Director Disqualification – A Government Proposal

A recent Government response to a consultation paper, involving the transparency of company ownership in the UK,touched upon extending the scope of directors’ disqualification legislation, currently contained in the Company Director Disqualification Act 1986 (CDDA). The response described the role of a director as crucial and acknowledged that it “warrants a robust system” for removing those deemed unfit to occupy such a position.

Under the CDDA, a director can be disqualified from holding that position within any company for up to 15 years and any breach will constitute a criminal offence. Schedule 1 of the CDDA currently sets out the issues which a court must consider before granting an order for disqualification. The Government has proposed to replace the schedule with a “broader and more generic” provision to have regard to. It was suggested that any amendment should include the following additional factors:-

  • material breaches of sectoral regulations (for example in the energy, media or public sectors);
  • the wider social impact of the failed company;
  • the nature of the creditors and the level of loss suffered by them; and
  • directors’ previous failures.

If the proposal is passed by parliament, either the courts or an insolvency service (on behalf of the Secretary of State) will have to take these factors into account when deciding whether to disqualify a director, and for determining for how long.

"You're off" - Costly punishments for misfiring Directors.
“You’re off” – Costly punishments for misfiring directors.

The Government’s proposals go further than widening the scope of points within the schedule. The government Insolvency Service (on behalf of the Secretary of State) will also be empowered to apply for a disqualification order in respect of a director on the basis that they have been convicted of a criminal offence in relation to the operation of a company or otherwise been guilty of director misconduct in respect of companies located outside the UK. There is to be further consultation as to whether there can be a restriction on people who are disqualified in a different jurisdiction from becoming directors in the UK.

As mentioned above, the planned amendments are to broaden the provisions in order to increase the reach of the director disqualification regime. The scope of the information that the Insolvency Service can gather during investigation of a director’s conduct will be widened and such information will become easier to share with other regulatory and enforcement bodies. Specifically, the aim is to enhance collaboration between the Insolvency Service, the Financial Conduct Authority and the Prudential Regulation Authority, allowing cohesive investigation, and ensuring compliance with company law is fully integrated across the UK economy.

In order to increase the chances of action being taken against a director, third parties will be sold or assigned the power to pursue the case against a director. The Secretary of State will also be given the power to apply for compensation orders against disqualified directors in order to compensate creditors for identifiable losses attributed to directors’ misconduct.

Finally, the time period for proceeding with a disqualification case following an insolvency event, under section 6 of the CDDA, is to be increased from 2 to 3 years.

Ellis Walls
Trainee Solicitor

50 Shades of Purple… but only one for Cadbury

The Supreme Court has refused Cadbury’s application to appeal against the Court of Appeal decision in Nestle SA v Cadbury UK Ltd. In the case, it was held that Cadbury’s trade mark application, regarding its distinctive colour purple, could not be a validly registered mark.

The Court of Appeal considered that a trade mark must be (1) “a sign”, and (2) “graphically represented”. However, on the basis of Cadbury’s verbal description, it did not meet the required criteria of constituting a sign:-

 “the colour purple (Pantone 2685C)… applied to the whole visible surface, or being the predominant colour applied to the whole visible surface, of the packaging goods.”

The wording “or… predominant” was thought to be vague and is capable of constituting a large number of alternative signs and designs without any certainty as to what the mark actually is. It was considered to be an application for a shade of colour together with secondary characteristics, rather than just a solid colour. Overall, the court stated that the mark lacked “the required clarity, precision, self-containment, durability and objectivity” required for registration.

Cadbury

Given that the Intellectual Property Office originally accepted the application, Cadbury may wish to make a further trademark application for Pantone 2685C. The judgment of the Court of Appeal highlighted some points which Cadbury (and other potential colour trade mark owners) should consider the following:

The application to register a trade mark must be:

  •    a sign;
  •    capable of graphical representation; and
  •    capable of distinguishing between different goods or services.
  •   In order to be identifiable, a mark must be clear, intelligible, specific, precise, accessible, uniform, self-contained and objective.
  •  A single mark cannot take on multiple forms so as to cause confusion as to what exactly is being registered.
  •  A colour alone is not capable of being a sign; the colour must convey a message as to the source or origin of the goods or services. In such a case, colours without a defined figure or shape would be capable of registration when applied to a product or service.
  • A mark with multiple combined colours must be strictly uniform in its graphical representation, for example Burberry tartan (mark UK2300419).

