Legal update

Parliament and Whitehall

Insolvency law consolidation planned

The Insolvency Service has announced plans to carry out a consolidation of secondary insolvency legislation. The Insolvency Service will work with the Department of Trade and Industry to review, consolidate and simplify the many statutory instruments that support the main insolvency statutes.

Important statutory instruments to be considered for consultation will include the Insolvency Rules 1986 (SI 1986/1925) and the Insolvent Partnerships Order 1994 (SI 994/2421).

Much of the secondary legislation provides detailed rules on the practical application of the law and has been amended on many occasions since it first came into force in 1986. Most of the detailed review and simplification work is expected to take place over the next 18 months, with a view to the consolidated statutory instruments coming into force in late 2007.

The project will involve wide consultation. Interested parties are invited to raise any issues they have regarding their experience of using the secondary insolvency legislation. Comments can be sent by email to the Insolvency Service's policy unit at

policy.unit@insolvency.gsi.gov.uk. Company charges consultation underway

The Department of Trade and Industry has issued a consultation document seeking views on the impact, cost and benefits of possible changes to the law that relates to the security interests of companies. The document, entitled The registration of companies interests (company charges), is available on the DTI website at www.dti.gov.uk/consultations/files/publication-1517.pdf.

By reforming the system for registration and priority of company charges, the government is aiming to facilitate company borrowing for the benefit of both creditors and debtors, and hence the whole economy. It also has the objective of making information about companies' secured borrowing easily available to assist creditors and potential creditors. It notes that reform of the current system is needed to address a number of risks, including the risk of concealment of secured credit, with markets being misled by the apparent unencumbered ownership by companies of assets that in fact are encumbered in favour of prior creditors. There are also concerns arising from current uncertainty over the rights of secured parties in the event of a borrower's insolvency.

Disability rights: timetable for implementation

The Department for Work and Pensions has announced measures to implement the outstanding provisions of the Disability Discrimination Act 2005.

From 5 December 2005 the DDA 1995 will be extended to cover, effectively from the point of diagnosis, people with degenerative conditions such as HIV infection, cancer, or multiple sclerosis. From that date also it will no longer be necessary that a mental illness must be 'clinically well-recognised' before it can be regarded as a mental impairment for the purposes of the DDA 1995. From 4 December 2006 the public sector disability duty will require public bodies to carry out their functions with due regard to the need to eliminate discrimination against and harassment of disabled people and encourage disabled people to participate in public life.

Employment Data Protection Code issued

The information commissioner has published a new 'user-friendly' guide to data protection in the workplace. The code, which has been several years in the making, is now published in full and covers:

•    Recruitment and selection, eg, job applications and pre-employment vetting;

•    Employment records, eg, collecting, storing, disclosing and deleting records;

•    Monitoring at work, eg, principles for monitoring employees at work, whether examining emails, recording telephone calls, or installing CCTV;

•    Medical information - dealing with drug and alcohol testing and obtaining and handling information on the health of workers generally.

The code is accompanied by supplementary guidance that provides explanatory notes, examples and frequently asked questions. A summary guide is also available, aimed specifically at small businesses and developed to meet their concerns. The summary outlines the key points any business should consider in order to meet its obligations under the Act.

The code does not in itself have the force of law but it may be cited by the information commissioner in any action against the employer. If an employer cannot show that he or she has met the requirements of the code, then there may be liability for a breach of the data protection legislation. The code will also represent good practice, where relevant, to issues in tribunal proceedings.

Further information on data protection and the new code is available at www.informationcommissioner.gov.uk.

Money laundering directive approved

The European Parliament has approved the proposed Third Anti-money Laundering Directive. The directive applies to the financial sector as well as lawyers and other key services sectors, including notaries, accountants, trust and company service providers. It also applies to casinos and to all providers of goods where cash payments are made in excess of EUR15,000.

Those subject to the directive must co-operate to combat money laundering by taking measures to identify and verify the identities of customers, report suspicions of money laundering or terrorist financing to certain public authorities, and set up internal preventive policies and systems.

The directive is scheduled for implementation in member states in 2007.

The existing 1991 directive, as amended in 2001, will be repealed when the third directive comes into force.

