Legal updates: July 2014

Our monthly roundup of the legislation, regulation and guidance, from the changes to company filing to the ramifications of the Knight case pertaining to register of members by legal experts at Gateley LLP

The government has published a response to its recent consultation on simplifying a company's statutory filings requirements, announcing a range of measures aimed at making easier for companies and those involved in their administration.

One of the key proposals will see the end of the annual return as we know it. Instead, companies will be required to "check, notify changes if necessary and confirm" their statutory information at least once in a 12 month period. If a company makes an event driven filing (for example, a change in a director's details) they will be given the option to check all other statutory information at that time. If a  company exercises this option it will not be required to "check and confirm" for another 12 months.

Improvements will also be made to the joint filing tool which enables accounts to be filed at both Companies House and HMRC via a single filing. Companies will also be able to complete the above "check and confirm" requirement at the same time as filing their accounts.

Concerns had previously been expressed that requiring directors to file their full dates of birth increased their risk of identity theft since a date of birth is one of the pieces of information often used to perpetrate this. The requirements will therefore be changed so that only the director's month and year of birth will be publicly available. The complete date of birth must still be filed but, like a director's residential address, this will not be on the public register.

The current requirement for companies to maintain certain registers (for example, registers of directors, secretaries and members) will be changed to avoid the duplication of the current system under which companies are required to maintain those registers themselves as well as file the relevant information at Companies House.

Companies will be able to opt out of maintaining certain of these registers themselves provided that the relevant information is kept up to date at Companies House, thereby ensuring that there is always a publicly accessible record of that information.

However, if a company decides to opt out of maintaining its own registers certain information which is not currently available via Companies House will become so available. In particular, this will include the addresses (not just names) of members and a director's full date of birth (rather than just the month and year under the new proposals referred to above).

As yet there is no date for when the proposals will be implemented but the government has said that it will bring forward the necessary legislation as soon as parliamentary time allows.


Access to a company's register of members

As noted above, one of the registers which a company is currently required to maintain is a register of its members. That register must be open to inspection by any member for free and by anyone else on payment of a prescribed fee. The Companies Act 2006 introduced certain safeguards in order to prevent that right of access from being abused: essentially, a company does not have to comply with a request for access to the register of members if that request has not been made for a 'proper purpose'.

Rather unhelpfully, however, the Act gives no guidance as to what is (or isn't) a proper purpose and we've had to wait until now for the matter to come before the courts.

Burry & Knight Ltd & anor v Knight [2014] EWCA Civ 604 arose out of a long-running dispute regarding the management of two family companies.

A member sought access to the register of members and effectively gave three reasons for his request, namely: (i) to study the current shareholders of both companies, (ii) to write to shareholders and trustees detailing his concerns about past conduct of directors and (iii) to raise concerns about the proposed method of valuation of the shares in the articles which failed to require a valuation of the assets of the companies. In considering whether these were "proper purposes" the court held that these words should be given their "ordinary, natural meaning" and that, where a request for access is made by a member, the proper purpose should generally relate to the member's interest as a member and/or to the exercise of shareholder rights.

In relation to the first two purposes in this case the court held that, on the facts, the member's evidence was "very thin". His allegations lacked substance and were essentially window-dressing with the real intention of "making mischief" – clearly not a proper purpose.

However, the court did find that the third purpose (communicating with the members regarding concerns over the method of share valuation in the articles) was a proper purpose. It was therefore faced with the situation in which some of the stated purposes were improper and one was proper.

In those circumstances it made an order preventing disclosure of the register of members to the member provided that the company circulated an agreed form letter to all the members setting out the concerns of the member making the access request. The court was not prepared to allow the member to communicate directly with the other members as it believed he would not do so in "appropriate or measured" terms.

Comment: This guidance from the courts on what amounts to a proper purpose will be welcomed. When a company receives a request for access to the register of members it has only five working days within which it must either comply with that request or else apply to the court for an order that the request has not been made for a proper purpose. This is a very short period, particularly where the company has little idea of what the court will consider to be a proper or improper purpose.

