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Why Maybe You Shouldn’t Sign a Written Contract, Perhaps an Oral Agreement is better?

There is a famous quote, “A Verbal Contract isn’t worth the paper it’s written on” this is attributed to Samuel Goldwyn, although the quote is a misreporting of an actual quote, which was praising the trustworthiness of a colleague: “His verbal contract is worth more than the paper it’s written on” and sometimes it may just be beneficial for a company to not have a signed contract.
The general view held by many lawyers is that a business should always enter into a written contract when undertaking a major project or purchase, however, often the business is potentially better off signing no contract at all, and here’s why.

In English law, a contract does not have to be a formal written contract; it does not even have to be in writing. Most contracts that SMEs enter into are based on meetings, telephone calls and email exchanges. Sometimes, these are accompanied by written purchase orders or even a company’s standard terms and conditions.

If anything goes wrong with the performance of a contract, the first thing a lawyer or a court will do is to look at what the contract says. They will examine the written evidence (contracts, orders, terms and conditions, emails, letters, and notes of meetings and telephone calls) and what anyone has to say about the communications. They will then try to piece together exactly what was agreed, where was there a meeting of the minds, between the parties.

If there is a signed contract, the court will often just look at what that says and ignore all the promises made before the contract was signed. If the contract does not in fact say what was agreed, then the parties are likely to be bound by what is in writing rather than what was actually agreed beforehand.

Take the following scenario: a purchase manager has had extensive contact with a salesman, who made an initial presentation and after that, the manager had raised various questions. The salesman answered all the questions positively and promised the world.

The contract has been sent over to sign. Everyone was busy so the contract wasn’t read carefully if at all, perhaps it was a misunderstand of the legal language and no one at the business quite understands it all. The other party has put the Company under time pressures, and the Business just signed the contract.

Later something goes wrong and the Company has its lawyer look at the contract only to discover that what the business had thought had been signed wasn’t actually what the contract says.

Usually, contracts contain clauses (normally towards the end) saying that the contract is an “entire agreement” and that no party can rely on representations made prior to signing it. What this means is that, usually, an
aggrieved party, will not be able to say that the contract was different from what was actually agreed with the salesman. The Company is bound by what the written contract says. Sometimes, it is done deliberately to trick the unwary, but, usually, the other party is just trying it on by adding clauses to the contract that are very much in their favour. They anticipate that this act will lead to negotiations on the terms and expect the other party to get back to them suggesting changes to the contract before actually signing it.

A lot of the time, clauses are added covering events that where not even discussed with the salesman. Maybe these are things that the non-breaching party simply didn’t consider crucial immediately and thought that they could come back to these issues later, they did not expect the problems to come back and bite them.

It can often be that the negotiations that led up to the signing of the written contract set out better what was actually agreed than the contract itself. If this is the case, you might be better off signing no written contract at all.

If a business is going to sign a contract, and often it is best to do so as it avoids arguments later, make sure it says what was agreed to. It should be gone through carefully, clause by clause and the signing party should consider what each clause means. If the reader is not sure, then the party should get legal advice on just what the contract says and be prepared to negotiate. If the other party is keen to get the business, they’ll usually be prepared to go to some lengths to accommodate the party.

Acknowledgement: Gary Cousins – Cousins Business Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

by Ian Randall

Who Can Give Business Law Advice?

Legal News

The simple answer to this question is a ‘Lawyer’ a person who practices law, whether as a Barrister, Solicitor, or Chartered Legal Executive, Attorney & Counsellor at law, Foreign Qualified Lawyer and Paralegals. Lawyer in the context I refer to it is much wider than would be expected and reflects changes introduced by the Legal Services Act 2007.

The Legal Services Act 2007, which came into force on the 6th October 2011, was hailed as a landmark day for the legal industry, and in another breath it was termed “Tesco Law” as it was anticipated that law ‘shops’ would open in Tesco stores; and whilst this reality has not come to pass, a new paradigm in legal services provision has.

Under the Legal Services Act 2007, Section 12 and schedule 2 defined six reserved activities, (1) Exercise of rights of audience; (2) Conduct of Litigation (3) reserved instrument activities (concerning land registration and real property) (4) Probate
activities (5) Notarial activities (6) Administration of Oaths. Section 12 further defined a legal activity as either a reserved legal activity or as the provision of legal advice, assistance or representation in connection with the application of the law or with any form of resolution of legal disputes.