Case Notes

Disclosure in share purchase agreements

The Court of Appeal has considered the adequacy of disclosures made by the vendor to the purchaser in a share purchase agreement. In particular, the court has ruled that the actual knowledge of an accountant acting for the purchaser of matters in relation to the accounts in the vendor's disclosure documents could form part of the disclosure to the purchaser, even though the accountant did not communicate the information to the purchaser. (See Infiniteland v Artisan (2005) EWCA Civ 758.)

An accountant acting for the purchaser in a share sale agreement became aware from an examination of the vendor's disclosure documents that there was an error in the accounts of the target company. He did not pass this information to the purchaser and the error was not properly disclosed in the disclosure letter. The purchaser contended that there was inadequate disclosure but the court ruled that the disclosure was effective.

The proper test in these cases, said the Court of Appeal, was for the court to decide whether it could fairly be expected that the purchaser's accountant would become aware from an examination of the documents, in the ordinary course of carrying out the due diligence exercise, of the accounting error and its effect on the accounts. In this case it could be fairly expected and so the disclosure was therefore effective.

Comment. In view of this judgment, a purchaser should specifically include in a purchase agreement wording as to the full and fair nature of the disclosure (both specific and general) required of the vendor in the warranties.

If knowledge of the purchaser is referred to, it is important to state explicitly whether knowledge of agents and advisers is included.

Interference with a contract

One of the civil wrongs in the field of business and trade for which damages can be obtained by the victim of the wrong is where a third party interferes with the contractual relationship that exists between the parties to a contract. Any valid and enforceable contract can found a claim if there is subsequent interference with it. The defendant must have actual or constructive knowledge of the existence of the contract that has been broken. In terms of the state of mind of the defendant, he must intend to bring about a breach of the contract. However, if the defendant commits an act where it is substantially certain the consequences will be a breach of a contract of which he or she is aware, then intention will be presumed unless there is evidence to rebut that presumption. Commercial cases do not often appear but the Court of Appeal did consider this common law wrong in Mainstream Properties Ltd v Young and others (2005) EWCA 861.

The defendant provided property financing for two directors of Mainstream who set up companies to exploit opportunities also available to Mainstream.

It was accepted that the contractual relationship between Mainstream and the two directors, ie, their contracts of service, had been interfered with by the defendant's acts. However, the issue was whether the defendant had the necessary intention to commit the wrong of interference.

The Court of Appeal upheld the trial judge's ruling that the defendant did not have the necessary intention to commit the wrong of interference with the contractual relationship between the company and the directors because he had accepted and relied on assurances given by the two directors that there was no conflict of interest with their duties to Mainstream.

The court ruled that the wrong of interference is not satisfied by showing that the defendant was reckless as to whether his or her conduct interfered with the company's rights or not.

Comment. The majority of the Court of Appeal stated that the wrong was restricted for policy reasons, for example, that it would not be right for the law to discourage competition by allowing wide-ranging actions by claimants against persons who are not parties to contracts.

Employment Law

Attempt to settle dispute not victimisation

An employer may be regarded as victimising an employee where that employee is treated less favourably because the employee concerned has brought proceedings under the Sex Discrimination Act 1975 or the Equal Pay Act 1970. However, where the employer acts to settle a dispute, can the motive for such action be regarded as victimisation? The Court of Appeal considered the relevant law in St Helens MBC v Derbyshire and others (2005) 767 IRLB 15.

Female catering staff brought equal pay claims against St Helens Metropolitan Borough Council. The majority of the employees settled the claim by accepting a lump sum. Thirty nine did not and brought a claim of victimisation.

The alleged victimisation took the form of two letters sent by the council to employees. One letter was sent to all relevant employees warning that if the remaining claimants were successful in their continued claim, the school meals service would not be viable and there would be redundancies.

The second letter was sent only to the continuing claimants, reminding them that the offer to settle was still open and implying that if their claim succeeded, the increased pay would lead to job losses. The claimants regarded the letters as an attack on them for bringing their claims and an attempt to sour relations between them and those who had settled with the employer.

The Employment Tribunal found victimisation contrary to s4 of the Sex Discrimination Act 1975. The employer's appeal to the Employment Appeal Tribunal was dismissed and the matter reached the Court of Appeal.

