Legal update

Parliament and Whitehall

Consumer protection proceeds

The Consumer Credit Bill, which was not enacted before the general election, has been reintroduced in the Commons. It will establish an independent ombudsman service to enable consumers to challenge agreements without the need to go to court. The Bill will also make it easier for consumers to challenge unfair lending practices and loan agreements. It will create a new requirement for lenders to give consumers better information about their credit accounts. It will also improve powers for the Office of Fair Trading to take action against rogue companies and introduce new powers to enforce financial penalties. There will also be a more targeted licensing system.

Equality moves continue

The Equality Bill, which failed to achieve enactment prior to the general election, has been reintroduced in the Lords. It will establish a new Commission for Equality and Human Rights to replace and add to existing Commissions in relevant fields. It will extend protection for discrimination on the ground of religious faith beyond the field of employment discrimination, the latter being already part of current law.

Fraud Bill enters Lords

The Fraud Bill has been introduced in the Lords. It creates a new offence of fraud with a maximum penalty of ten years imprisonment. The offence can be committed in three ways: by false representation, by failing to disclose information and by abuse of position. New offences are also introduced, such as obtaining services dishonestly and participating in fraudulent business. Possession of articles for use in fraud is also criminalised, including computer programmes that can generate genuine credit card numbers to use for fraudulent purposes.

Charities Bill reintroduced

The Charities Bill, which was not enacted before the general election but which was summarised in Accountancy's March 2005 issue (p120), has been reintroduced in the Lords. Major features include modernisation of the Charity Commission, a new appeal tribunal, and a new corporate legal form for charities.

Statutory Instruments

Company deeds and documents: reform underway

The Draft Regulatory Reform (Execution of Deeds and Documents) Order 2005 has been laid before Parliament. The purpose of the Order is basically to simplify and clarify the law relating to the signing of deeds and documents by corporations, of which registered companies are a species. The Law of Property Act 1925 and the Companies Act 1985 are principally involved.

These contain overlapping provisions, the 1925 Act requiring the signature of a director and company secretary, while the 1985 Act permits the alternative of a signature by two directors. Both Acts appear to envisage that the officers mentioned are natural persons, which restricts officers that are bodies corporate. The Order removes the company secretary requirement and affirms the validity of the signatures of two directors. Where officers are bodies corporate the Order allows an authorised person to sign. There is also a presumption of delivery of deeds and documents on signature in the 1985 Act which, in effect, completes a transaction on signature and prevents delay by the company where this is required until actual delivery of the instrument. This presumption of delivery was irrebuttable.

The Order removes that presumption.

The Order also allows those giving powers of attorney to delegate the task of signature and allows corporations to authorise an individual to sign on their behalf. This rule of personal signature was always ignored for obvious reasons in the case of corporations, but the Order legalises the delegation procedure. The above amendments make changes in the Powers of Attorney Act 1971.

The Order is to come into force at the end of 12 weeks from parliamentary approval, which, if schedules are complied with, would be September 2005.

Case Notes

Non-executive disqualified

The High Court has recently considered what action is appropriate for a non-executive director to take where financial irregularities and improprieties within the company are reported to him or her. The High Court's ruling sends a warning to non-executive directors and points up the kind of action expected of them, especially where a whistleblower is involved. (See Secretary of State for Trade and Industry v Swan and others [2005] EWHC 603 (Ch).

The court was asked to make disqualification orders against former directors of a parent company where the subsidiaries had been involved in cheque kiting procedures. This involves making use of the period of time it takes a bank to clear a cheque to obtain a fictional credit in the payee's bank account before the cheque is cleared and the balance in the payer's account is reduced. Perhaps the main interest of the decision is the disqualification of a non-executive director who was not involved in the cheque kiting policy but was told about it in terms of allegations reported to him by a whistleblower. He did not discuss these allegations with the other non-executive directors, nor with the auditors. Furthermore, having received the whistleblower's report, he did not meet the whistleblower to discuss the allegations. Instead, he had a meeting with the CEO, another executive director and the chief finance officer (who was alleged to have operated the policy). He then decided that it was not necessary to take any further action in regard to the allegations.