The purpose of these rules is to prevent any unfair competitive advantages through the abuse of trade mark law.

The difficulties in securing the more unusual trade marks, as demonstrated by this case, may deter potential applications. If the potential owner can establish a reputation in the colour (as Cadbury had been able to do by showing the goodwill built up in their use of the purple since 1914) they can still rely on passing-off rights. Given the additional complexities in enforcing rights in unregistered marks, it is to be hoped that this area of the law develops further in the near future to ensure much needed clarity for applicants.

Ellis Walls
Trainee Solicitor – Business Services

Games Tax Relief – Will this be console-ation to the industry?

Gaming

TIGA, the gaming industry’s representative body, has announced the introduction of a Games Tax Relief to assist those companies operating in the video game development industry.

It is asserted by TIGA that the relief will contribute up to £188m in extra investment to the UK games industry in the next five years. While the extent of these indirect benefits are not yet clear, what are the direct benefits for those companies qualifying for the relief?

Qualifying Games

UK registered companies which develop video games for distribution to the public may qualify for the relief, applicable to accounting periods beginning on or after 1 April 2014. The relief does not apply to partnerships or LLPs. Start-ups in the video games sector should note this when considering what structure (incorporated or otherwise) will be appropriate for them. Although the tax advantage ‘tail’ should not be allowed to wag the dog.

The company must be directly responsible for designing, producing and testing the game or contracting and paying for goods and services required in relation to that game. This is presumably to avoid duplicate claims for relief from other organisations because they have carried out development work for the original developer through a sub-contract.

The game in relation to which the relief is applied must have been developed as a game intended for distribution to the public from its inception. It must not have been developed in relation to another technology project and “switched” to a game in order to apply for the relief. Games which were produced for advertising or gambling purposes for not eligible for GTR. It is suspected these were intentionally excluded to prevent the multitude of gambling and bingo websites from claiming the relief on the grounds of limited original artistic or development work.

Spend

Not only are there parameters on what qualifies as an eligible game, but also what is eligible spending. The expenditure should not be on developing the initial concept or for general maintenance or carrying out ‘fixes’. All costs incurred in the design, production or development stages of a game are eligible. Having said that, the game must be completed and brought to market in order to qualify; a cancelled project may not qualify for relief.

Relief

Presuming that a company’s developed game and its spending is eligible for relief, how can the company benefit?

If a claim is successful HMRC will pay back the amount of relief in the form of a tax credit to reduce the liability to corporation tax (or claim a cash rebate if the game makes a loss). 80% of the total costs of game production can be claimed against. Up to 25% of those costs can be claimed back. The percentage relief applied is calculated on the basis of a points system. Points are awarded as to what extent the game in question is culturally British. HMRC will consider the following:

  • the location of the game;
  • how many of the game’s characters are from the UK;
  • does the game portray a British story;
  • if the dialogue is in English or another UK recognised language;
  • the extent of the game’s promotion of British culture;
  • the number and role of the production staff who are citizens or residents of the UK.

This UK test also extends to consideration of whether the costs will be eligible. The intention is to avoid companies exporting all of the production and development work to other countries and losing those jobs from the UK market.

There are certainly a number of tests to overcome before a company can qualify for the GTR, which may limit how beneficial it will be to the industry in general.

The real concern however may be for the gamers, rather than the developers, should the content and style of games become increasingly homogenised in order to pass the “Britishness” culture test in order to qualify for greater percentages of relief.

Kelly Craig
Solicitor – Business Services

Unfair Competition? A Fresh Look at Restrictive Covenants

Those currently negotiating the purchase or sale of a business might have been interested to see the judgment in the recent Scottish Court of Session case of Agri Energy v Ian Logan McCallion.

Mr McCallion sold his business, which supplied cooking oil and arranged for its disposal and recycling into biofuel, to Agri Energy in October 2009. The sale and purchase agreement contained a clause which restricted Mr McCallion from carrying on business throughout Scotland for a period of five years.

Following completion of the deal, Agri Energy discovered that Mr McCallion was involved in a competing business, which was established by his son. Agri sought an order from the court preventing Mr McCallion from continuing to act in breach of the agreement which Mr McCallion challenged on the grounds that the restriction was unreasonable and unenforceable.