The company will be penalised with a costs order if it makes a court application and the purpose is found to be a proper one. The only other guidance available to companies in this area is a note produced by the Institute of Chartered Secretaries and Administrators (available via which gives advice on deciding what is a proper purpose. Whilst the court in this case noted that this guidance may be useful it did also point out that it was non-binding and non-exhaustive.

Legally binding deeds: when is a deed not a deed?

Whilst many legally binding arrangements can be created and evidenced by simple contracts, in certain circumstances the law requires the parties to enter into a deed. Powers of attorney, mortgages, appointments of trustees, transfers of land and variations of existing deeds will only be valid if effected by means of a deed.

Creating a legally binding deed requires compliance with certain formalities. A deed must:

  • be in writing – in contrast to simple contracts which can be made orally as well as in writing;
  • be clear on the face of it that it is intended to be a deed – this is usually accomplished by the language used in the document, such as "The parties have entered into this deed";
  • be delivered – a deed is delivered by a party when that party indicates their intention to be bound by the deed. Again, this will often be accomplished in the wording of the deed, such as "Executed and delivered as a deed on the date above"; and
  • be properly executed: for an individual, this means signature by the individual which must be witnessed. For a company, a deed may be executed by (i) the (unwitnessed) signatures of either two directors or a director and the company secretary, (ii) the signature of a single director which is witnessed or (iii) attaching the company's common seal to the deed.

Failure to comply with these requirements means the purported deed, and the transactions or arrangements contained in it, will not be valid or binding.

The consequences of incorrect execution were vividly demonstrated in the recent decision of the High Court in Briggs & others v Gleeds & others [2014] EWHC 1178 (Ch). In this case, the rules of a pension scheme operated by a professional partnership were purported to have been amended over a period of years by deeds signed by the partners. However, those signatures were not witnessed and, as a result, the amending deeds were held by the court to be invalid and ineffective. The potential effect of this decision was that the pension scheme’s deficit was increased by up to £45 million.

Comment: This case is a clear demonstration of the need to comply with what may, at first sight, appear to be arcane formalities. Where a deed is required it will be vital to ensure that those formalities are indeed properly observed. One of the advantages of a deed is that the limitation period (that is, the period within which claims on the document must be started by way of legal proceedings) is extended: for a "simple" contract this is six years but for a deed it is 12 years.

Case report: why the Bates van Winkelholf case means partners can be workers too

Employment status can be a key issue when considering statutory rights. Employees enjoy a number of statutory rights, for example, the right not be unfairly dismissed; the right to receive a redundancy payment etc. The self employed will obviously not have the need for such statutory rights as they will not be at risk of dismissal or redundancy. There are a growing number of statutory rights though that are expressed as applying to 'workers'. This reflects the situation where a person is engaged to carry out work in their personal capacity but without some of the more usual obligations found in an employment contract.

Could a partner be entitled to the protection of worker rights? That was the question in the recent case of Clyde & Co LLP and another v Bates van Winklehof [2014] UKSC 32. The background to the case was that Ms Bates van Winklehof was a junior equity partner in Clyde & Co LLP. She had been on secondment in Tanzania and had reported the managing partner there had paid bribes. Her secondment was ended and she was expelled from the LLP.

She brought various claims in the Employment Tribunal including a claim that she had suffered a detriment as a result of making a 'protected disclosure' in other words whistleblowing. The Respondent argued that as an Equity partner in the firm she had no right to bring such a claim. An Employment Judge agreed deciding that the claim could not be brought as she was not a 'worker'; the Employment Appeal Tribunal disagreed and said the claim could be brought.

The Court of Appeal then restored the original decision that she had no protection. In particular it considered that the provisions of the Limited Liability Partnership Act 2000 prevented her from being a worker. This was because she would not be regarded as an employee of a traditional partnership and the statute provided the same would apply in an LLP.

