to be executed by all of them and signed just once by each director?

In Williams v Redcard Ltd the Court of Appeal refused to extend this principle, holding that there was no reason why an individual could not sign both for the company and in a personal capacity, and that it was not necessary for the document to specify that the signatory was acting for the company. Good news so far, though the trap remains when you are dealing with several companies.

But the real worry in the case is the assumption that section 44 was relevant at all. The section 44 formalities (signature by two directors, or one director with a witness) apply to documents executed “by" the company. Usually this applies to deeds; most other forms of contract are simply signed or agreed by a director (or some other authorised person) as an authorised agent “on behalf of” the company, which is permitted by section 43(1)(b). No formalities at all are required to agree most contracts as agent on behalf of a company. The contract in the case was a contract for sale of land, so it had to be in writing and signed by or on behalf of the parties[1], but it did not have to be a deed. Property contracts are often signed just by one signatory on behalf of the company. Yet it was somehow assumed that the contract was not signed "on behalf of" the company by the two directors who signed it, and needed to satisfy the section 44 formalities for execution "by" the comapny.

The reasoning is unclear, but the assumption seems to have been that there must be some clear indication that a person is signing “for and on behalf of” the company before it is accepted that it has been signed by an agent. That creates all sorts of traps for contracts entered into informally. Let’s hope that it is not applied further.

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[1] Section 2 Law of Property (Miscellaneous Provisions) Act 1989

Serving documents via Facebook and email

A County Court has given permission for one of its orders to be served through Facebook [1]. Even the law is trying to keep up with the social media revolution! The courts have a wide discretion to allow service by alternative means likely to come the attention of a defendant. There has been a previous instance of service of a High Court injunction on an anonymous defendant via Twitter.

Many contracts specifically exclude the use of email for service of notices, and I am not convinced it is the right approach. Everyone in business uses email, including for important communications, and the risk of someone being caught out by failing to serve a notice by post exceeds the risk of an email notice not being received.

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[1] http://www.telegraph.co.uk/technology/facebook/8382570/British-lawyer-uses-Facebook-to-serve-court-summons.html

Of course banks want to lend money!

A rare case of a customer successfully suing a bank for failure to advance a loan! It is sometimes claimed that a person who does not get a loan suffers no loss because he avoids liability to repay the loan.

In Essentially Different Ltd v Bank of Scotland PLC [1] the judge dismissed a rather desperate claim by the bank that there was a condition precedent that everyone had forgotten to put in the facility documents. But the interesting part is that he went on to hold that the bank’s breach of contract caused the loss of an opportunity to pursue a project, so that the bank could be liable in damages for that loss. In a Shakespearian turn of phrase, Burton J. held that failure to supply the loan "really knocked the stuffing out of" the project. Whether the project was in fact valuable was left to another day, but clearly banks cannot withhold loans with impunity.

 
 
 
 
 
 
 

[1] http://www.bailii.org/ew/cases/EWHC/Comm/2011/475.html

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Property developers personally liable

Insolvency and the single purpose vehicle

Developers should take note of a recent case in which an SPV’s directors were held personally liable for its debts.

It’s a common scenario (or it was, when developments could be funded…). Entrepreneurial developers identify an opportunity. They form a company to carry out the development – a single-purpose vehicle (SPV). They put in some “equity” – more often subordinated debt, or even a limited guarantee of bank debt – and often from a funding partner rather than the personal wealth of the developers. The rest of the money is non-recourse lending from the bank, secured on the property. All the equity goes on land purchase, so the build costs are funded entirely from bank money, advanced against certificates showing that valuable work has been done. There’s a fixed-price building contract with the contractor – though how fixed may not always be clear to everyone.

If it goes well, the bank gets repaid on sale of the investment, or rolls its loan into investment funding. If sale price is greater than land cost plus development costs, the developers walk away with a profit. If it all goes wrong – cost overruns, long void period before sale or letting, fall in market prices – well, from the developers’ viewpoint, they haven’t lost much – the equity  provider loses out, and the bank may take a bath, the contractor loses his retention and the cost of uncertified work, but the developers just go on to another project.

But what if the SPV liquidator cuts up rough? In Roberts v Frohlich and Another [1] the directors were found to have traded after there was no reasonable prospect of avoiding insolvency. They were made personally liable for the build costs after a certain date, on the grounds that this was a breach of duty to the company and wrongful trading [2].

They had juggled the contractor, the bank and a potential buyer of the development, keeping the balls in the air while trying to resolve some fundamental conflicts. The bank’s conditions included a fixed price build contract and pre-sales, but the contractor was insisting on a cost-plus basis and no sales were likely until construction was under way. Neither bank not contractor knew that the other was not yet committed. In the meantime the directors got the contractor to do groundworks and civils under a letter of intent, and had the contractor order the steel for the construction, with no facility in place to pay for them. They drew down a bank facility for the preparatory works whilst knowing that they could not meet the conditions for the development facility. They continued to allow the contractor to run up large costs They knew that the cashflows they and the bank had relied on could not be met. They were driven, in the words of the judge, by “wilfully blind optimism; the reckless belief that… something might turn up.” When the SPV went into administration and the property was sold, the bank got repaid, leaving the liquidator with a fighting fund of £25,000 to pursue the directors on behalf of the unpaid contractor.