The presiding judge noted that there were two points to consider in relation to the reasonableness of the clause:

(i)             the geographic extent of the restriction; and

(ii)            the length of time that the restriction applied for.

The judge decided that the clause was enforceable and found in favour of Agri Energy.

It is important to note that this decision turned, in large part, on the facts and circumstances surrounding the payment of the purchase price. The judge noted in his opinion that the purchase price was greatly over the price which could be attributed to the modest sum of the assets concerned in the business and therefore the purchaser was paying for an established client list and the associated goodwill. It was also observed that half of the purchase price was paid at completion with a further three instalments, the last of which was payable in October 2014 (being the five year anniversary of completion).

The judge took the view that this was indicative of the obligations of the parties being reciprocal during that period.

It was also taken into account that if Mr McCallion set up in competition to the purchaser he would not require to be situated in the North East of Scotland, where he had previously traded, in order to attract his former clients away from the purchaser. What might otherwise be considered onerous geographic restrictions were, on the facts of this case, considered to be reasonable. 

Recognition was also given to the general principle that parties have freedom to contract and are in the best position to decide what is reasonable in the circumstances of their trade. This also persuaded the judge to find that the constraints on Mr McCallion were reasonable.

This case demonstrates that, despite the generally accepted principle that restrictive covenants should be narrowly geographically and temporally defined, longer and wider restrictions can be considered reasonable in certain circumstances.

A note of caution should be sounded though. The overarching principle remains the same; parties should be free to reach agreement. Mr McCallion had received independent legal advice and was therefore not deemed to be at a commercial disadvantage in the negotiations.

In summary, while this was an interesting case, I would not recommend that purchasers attempt to negotiate lengthier restrictions than they otherwise would purely on the basis of this decision, as each situation must be considered on its own merits.  Certainly, these clauses should not be negotiated by a party without them having taken proper advice in the hope that they can challenge their validity at a later date, should they turn out to constitute a “bad bargain”. This decision highlights the importance of ensuring that you have both proper advice and are fully committed to negotiating these crucial clauses, rather than simply hoping that the other party will be too busy or have insufficient funds available to enforce their rights through the courts.

Kelly Craig
Solicitor – Corporate & Commercial 

Linking to Other Websites – Copyright or Wrong Again?

My colleague, Kirk Dailly, wrote on this blog in September 2011 concerning the developments in case law surrounding hyperlinks at the time. Another decision has recently been issued concerning hyperlinks, but has it changed the position since Kirk reported?

The European Court of Justice (ECJ) has recently (13 February) published a pragmatic decision finding that the redirection of internet users to protected copyright material via hyperlinks is permissible without the authorisation of the copyright holder of the protected works.

Under EU law, authors of copyright work have the exclusive right to authorise any communication to the public of their protected work. The question was put to the ECJ by the Swedish Court of Appeal as to whether the redirection of internet users to journalists’ articles via hyperlinks was a “communication to the public”.

If the court had decided that it was such a communication then consent from the owner of copyright work would be required in order to establish a hyperlink from one site to the site containing the copyright material.

However, the court noted that the communication must be made to a new public in order to qualify as requiring authorisation. The articles which were the subject of the referral to the ECJ had originally been published on an open website to which any member of the public had access. The court took the view that, despite the fact that the hyperlinking website’s users were considered a “public” for the purposes of the legislation, they were not new, or were outwith the scope of the possible public to which the articles were intended for circulation.

Given the prevailing practice of hyperlinking across the internet, the practical consequences of a decision finding hyperlinks to be a communication requiring consent could have been extensive.

However, the court did acknowledge that any hyperlink which attempted to circumvent restrictions put in place on the protected works which normally permitted access only to members or subscribers would be considered a communication to a new public, as these people would not have been considered in the ‘public’ originally envisaged by the copyright owner.

Interestingly, the ECJ went a step further than simply acknowledging the realities of internet practice, noting that even if the internet user was under the impression that the copyright material was appearing on the site containing the link, authorisation was not required in that scenario either.

Despite this decision, we would still recommend that operators of websites who use hyperlinks at least make it clear who owns or operates the site and the material to which the link relates.