The effect of the Legal Services Act and the definition under Section 12 was that it deregulated the provision of legal work, so that companies that did not offer legal services as their primary business can now undertake legal practice. Essentially it was this point that spawned the ‘Tesco Law’ because technically supermarkets would now be able to offer legal services.

This deregulation simply gave credence to what was already happening, which was the provision of expert legal advice to businesses by non-solicitor lawyers. Expert advisors had been providing advice and preparing documents and contracts, giving expert advice on commercial and business law, construction law, representing clients in adjudications, arbitrations, providing representation at Employment tribunals and other tribunals, relating to matter like, boundary disputes, registration required under the law, (In the Care Industry, In the Security Industry for example), giving advice on consumer protection law, corporate law, acting as company secretaries, giving advice on compliance issues, consumer protection law and a whole raft of Alternative Dispute Resolution problems.

The benefits of early legal advice and why pro-activity is better than reactivity.

The reality is that Law is the lifeblood of the business world, and therefore Lawyers must spend time with clients or potential clients and do more than just listen to their clients concerns and desires. Lawyers must ask questions that help identify the legal issues at stake and use the answers to identify the legal point at issue. Once the issue has been identified the lawyer must act on the client’s behalf, research the law of the jurisdiction, then provide advice, guidance and where appropriate suggest solutions.

One question many people ask is whether or not it is worthwhile engaging a lawyer and will the costs
in time and money outweigh the benefits the advice provided. Traditionally, clients come to their lawyers once they the prospective client, has realised that they have a problem, it is only then that a legal opinion is sought, effectively trying to close the door after the horse has bolted, what is known as a reactive approach. Many practitioners of Non-Reserved activities are progressive and react pro-actively, seeking to avoid problems before they arise. The question of reactive and proactive legal services is well illustrated in the context of the management of projects. Many project managers are suspicious of lawyers and regard the law as cumbersome, full of jargon and divorced from the realities of the day-to-day business community. In the past this has led to work being undertaken in isolation from the intricacies of the legal system, leaving the law to lawyers without attempting to
integrate good legal practice with sound project management discipline, and sensible business management. The law then tends to rear its head most noticeably for many projects at the cradle (contract negotiations) and then at the grave (in the resolution of disputes) but often the intervening period, at times when those crucial preventative measures can be taken are regarded as the esoteric province of lawyers.

The law is mysterious, even to the most sophisticated business owner. It is sometimes illogical. It is often frustrating. The reasons for seeking legal advice can be triggered by frustration at artificial limitations imposed by law, the inflexibility of Local or International Regulations and the unpredictability of the legal system. Companies sometimes fall victim to frivolous lawsuits, suffering the apprehension of the threat they represent. This is compounded by the expense of having to defend when they should not have to.

At some point, frustration at the law intersects with frustration at the traditional cost of legal advice.
That is when companies begin to wonder if they can get more personalized, cost effective legal services at a market rate that makes business sense. Corporate clients are recognising that the expensive hourly rates charged by solicitors, which are then transferred into high fixed fees, are unsustainable within the marketplace when other providers can provide equal or superior services, in many cases, for fixed prices which are dramatically cheaper than traditional providers.

Obtaining early legal advice from the outset is extremely important for several reasons. Parties are usually more willing to negotiate essential terms of agreements at the bringing of their relationship, it allows parties to ascertain their legal position at an early stage ensuring that they can minimise their exposure to potential legal risks and possible litigation. Early legal advice can reduce the risks of litigation in the future or end a dispute before too much cost is incurred, these cost to reduce the existence of these risks can and must be considered an investment in the future of the business.

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

by Ian Randall

What is Alternative Dispute Resolution?

Commercial, Contracts

In the resolution of a civil dispute anyone is entitled to a fair hearing within a reasonable time, at a reasonable cost, and with appropriate independent input to ensure fairness. There are, however, circumstances in which options other than litigation may be more cost effective, quicker, or flexible, while still resulting in a fair outcome. All those involved in the litigation process need to have a proper understanding of the ADR methods available.

The term ‘alternative dispute resolution’ has no agreed definition, but clearly the phrase is used to cover the full range of alternatives to litigation potentially available to resolve a civil dispute. Whilst there have always been alternative ways of resolving disputes, the importance of ADR in the context of Litigation is a relatively recent development. ADR is now seen as an essential part of the process by which parties seek to resolve their
disputes by way of litigation, as much as an alternative process in itself.