The court found that his behaviour fell below the standard expected of someone in his position and with his experience. He was disqualified as a director for three years. The CEO was also disqualified and other executive directors gave disqualification undertakings.

Auditors lose appeal

In the October 2002 issue of Accountancy (p83) we reported on a ruling at first instance of the Scottish Court of Session (Outer House) in Royal Bank of Scotland v Bannerman Johnstone Maclay (a firm) and others, The Times 1 August 2002. The law involved is equally applicable in England and Wales. The firm asked the court to strike out the bank's claim against it in alleged negligence but the court refused to do so. There has now been an appeal by the firm to the Scottish appeal court which has also refused to strike out the claim. (See Financial Times 30 May 2005.)

The claim was brought by the bank, which contended that it relied on accounts that the firm had audited when reaching decisions on how much credit to extend to APC, a plant hire firm. APC and its subsidiary, APC Civil, later went into receivership with total debts of £30m. The firm asked the court to strike out the claim because the bank was attempting to extend the duty of care beyond the limits of previous case law. The auditors contended that no duty of care could exist unless the bank could show that the firm intended the bank to rely on the audited accounts when making investment and lending decisions. The firm contended that the bank never contacted them to state how the accounts would be used.

However, the Scottish Court of Session refused in May 2005 to strike out the claim. Intention was not required. In this case the auditors knew that the bank was entitled under facility letters to see management accounts and annual audited accounts and so owed the bank a duty of care.

Comment. A major matter in this case was that the auditors had not disclaimed liability to third parties, such as the bank. The absence of such a disclaimer may enable a court to draw an inference that auditors have assumed responsibility to third parties, such as the bank. Following the first instance decision, the ICAEW issued a recommended form of words for use by auditors as a disclaimer. It will also be appreciated that these are only strike out rulings. The bank has yet to prove its allegations of negligence at a full trial.

Employment Law

Poor conduct jeopardises award

The Employment Appeal Tribunal has ruled that objectionable conduct by an employee at an employer's disciplinary hearing may result in a 100% reduction in the award, even where the employee is to be regarded as unfairly dismissed by reason of defects in the procedures followed at the hearing.

(See Perkin v St George's Healthcare NHS Trust (2005) 761 IRLB 6.)

Mr Perkin was employed as a finance director by the trust from 1986 until his dismissal in December 2002. In mid 2002 the trust instigated its disciplinary procedure against Mr Perkin following concerns expressed by senior colleagues in regard to his aloof, stubborn and intimidating manner and management style. The chair of the trust, Ms McLoughlin, conducted the hearing during the course of which Mr Perkin made a number of allegations against senior colleagues. He said that the director of human resources had doctored notes of the investigatory meeting conducted by the chief executive. He cast doubts on the financial probity and integrity of the CEO and alleged that the CEO had dishonestly stated that he was a member of CIPFA when he applied for the role of chief executive. An employment tribunal subsequently found that these allegations against the two colleagues mentioned above were 'unfounded and unsustainable'.

The outcome of the disciplinary hearing was that Ms McLoughlin decided to dismiss Mr Perkin with immediate effect. He received six months' pay in lieu of notice. The reasons given were the breakdown in Mr Perkin's relationship with the executive team and his inability to engender the quality of relationships required to preserve and advance the interests of the trust. Concern was also expressed regarding his conduct during the disciplinary hearing.

Mr Perkin claimed to an employment tribunal, which found his dismissal to be unfair on procedural grounds. It appeared that Ms McLoughlin was not to be regarded as impartial because she had expressed her wish to put in place an exit strategy for Mr Perkin at a meeting with KPMG in July 2002. However, the tribunal reduced his award by 100%, thus making a Polkey deduction on the basis that Mr Perkin would have been dismissed even if a fair procedure had been followed. (See Polkey v A. E. Dayton (Services) Ltd [1988] AC 344.) Apart from the matter of impartiality, there were no defects in procedure. The EAT affirmed the decision of the tribunal and its finding of contributory fault. In a case where there were existing relationship difficulties and where the claimant had made unfounded allegations against senior colleagues at a disciplinary hearing, the deduction was correct.