It is also important to be clear in your website terms and conditions that any outside links are just that. You should state that any material which is contained on a third party’s site is the responsibility of that party. In addition, if the user enters into a contract with the party operating the linked website, your own terms of use should also be unambiguous that the responsibility for entering into that contract lies with the user.

Please contact me, or another member of the Corporate and Commercial team, if you feel that your website terms and conditions would benefit from a review.

Kelly Craig 
Solicitor – Corporate & Commercial 

The Bankruptcy and Debt Advice (Scotland) Bill: A Financial Health Service

The Bankruptcy and Debt Advice (Scotland) Bill was introduced in the Scottish Parliament on 11 June 2013.

The bill follows the consultation on Scottish bankruptcy reform led by the Accountant in Bankruptcy (the government agency responsible for administering the process of personal bankruptcy in Scotland).

It has been said that the purpose of the bill is to deliver significant reform to Scottish Bankruptcy legislation and, according to the Accountant in Bankruptcy (AiB) ‘will modernise debt management and debt relief in Scotland to ensure that they are fit for the 21st century, taking account of the recent credit crunch and recession and the increase in pay day lending.

The bill reflects the AiB’s vision of a ‘financial health service’ providing rehabilitation to individuals and organisations in relation to their financial affairs.

The bill introduces a number of new concepts, most noticeably:

Compulsory Money Advice

The bill proposes that debtors considering applying for their bankruptcy (or any other debt relief regime) first require to receive certain financial advice from a money advisor.

Moratorium of enforcement

Where notice has been given to the AiB by a debtor intimating that they intend to apply for either sequestration (bankruptcy), a protected trust deed or debt payment programme under the Debt Arrangement Scheme legislation, creditors will be prohibited from either serving a Charge for Payment on the debtor, this being a necessary precursor to many diligences (diligence being the method of enforcing a court decree, e.g. an earnings arrestment) or, if a Charge for Payment has been served prior to such notice having been given, from carrying out any form of diligence.

Compulsory Financial Education

In addition to pre-bankruptcy money advice, the bill also proposes mandatory financial education for those who need it, for example, those debtors who have been bankrupt more than once, to try to help them avoid ending up in financial difficulty again in the future.

Common Financial Tool

The bill proposes the introduction of a ‘common financial tool’, which is a single Scottish-specific tool for money advisors to use in determining the balance of a debtors income and outgoings.  The logic behind the tool is that it will, in theory, ensure that the debtor’s ability to pay a contribution towards their debts is assessed in a way that is consistent and sustainable.

While the primary aim of the bill is to establish a ‘financial health service’, the bill does not solely cater for the needs of debtors and there are, in fact, a number of provisions which work in favour of creditors with the view to maintaining the balance between effective enforcement and debtor protection. For example:

  • The bill extends the period in which an asset acquired post-bankruptcy by the debtor will vest in the trustee to four years. At present, such assets generally revert to the debtor after only one year.
  • The bill proposes that, where a debtor cannot be traced, the debtor’s automatic discharge after one year be deferred indefinitely. Accordingly, should a debtor fail to engage in the process, he shall not be released from his debts.
  • It is further proposed that, in the event that assets belonging to the debtor are discovered following his discharge and those assets would have formed part of his bankrupt estate, the AiB will have the power to re-appoint a trustee with a view to realising that asset for the benefit of the debtor’s creditors.

The most radical aspect of the Bill is, however, the enhanced role of the AiB in the Bankruptcy process in Scotland. It is proposed that a number of functions that had previously been exercised by the Courts be transferred to the AiB, in particular:

  • A debtor who is able to repay all his debts can apply to the AiB for a recall of sequestration (as opposed to the Sheriff Court).
  • The AiB shall be able to remove a trustee from office and appoint a replacement directly.
  • The AiB shall have the power to convert a protected trust deed to a sequestration.
  • The AiB shall have power to cure defects in procedure in certain circumstances.

Of all the proposals contained in the bill, the transfer of certain powers traditionally exercised by the Courts to the AiB is coming under the most scrutiny, particularly from the legal profession.  The Law Society of Scotland has questioned this move, stating that matters of a legal nature, involving fundamental rights, should receive judicial scrutiny.  The Society is also concerned about proposals in the bill which would allow the AiB to review its own decisions, highlighting the serious potential for conflicts of interest.