The planning of ADR is as important as the planning of the other parts of the litigation process and requires knowledge both of the detail of ADR methods and of factors affecting tactical decisions in ADR.

There are a number of alternative dispute resolution mechanisms available to parties involved in a dispute. There are a number of ADR options available (a) negotiation which is a non-binding ADR process without third party intervention (b) mediation; executive tribunal; conciliation; stakeholder dialogue; early neutral evaluation is non-binding ADR processes with third party intervention and (c) expert determination; adjudication; Dispute Review Board; arbitration and Med-Arb these are binding ADR processes.
Negotiation is the most flexible and informal of the dispute resolution methods. Parties attempt to reach agreement on matters in dispute without the assistance of a third party. Discussions usually proceed on a without prejudice basis. If the negotiations do not succeed to settle the matter, the parties’ rights are not prejudiced.

Mediation is the process whereby parties, with the assistance of neutral third party (the mediator), identify the issues in dispute, explore the options for resolution and attempt to reach agreement. It is a voluntary, non-binding and private form of dispute resolution. The parties retain control of the decision on whether or not to settle and on what terms.

There are different styles of mediation, but the most common in the UK is facilitative mediation, in which, unlike a judge or arbitrator, the mediator will not decide the case on its merits but will work to facilitate agreement between the parties.

A representative of each party makes a formal presentation of his best case to a panel comprised of senior executives for the disputing parties and an independent chairperson. The panel then retires to discuss the dispute and the chairperson normally acts as a mediator between the senior executives. The entire process is private, confidential and without prejudice.

Conciliation is similar to mediation except that, usually, the third party will actively assist the parties to settle the dispute. The term is widely used to describe the facilitated settlement discussions that occur in the employment arena. It is also the term used in Europe to describe the function performed by judges when they hold
settlement conferences with the parties in an attempt to assist them to reach a settlement of their dispute.

This process is primarily encountered in environmental disputes. A series of meetings takes place with stakeholders/interest groups to facilitate decision-making, with the hope of avoiding future disputes.

The parties appoint an independent person to provide a non-binding opinion on the merits which evaluates the facts, evidence and law relating to a particular issue, or the whole case. The rationale is that, once armed with the opinion, the parties will be able to negotiate an outcome, with or without the assistance of a third party.

Expert determination is an informal process that produces a binding decision. An expert is appointed by the parties to determine an issue, usually of a technical nature. As an expert’s decision is an evaluation, this approach is treated as having different legal characteristics to an arbitration award.

Adjudication has been used as a method for dispute resolution in the construction industry for decades, and since the introduction of the Housing Grants, Construction and Regeneration Act 1996, parties to certain construction contracts have had a statutory right to refer disputes to adjudication.

An adjudicator usually provides a decision on disputes as they arise during the course of a contract. Typically, the decision of an adjudicator
has interim binding effect; that is, the decision is binding pending agreement of the parties altering its effect or a reference of a dispute to arbitration or litigation for final determination.

A dispute review board is a project specific adjudication process. A panel (usually of three neutrals) is appointed at the start of a project. The panel visits the site of the project, usually three or four times a year, and deals with disputes by providing an interim binding decision (like adjudication). The parties can challenge board decisions via arbitration or litigation. The board can have a preventative effect on disputes.

Arbitration is an alternative to litigation as a means of resolving disputes. It is based on the parties’ agreement: all parties must agree to submit the dispute in question to arbitration. Arbitration is a private forum in which an independent arbitrator makes an award, acting in a judicial fashion, to finalise the dispute. The
outcome (the award) is final and binding on the parties. The arbitrator focuses on the issues (fact or law) presented by the parties. The matter is referred to arbitration for determination where it is satisfied that the dispute arises under a contractual arbitration agreement (section 9, Arbitration Act 1996). The arbitrator cannot meet with each party in private.

Med-arb (or arb-med) is when mediation is combined with arbitration to resolve a dispute. In med-arb, if mediation fails in whole or on any issue, the parties may agree that the mediator becomes an arbitrator and issues a final and binding award on the outstanding matters.

Owllegal are well versed in all areas of ADR, and can assist clients in both creating the right to utilise ADR, and then using the ADR process to reduce, the time in both money and man hours to reach conclusions to business disputes.

Acknowledgement: Thomson Reuters online resource Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

by Ian Randall

Oral Contracts Not Worth The Paper They Are Written On Or Are They?