Comment. This case followed an employer's disciplinary procedures. Now there are statutory procedures as well. Under the Employment Rights Act 1996, s98A (inserted by the Employment Act 2002), as long as the statutory procedures are followed, the employer's failure to follow some additional fair procedure in his own arrangements will not in itself make the dismissal unfair unless the outcome would have been different.

Continuity of employment: reinstatement at internal appeal

Where, in a case of unfair dismissal, a tribunal orders that the employee be reinstated, the period between the dismissal and the reinstatement counts as a period of continuous employment. This is the effect of s219 of the Employment Rights Act (ERA) 1996 and the Employment Protection (Continuity of Employment) Regulations 1996. What is the position where reinstatement takes place at an internal disciplinary hearing? In such a situation, is there continuity of employment as there is in the statutory context? The EAT has recently ruled on this matter. (See London Probation Board v Kirkpatrick (2005) 760 IRLB 12.)

Mr Kirkpatrick was employed as a process finance manager by the London Probation Board (LPB) until he was dismissed with effect from 10 June 2003 following a disciplinary hearing. He received 12 weeks' pay in lieu of notice. There was an appeal on 11 August 2003 where it was decided that Mr Kirkpatrick's conduct did not amount to a breach of confidence and trust and that he should be reinstated with a final written warning.

In the event LPB did not comply with its decision to reinstate him and, by a letter dated 5 September 2003, stated that it would not reinstate him because of a breakdown in trust and confidence. On 28 November 2003 Mr Kirkpatrick claimed unfair dismissal before a tribunal. LPB contended that in the circumstances he did not have the 12 months unbroken service required for the claim and this was true unless the gap between the first and second dismissal could be counted. The tribunal found that continuity had been preserved and the EAT agreed. The tribunal was correct to rule that it is open to the parties to agree reinstatement as a matter of contract.

Such an agreement, even though made after the breach in employment has taken place, fills in the gap for the purposes of computing the period of continuous employment under s212 of the ERA 1999.

The employer's appeal was dismissed and the EAT directed that the claim should proceed to a full hearing. Leave to appeal to the Court of Appeal was refused.

Has the employee appealed or claimed in time?

Appeals to the Employment Appeal Tribunal (EAT) have to be lodged at the latest 42 days (six weeks) after the date on which the written employment tribunal (ET) decision is sent to the parties. (Employment Appeal Tribunal Rules 1993 (SI 1993/2854 rule 3(3).) The EAT follows the practice of the courts regarding the sending of documents by fax, ie, the day ends at 4pm and documents received after 4pm will be regarded as received the following day. For the ET, however, the day still ends at midnight. The following case concerned the faxing of an appeal where some parts of the appeal documents were sent after 4pm.

(Midland Packaging Ltd v Clark UKEAT/PA/1146/04.)

Mrs Clark began faxing her notice of appeal and the required accompanying documents to the EAT office a few minutes before 4pm on the last day of the appeal time limit. Twenty-one pages were involved and her fax did not finish transmitting the documents until 4.09pm. The EAT's fax machine did not start printing the documents until 4.06pm.

The EAT ruled that where a notice of appeal was lodged by fax and where the faxing commenced before 4pm on the 42nd day, but had not been completed and not printed out at all until after 4pm, it was nevertheless lodged in time.

A contrast is provided by Mossman v Bray Management Ltd UKEAT/0477/04/TM.

Here an ET1 (claim form) was sent online to the Employment Tribunal Service (ETS) on the deadline date, which was 29 December 2003. The claimant used the ETS website service because she thought the post might not have recovered from Christmas pressure. On enquiry, almost a month later, it appeared that the ET1 had not been received. The website indicated that on pressing the submit button the completed ET1 would automatically be sent to the appropriate ET office. The EAT held the submission to be invalid in spite of the website wording. Arrangements should have been made sooner, said the EAT, given the problems of Christmas post. Thought might also have been given to the generation of a receipt to indicate transmission.

Comment. It is, perhaps, obvious that it is good practice not to leave these matters to the last minute, and employers should be on notice, in particular, of the time limits on appeals.

Edited by Denis Keenan FCIS barrister.

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