On a final note, under the provisions of the Bill, creditors will have a period of 120 days to submit their claims from the date of receipt of notice from the Trustee.  In order to avoid disappointment, creditors will have to be organised to ensure their claims are received within the statutory 120 day period.

The Bill is presently at an early stage, however, it is anticipated that Stage 1 will be completed by the 20th December 2013 and, given the criticism the bill has received to date, it will be interesting to see whether or not it progresses to Stage 2 unscathed.

Ryan McKay
Partner – Dispute Resolution  

Government announces its conclusions in relation to the law surrounding company names

The Government has announced its conclusions following a consultation undertaken in relation to the law surrounding company names.

Approximately 30,000 company incorporation applications are received by Companies House each month. Of these, around 4,800 require a specified body (such as a government department) to confirm that it does not intend to object to the name under legislation concerning the use of ‘sensitive’ words. These regulations relate to the use of words which imply (i) pre-eminence in their field; (ii) a connection with a government body or other public authority; (iii) a representative function; or (iv) the carrying out of a specific function (such as a holding company or trust).

A large proportion of these applications are ultimately approved and the government has considered ways in which the system can be simplified in order to reduce the time and costs involved in the incorporation process.

When an incorporation or change of name application is received, Companies House also has to consider whether certain words, characters or symbols should be disregarded in order to determine whether a proposed name is confusingly similar to a company already on the register. These are referred to as the ‘same as’ rules.

Four questions were posed in the consultation document:

  1. Should all regulations relating to names be repealed?
  2. Should regulations relating to names be retained but reduced and simplified?
  3. Should the list of ‘sensitive’ words be reduced, and if so, which words should be removed?
  4. Should the list of words on the ‘same as’ list be reduced? If so, which words should be removed?

Although there was not overwhelming support to simplify the ‘sensitive’ word regulation, the majority of respondents did acknowledge that some regulation was required in order to protect consumers.

I am pleased to note that, following the consultation, the list of ‘sensitive’ words is to be reduced. The response document suggests that words including Authority, Board, Data protection, Group, Holding, Registry and United Kingdom are to be removed from the list.  A significant number of sensitive words will, however, remain subject to appropriate review, including those suggesting a connection with a government or local authority.

The removal of words such as ‘Group’ or ‘Holdings’ from the sensitive words list is particularly welcome as it will simplify incorporations and/or name changes which are required as a matter of internal reorganisation or restructuring. The proposed removal of these (and many other) words from the ‘same as’ list will have a similar effect on proposed name swaps within the same group of companies.

In addition to these simplifications, the government has noted its intention to merge legislation concerning company and business names with laws concerning trading disclosures. These stipulate what information businesses are obliged to display on their stationery, correspondence and signs at business premises.

Clearer laws will assist companies in two respects. First, compliance should be more straightforward, as the government’s proposal is to set out the requirements in a more user-friendly, tabular format. Second, the anticipated laws should aid incorporations and reorganisations by cutting bureaucracy and costs.

We will provide an update when the draft regulations are available. It is anticipated that the legislation will take effect in 2014.

If you would like advice about the points raised in this article, please contact me or another member of the corporate and commercial team.

Kelly Craig
Solicitor, Corporate & Commercial Team 

Simply Irresistible…

The Supreme Court in America has ruled that a dentist who dismissed a female assistant because he found her “irresistible” did not act unlawfully or discriminatory.

The dental assistant had worked in the practice for 10 years prior to her dismissal which was on the basis that the dentist who ran the practice (and his wife) regarded the assistant as a threat to their marriage. The assistant was dismissed and replaced by another female. The Court held that the dismissal did not amount to sex discrimination because the decision was motivated by feelings as opposed to gender.

It would be interesting to see how this case would have been decided in the UK.  There was a similar case decided in the UK by the EAT in 2003 (Martin v Lancehawk Ltd t/a European Telecom Solutions). A female employee had been having an affair with the company’s managing director. Problems developed with the relationship and the female subsequently told her husband about the affair (despite having told the managing director that she would not do so). She was dismissed shortly after coming clean and the tribunal ruled that her dismissal for gross misconduct was unfair.