Contracts

A contract is a promise or set of promises, the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a parties’ obligation. It is an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.

In this fast paced world of doing business, parties sometimes disregard the formalities of a written contract, and conduct business with a handshake, or oral contract. Generally, these oral contracts are enforceable! Obviously not every statement made between parties can be considered as a promise, agreement or contract, however, it is important to identify when a valid contract can be said to have been formed.

For a contract to exist the following must be present; offer, acceptance, consideration, intention to create legal relations and capacity to contract. It is also a fundamental principle of contact that there must be a meeting of minds, the parties must agree on certain terms before there can be a valid, legal and enforceable contract. Where the parties say different things at different times, there is no meeting of minds, they are not in agreement on specific terms and so cannot be said to have a created a contract between them.

An offer is an unequivocal expression of readiness to contract on terms specified by the offeror (person making the offering) which if accepted by the offeree (person to whom the offer is made) will give rise to a binding contract. Thus, it is by acceptance that an offer becomes converted to a contract.

Acceptance is an unconditional (without conditions or limitations) approval communicated by the offeree to the offeror. It must be unqualified and on the terms of the offer before acceptance can create a binding contract. When acceptance is qualified or varies from the terms of the offer, it becomes a counter-offer and no longer an acceptance that can lead to a valid contract.

Another essential element of a valid contract is consideration, (except where the agreement is under seal). Consideration has been defined as the inducement to contract; the cause, motive, price or impelling influence which induces a contracting party to enter into a contract; the reason or material cause for a contract; some right, interest or profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

In order for consideration to qualify as an ingredient of a valid contract, it must be valuable in the eyes of the law and must flow from the offeree to the offeror. However, consideration need not be adequate so long as parties have agreed that it constitutes sufficient price or motive for the formation of a contract.

Parties to a contract cannot be said to have a legally binding agreement between them where either or both parties lack the capacity to contract. Capacity in this regard refers to the competence of a party in the eye of the law to be able to enter into a contract. In this regard, some classes of persons are incompetent in law or have a limited capacity to enter into contractual relations. They include minors, lunatics, illiterates or intoxicated persons.

Before a valid contract can be said to have been created, there must be an intention by the parties to the contract to create legal relations. This means that even where other ingredients are present, parties may not have intended to create a legally enforceable agreement and this can be inferred from the nature of the contract.

Generally, a contract could be oral or written. It could also be express – clearly stated or implied – deduced from conduct of the parties. Oral contracts are very common in everyday activities. Indeed, it would be almost impossible to require that all contracts, no matter their level of significance should be written.

It is a fundamental principle of the law of evidence that he who asserts must prove. Therefore, the person who alleges that there was a contract has the burden of proving the
assertion to the satisfaction of the determining body.

How do you do this? First you need to give oral evidence of what transpired and what the understanding between the parties to the agreement was. In doing this, there will be need to state the terms and conditions that formed the contract and also highlight the understanding between the parties.

A party who seeks to prove the existence of an oral contract should go a step further and call a witness or witnesses to buttress his claim. In addition, where there are supporting documents such as emails, memos, receipts, faxes, photographs, recordings etc; Cheques or payment vouchers and bank statements could also be used as evidence of the existence of a contract. Documentary evidence generally is more reliable and
usually serves as an aid in assessing the veracity of oral testimony or evidence.

Whilst for many years the misreported quote of Samuel Goldwyn or Metro, Goldwyn, Meyer fame, of “an oral contract is not worth the paper it’s written on” has formed the basis of the view that oral contracts are unenforceable, this myth is dangerous.

Goldwyn’s actual quote, was praising a colleague and was in fact “His verbal contract is worth more than the paper it’s written on” it was meant to praise the honour and integrity of his colleague. In modern business where emails, telephone calls and conversation rule, and time is often of the essence both to secure the work and confirm the contract great care should be taken that an enforceable contract is not created by accident.

Acknowledgements: Teingo Inko-Tariah / Thomson reuters online legal resource Practical Law Company / Olender Feldman LLP

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org

by Ian Randall

Directors of Companies in Financial Difficulties

Management

While a company is trading solvently, the duties of the directors are owed to the company for the benefit of present and future shareholders. However, once the company becomes insolvent, or there is doubt as to its solvency, the directors must also consider or act in the interests of the company’s creditors in order to minimise the potential loss to them.