In addition, as an equity partner, she would not be subject to any element of control and subordination which was inherent in the concepts of both 'employee' and 'worker'. Bates van Winklehof appealed to the Supreme Court.

Even the Supreme Court could not reach a unanimous decision the points were so finely balanced. However the majority considered that even though an equity partner Ms Bates van Winklehof was 'clearly a worker' also. Unlike the Court of Appeal it considered the references in the Limited Liability Partnership Act to not being 'employed by' the partnership would only be relevant to employee rights. The meaning should not be extended so as to exclude the possibility of a partner being regarded as a 'worker'. It was also not accepted that in order for Ms Bates van Winklehof to be a worker she had to show that she was 'subordinate' to another party. The Court considered that subordination may be an aid to distinguishing workers from other self-employed people but it was not a freestanding and universal characteristic of being a worker. Other factors had to be taken into account including that Ms Bates van Winklehof was an integral part of Clyde and Co's business; that she could only market her services as a solicitor to the LLP and the firm was in no sense her client or customer.

Comment: Clearly LLP members will now be able to take action if they suffer a detriment as a result of making a protected disclosure. It follows that there may now be a risk of claims not just where the partner is being expelled but potentially also where there is a compulsory retirement, demotion or reduction in profit share.

Looking at the larger picture the decision means that although LLP members will still not be able to claim unfair dismissal or other employee rights they will be able to rely on a great many protections that had been previously been regarded as not relevant to them. In practical terms those that might have the biggest impact include the rights under the Working Time Regulations 1998 which provide for paid annual leave, limits on working time, minimum rest periods and maximum weekly working hours. The Part Time Workers (Prevention of Less Favourable Treatment) Regulations 2000 will also need to be taken into account as these provide part time workers with the right to equivalent pro rata rights as full timers. Amongst other things there is also the potential for the Pensions Act 2008 to now apply to LLP members meaning that they should be subject to the auto-enrolment provisions if not excluded on other grounds.

Case report: holiday pay out of commission in Lock

On 22 May 2014 the European Court of Justice (ECJ) held in Lock v British Gas Trading Ltd [2014] CJEU C539/12 that where a worker's remuneration included sales generated commission the holiday pay arrangements had to reflect this in order to ensure that the worker was not financially worse off for taking the leave.

When Mr Lock, a sales consultant, was on annual leave he was paid his basic salary plus the commission from previous sales that fell due to be paid. So he was paid commission during the holiday period. However, he claimed that he still suffered a loss as he only received a reduced income in the months following his return from annual leave because he had not been able to secure sales and generate commission whilst he was on holiday.

The ECJ agreed that he had suffered a loss and found this was contrary to the EU Working Time Directive even though the actual loss was suffered some weeks after he had been on holiday. It was considered that if this was allowed it may deter workers from exercising their right to take annual leave which was contrary to the health and safety aims of giving rights to paid holiday. As to how in practice holiday pay can be calculated so as to avoid the worker being disadvantaged the ECJ said it would be for the Employment Tribunal to determine taking account the principles of their decision and the national laws governing holiday pay.

Comment: In practice it seems certain that going forward employers who pay commission will have to review their pay systems to take account the average amount of commission payments received over a period of time of 12-weeks or even longer. It will then be necessary to ensure that the worker who takes leave receives at least that average in the weeks following their return to work.

The ECJ's decision comes at a time when there are two cases pending before the Employment Appeal Tribunal regarding the exclusion of overtime payments from holiday pay. In the cases of Neal v Freightliner Ltd and Fulton and another v Bear Scotland Ltd Employment Tribunals have held that overtime must be taken into account when calculating statutory holiday pay. At the time of writing these cases are due to be heard at the end of July. If it is decided that all hours worked, including voluntary overtime, have to be taken into account when calculating holiday pay it will with the commission changes substantially increase the cost of holiday pay for many more employers going forward.

Legal udates by Sophie Brookes and Christopher Davies of Gateley

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