The court ruled that the Employment Tribunal had erred in regarding the employer's attempt to compromise an equal pay dispute pending under the Equal Pay Act 1970 as victimisation. Because of the impact of equal pay proceedings on the employer's costs, it was not unreasonable for the employer to send individual letters to the claimants with the aim of persuading them to settle. It was not enough to show less favourable treatment and detriment since these did not by themselves amount to victimisation, provided there had been an honest and reasonable attempt to settle: this was the critical question.

Comment. The issue is one of motive, and a genuine and reasonable step to settle proceedings is not a motive of victimisation.

Dismissal for refusal to sign contractual restraint

An employee has a duty of loyalty to the employer under an implied contract term. This does not extend beyond the period of employment. Post-employment restraints require a contractual post-employment provision. These restraints are void and of no effect unless they are reasonable as to their extent.

Where employees are dismissed for failure to enter into a contractual post-employment restraint, can this be regarded as a fair dismissal for 'some other substantial reason? The Employment Appeal Tribunal (EAT) considered this area of the law in Forshaw and others v Archcraft Ltd (2005) 766 IRLB 17.

Archcraft was a manufacturer of plastic products for windows and conservatories.

The business was under threat of competition from a rival business to be run by a director and others from within the company. The company approached three key members of staff and asked them to sign a contract in restraint of trade limiting any competition with their employer until 12 months after leaving the company. The relevant employees would not sign and were dismissed, the employer contending that the dismissal was fair as being 'for some other substantial reason', as provided for by the Employment Rights Act 1996. The Employment Tribunal agreed that the dismissal was fair on the above ground.

The employees appealed and the EAT ruled that the tribunal had erred in holding that refusal to sign a contractual restraint which was too wide to be enforced was 'for some other substantial reason'. An employer, said the EAT, cannot assert as a potentially fair reason for a dismissal the fact that an employee has refused to sign up to unreasonable terms.

In the circumstances of the case it would have been reasonable to ask the employees to sign contracts containing a reasonable restraint clause, so that any dismissal for refusal to sign up would have been potentially fair.

Post-employment discrimination ruling

Post-employment discrimination was at one time not unlawful, the classic example being the employer's refusal to give a reference to an ex-employee.

Then came the ruling of the House of Lords in Rhys-Harper v Relaxion (2003) IRLR 484, which was to the effect that then existing law could be interpreted as covering post-employment sex discrimination. Since that time all the discrimination statutes have been amended to allow for claims of post-employment discrimination. The Employment Appeal Tribunal (EAT) has now ruled that post-employment claims can include a 'continuing act' spanning events both pre- and post-termination. (See BHS Ltd & Hough v Walker and Premier Model Management Ltd (2005) 766 IRLB 13.)

Ms Walker was a self-employed photographic model engaged through the agency Premier Model to work on photographic shoots for BHS advertising.

Ms Hough was employed by BHS to organise the shoots and engage the models.

Both Ms Walker and Ms Hough were involved in same-sex relationships with partners.

It was accepted by all parties that although she was self-employed, Ms Walker came within the wider definition of employment in s82 of the Sex Discrimination Act 1975 and was thus an employee of BHS. It was also accepted by BHS that they were vicariously liable for the unlawful acts of Ms Hough in the course of her employment.

Ms Walker made a claim for sex discrimination in the form of sexual harassment and loss of her career as a fashion model due to Ms Hough's unwanted sexual advances. Argument centred around the fact that two of three incidents found as facts by the Employment Tribunal took place after Ms Walker's employment had ended. Nevertheless, the EAT, following Rhys-Harper, ruled that the discriminatory acts that took place after the termination of Ms Walker's employment must be deemed to have sufficient proximity to the employment relationship so as to give rise to a continuing act of sex discrimination for the purposes of Ms Walker's claim.

Comment. This ruling applies also to claims under the amended discrimination legislation which is now available. The decision is fair in all the circumstances because, as the House of Lords judgment in Rhys-Harper says, it would make no sense to draw an arbitrary line as the precise moment when the contract of employment ends, protecting the employee against discrimination in respect of all benefits up to that point, but in respect of none thereafter.

Edited by Denis Keenan FCIS barrister.

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