However, the tribunal rejected her claim of direct sex discrimination. The claimant appealed, arguing that the only reason that the managing director had engaged in an affair was because she was a woman – but for her sex there would have been no affair and thus no dismissal. The EAT, in rejecting her appeal, reiterated that the key question in claims of direct discrimination will generally be “why did the employer act as they did?”  In that case, the EAT accepted the employer’s evidence that the reason for her dismissal was not her sex, but the breakdown in the personal relationship.

Jack Boyle 
Solicitor – Employment Law

Blackadders Associate Kirk Dailly Receives Signet Accreditation in Corporate Law

We are delighted to announce that Kirk Dailly, an associate in our Corporate & Commercial team, was last night awarded the coveted Signet Accreditation in Corporate Law at a prestigious ceremony in Edinburgh.

The Signet Accreditation is a formal qualification for Scottish solicitors recognising excellence in legal services and signifying proficiency in an area of legal practice.  It is an initiative of The Society of Writers to Her Majesty’s Signet, Scotland’s independent association for lawyers and one of the world’s oldest independent professional bodies.  In order to attain the accreditation, candidates must undergo a rigorous assessment process which, in addition to testing their specialist legal knowledge, examines client-facing skills, drafting ability, commercial awareness, ethical standards and ability to perform under pressure.

Kirk, who joined Blackadders in 2005, said: “I am delighted to have received the Signet Accreditation.  To be independently recognised in your area of practice by such a renowned institution is very rewarding.”

With the head of our Corporate & Commercial team, Campbell Clark, having been accredited in 2010, Blackadders is now the only firm in Scotland to have two lawyers accredited by the WS Society in the field of corporate law.

David Milne, head of Blackadders’ Business Division, commented: “This is a considerable achievement for Kirk and for the firm.  Not many lawyers attain the Signet Accreditation.  The fact that we now have two accredited corporate lawyers makes us stand out from the crowd and is testament to the expertise and dedication that lies within our Corporate & Commercial team.”

The Blackadders Business Team

Registering the Times: Changes to Company Law

Present

Legislation will soon come in to force which will make changes to the registration of company charges. The changes will simplify the process by creating a single, UK-wide system of registration.

Securities which are created by a document are required to include a certified copy of the instrument with the form. However, it was the case that the instrument was not available to view; only the form which was submitted with it. The new system provides for the instrument to be accessible to the public. This should improve the transparency of the registers. Information submitted does not always provide interested parties with sufficient details regarding the conditions attached to security. There will be a limited exception in terms of which it will be possible to redact personal information about connected individuals.

Another practical consequence of the new system is that it will now be possible to electronically register securities. It will cost £10 to file electronically or £13 to submit a paper copy of the security.

Companies negotiating the terms of a charge which may be registered under the new system should remember that the accompanying forms will change for charges created on or after 6 April, so they should be vigilant when submitting the charge for registration that they use the correct form.

Equivalent provisions will also apply to Limited Liability Partnerships.

Future?

The European Commission has launched a consultation regarding the requirement for, and feasibility of, the introduction of legislation to allow companies to transfer their registered offices across borders.

The Commission is conducting this consultation to ascertain whether there is a demand from companies for such transfers and whether clarity of the law is required.

The Commission is seeking contributions to the following questions posed:

  • Whether companies are currently contemplating cross-border transfers of their registered office or have done so in the past
  • The means that a company may currently use to effect a cross-border transfer
  • The barriers that currently exist for a company that wants to effect such a transfer, e.g. costs, complicated administrative requirements
  • Why a company may wish to effect a transfer, or what would make companies more likely to contemplate a transfer
  • Whether there is an adequate procedure in place in the EU and whether case law provides an adequate solution
  • Whether there is a need for a legislative instrument to deal with cross-border transfers

We would be interested to have your thoughts on these questions and whether you consider that there is an appetite for such a development.

The current situation in the United Kingdom would require the transfer of the assets of a UK registered company to a newly incorporated company in another EU member state and the subsequent dissolution of the UK company.

One legislative change that we think would be of benefit to a greater number of UK companies would be the ability for a company in England to change its registered office to an address in Scotland, and vice-versa.

The questionnaire for responding to the consultation is available to complete and submit until 16 April 2013.

 

Kelly Craig
Solicitor – Corporate & Commercial