Norris J. found the directors guilty of three breaches of duty: (1) the fiduciary duty to the company to act in the interests of the company, which when the company is insolvent or of doubtful solvency or on the verge of insolvency becomes a duty to protect the interests of its creditors; (2) the fiduciary duty to act with reasonable care and skill and (3) the statutory duty [2] not to trade after there is no reasonable prospect of avoiding insolvent liquidation.

(3) is not surprising: directors can be made liable for debts they continue to run up after the point at which they should have called in an insolvency practitioner [2], and an order to that effect is likely in the next stage of  the case. (1) and (2) are a little more surprising: the duty to the company to act in the interests of creditors has been well known, but it has never been clear what liability might attach to a breach. Unfortunately the reported judgment did not deal with remedies, so we are none the wiser.

What lessons can be learned? Directors cannot speculate wildly with other people’s money, even if was willingly lent into a non-recourse vehicle like an SPV. Expect to see more “non-recourse” lenders to companies trying to recover losses through claims against directors.

Don’t incur debts if you cannot be confident that funding will be in place to meet them. Be honest with bankers and suppliers – it is far too easy to slip from hard bargaining into deception. Or, as in this case, self-deception: make sure that the legal documents say what you wish they did.

Remember the shaving-mirror test: is today the day on which insolvency is inevitable?

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[1] [2011] EWHC 257 (Ch), [2011] All ER (D) 211 (Feb)

[2] Section 214 Insolvency Act 1986

Workplace safety: it's criminal

First corporate manslaughter conviction

A company has been convicted of the new offence of corporate manslaughter, arising out of an accident in 2008[1].

Before the Corporate Manslaughter and Corporate Homicide Act 2007 it was very difficult to prosecute for manslaughter arising out of industrial accidents. It was necessary to prove the personal guilt of an individual director. The new offence is committed if the way the company’s activities are managed or organised causes a death, amounting to gross negligence, to which senior management contributed. 

Cotswold Geotechnical (Holdings) Ltd ignored industry standards and left a junior geologist to work alone in a 3.5m deep trench. Sadly, Alex Wright was killed when the trench collapsed.

Originally, the managing director was also charged with manslaughter, but was unfit to stand trial, and the company was also charged with a health and safety offence. Was the corporate manslaughter offence is unnecessary in the circumstances? The company can expect a heavier fine than for the H&S offence[2], and has the public notoriety of being convicted for manslaughter[3] – perhaps that was the main reason for bringing in the offence, to convict companies of a “real” crime instead of what looked like a technical offence. Still no-one goes to jail.

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[1] Source: http://www.cps.gov.uk/news/press_releases/107_11/

[2] Sentencing guidelines for corporate manslaughter recommend a fine of over £500,000, that may be in millions; for health and safety offences causing death, of over £100,000. Fines cannot be recovered under insurance.

[3] Which is likely to include court-ordered publicity, eg on the company’s own website.

A decent website?

Advertising code extended to all websites

The Code of Advertising Practice is being applied to all websites from 1 March. I blogged this week about the legal requirements for your website, but now it also has to follow the Code if it directly promotes products or services to consumers (including businesses) in the UK. That includes a Facebook page or LinkedIn company page.

You may think that all your promotional material is already legal, decent, honest and truthful, but do you hold documentary evidence to prove all claims that are likely to be regarded as objective? Is it clear that opinions are not intended to be objective claims?

For a start, very few law firm websites don’t claim to be a “leading” practice!

Some parts of the Code go beyond the content of advertisements: for instance products ordered must generally be delivered in 30 days, and the CAP duplicates and extends some parts of the Distance Selling Regulations, and brings in general obligations to treat customers fairly – and appears to apply them to business-to-business sales. Of course it does not have the force of law – its terms are enforced by the Committee of Advertising Practice through advertising industry sanctions, so it does not give customers direct contractual rights. But an adverse finding could be highly embarrassing. Remember, many complaints come from competitors!

Name, rank and number

Company details you need on your stationery, websites and emails

Routine stuff, but I see many companies are still getting these wrong. Letterheads and invoices are usually right, but people fall down when it comes to email footers, websites and minor stationery items. Have you got them all right? As a reminder, download my easy guide as PDF.

Companies House: all-electronic filing

Companies House has announced that all incorporations and filings of annual returns, accounts and the main company forms for the standard company types will be electronic-only by March 2013. That means the end of paper forms.

In most cases web filing is much easier, though it does make it harder to make sure that filings are right and properly authorised: a mistake by the person filling in the online form will not easily be picked up. You do have to struggle though the arcane director/secretary authority codes involving the first three letters of your eye colour and Dad's forename.

It can go wrong, though. A client acquired a company and moved the office, and was given an incorrect online filing code. We couldn't file the change of registered office or new directors. Companies House would only send the filing code out by post to the old registered office...

Bribery Act delayed

The Government has delayed bringing the Bribery Act into force, until three months after it publishes its guidance. The guidance was due in January and the Act was to come into force in April. The guidance is to be made clearer and more comprehensive. It is important because it will clarify the steps businesses will have to have taken to show that they have "adequate procedures" to prevent bribery on their behalf. there is a fear that small businesses may be caught out because they will not have written manuals, processes and contracts.

Insolvency and pension deficits: a Bonas for groups?

Big cut in the threat of contribution notices

An important case for the insolvency world when dealing with pension scheme deficits: the Pensions Regulator has been knocked back in its demand for a substantial contribution (£20m claimed, £5m originally ordered) by way of a contribution notice against a parent company, following a pre-pack that resulted in the business being sold back to a member of the same group. In Re the Bonas Group Pension Scheme the Tribunal effectively held that a contribution notice can only be used to recover actual loss caused by the parent company’s conduct. Unless the pre-pack sale was at an undervalue (and since the subsidiary was insolvent and the parent had no other obligation to contribute to the scheme) the Pensions Regulator had no grounds for recovery of the scheme deficit from the parent by way of a contribution notice. This greatly reduces the threat of contribution notices is associated companies are allowed to go down with pension deficits, and  slashes the Pension Regulator’s bargaining power when negotiating contributions from groups.

Contribution notices can require a person connected to or associated with the employer to make a contribution to a scheme deficit. Financial support directions are not affected by the case, and there have been some legislative changes that could affect the result, but this is a big and unexpected reduction in the Pension Regulator's powers.

Competition: bite the hand that feeds you

Would you have done the right thing?

RBS has been fined £28.59m by the OFT for supplying information on its pricing of loans to professional practices over a four-month period. Ouch!

A specialist team provided the information to Barclays. Barclays shopped them to the OFT, and by doing so escaped a fine and damaged its competitor. This is now the pattern – whistleblowers get off scot-free, so there is every incentive to be the first to rat.

Banks should know better, but smaller businesses are often not alive to competition issues. The occasional chat or bit of co-operation through a trade association seems only natural. Just think what might happen if your competitor goes to the OFT. Should you go first?

£28.59m! I wonder what the .59 was for.

Why try to save money on legal fees?

Partner rates skyrocket at top firms despite economic gloom [1]

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[1] The Lawyer 20 September 2010

"Magic circle partners are again charging as much as £725 per hour… five-year PQE associates now charge an average of £450-£550… US firms in London broke through the £600 barrier… some [City partners outside the magic circle] are now charging an all-time high of £640… national firms have… partners charging between £325 and £350 and five-year associates between £250 and £300." full article

Are those rates good value for money? Or is it worth saving money by finding the same levels of expertise at much lower rates?

Virtual law firms such as Excello Law can offer the experience of big firm partners at much lower rates – often half those of big firms with equivalent expertise. And law firms who bring in independent consultants like me only when needed can also be profitable at lower hourly rates.

More stats – what do they mean?

Public deals up, private deals down

There were 34 public takeovers (listed and AIM) in 2010, compared to only 21 in 2009.[1] That may reflect the effect of surging stock markets, with companies looking to use the value of their paper to make acquisitions.

But if so, it hasn’t trickled down to unlisted companies. Q3 statistics show only 38 acquisitions of independent UK private companies over £1m.[2] That must be an under-estimate, but the level of activity is still paltry, and a decline on Q2.

Good news for everyone except insolvency practitioners: corporate insolvencies were down to 15,894 in 2010, a fall of 3,618 on 2010, with Q4 figures down 19% on Q4 2009 and down 6% on Q3.[3] Ever since the beginning of the recession people have been predicting a huge surge in insolvencies in three months’ time, but there is no evidence of it happening, or that it ever will. Corporates are limping out of the recession, slowly rebuilding their balance sheets, and lenders are waiting patiently for their customers to recover, taking the modest profits and leaving the equity holders waiting more patiently still. HMRC may be trying to claw back their time-to-pay arrangements, but there is little evidence that they are aggressively pushing companies under; now that they are ordinary unsecured creditors, they don’t get much out of a liquidation.

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[1] Source: PLC

[2] Source: ONS

[3] Source: PWC as reported in Insolvency News

Defamation and archives

Unacceptable publications: falsifying the record?

One problem we are having to grapple with increasingly in the internet age is that of archives. In the past, if a book contained illegal or defamatory material, you would supress its further publication, but it took too much effort to engage in book-burning, and libraries would probably retain their copies. No-one would attempt to get back all copies of last week's newspaper, or to fillet the publisher's archive. In the internet age we have semi-permanent, searchable, global access to almost anything, so the damage done continues long after publication of even the most ephemeral comment. How far is it acceptable to require filleting of archives to remove illegal or defamatory material? When does falsifying the record become worse than dissemination of the unacceptable material?