A breach of these duties can lead to personal liability and possible disqualification from acting as a director or being involved in the promotion, formation or management of the company for a specified period. The directors must also consider whether the company’s liabilities, including contingent and prospective liabilities, exceed its assets.

A company’s statutory balance sheet should not be used alone to determine whether a company is “balance sheet insolvent” as it may omit some information, such as the company’s contingent liabilities. It is generally accepted that, for the purpose of this test, accounts should be prepared on a going concern basis, as it is likely that many companies would be balance sheet insolvent if the accounts were prepared on a break-up basis.

In order to assess the extent of the problem, the directors will, at the very least, need an up-to-date cash flow statement, whatever recent monthly or other management accounts are available and appropriate projections, such as of trading prospects, cash flow and financial covenant compliance. Any actual or potential breaches of covenant or events of default in relevant loan agreements should be brought to the immediate attention of the directors.

The full board of directors should meet as soon as possible after the preliminary assessment of the position. If any of the directors cannot attend in person, they should participate by telephone. The company’s lawyers should advise the board of the statutory and other duties of the directors in this situation, both in general terms and by application to the facts.

Directors are subject to a number of duties, many of which have been codified under the Companies Act 2006 (“CA 2006”). CA 2006 also preserves the common law duty to consider or act in the interests of the company’s creditors when a company is insolvent or of doubtful solvency, with a view to minimising losses.

Under section 212 of the Insolvency Act 1986 (“IA 1986”) if, in the course of a winding up, anyone who has been involved with the promotion, formation or management of the company is found to have misapplied, retained or become accountable for any money or other property of the company, or been guilty of misfeasance or breach of a fiduciary or other duty in relation to the company, a court may on an application by the official receiver, liquidator or a creditor compel him to:

(a) repay, restore or account for the money or property of the company with interest; or (b) contribute such sum to the company’s assets by way of compensation in respect of the
misfeasance or breach of fiduciary duty or other duty as the court thinks just.

A director can also incur personal liability following an application to the court by a liquidator for fraudulent trading (section 213 of the IA1986). The court can order that any person who was knowingly a party to carrying on the business of the company with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, is liable to make such contributions to the company’s assets as the court thinks proper.

Fraudulent trading is also a criminal offence which carries the risk of imprisonment, a fine or both. Fraudulent trading can arise when directors of a company allow it to incur debt when they know there is no good reason for thinking that funds will be available to repay the amount owed when it becomes due or shortly thereafter. Thus, directors have to be satisfied that services or goods supplied to the company can be paid for on the relevant due date.

Wrongful trading (section 214 of the IA1986) can lead to personal liability, although there have been few reported cases. The provision applies where a company has gone into insolvent liquidation and: (i) before the commencement of the winding up, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation; and (ii) thereafter the director failed to take every step with a view to minimising the potential loss to the company’s creditors.

The standard required as to what a director ought to know, the conclusions he ought to reach and steps he ought to take is that which would be known, reached or taken by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as those of the director in relation to the company and with the general knowledge, skill and experience that the particular director has.

Apart from the risk of incurring personal liability, where a director or former director of an insolvent company is found to have engaged in conduct which makes him unfit to be concerned in the management of a company, he must be disqualified by court order or have a disqualification undertaking accepted by the Secretary of State under the Company Directors Disqualification Act 1986.

Where a Director is disqualified or provides an undertaking the Insolvency Service can apply to the court for a compensation order on behalf of the Secretary of State for Business, Energy & Industrial Strategy. The court can make a compensation order if the director is subject to a disqualification order or undertaking and their conduct has caused a quantifiable loss to one or more creditors of an insolvent company.

Directors are advised to take early legal advice as soon as they consider the company to be under pressure, where a dispute arises affecting income, or clients extend payments past agreed payment terms, or costs of projects start to outweigh incoming.

by Ian Randall

Board Meetings

Management

The management of a company is invariably delegated, under the company’s articles, to the board. Articles will typically provide that the business of the company is to be managed by the directors, who are empowered to exercise all the powers of the company, the powers must usually be exercised by the board collectively at a properly convened board meeting.

There is no specific minimum number of board meetings prescribed by law: directors must meet sufficiently often to ensure that they are discharging their duties as directors. The articles usually provide that any director may, and the secretary at the request of a director shall, call a meeting of the directors. Unless the company’s constitution prescribes a period of notice, the period must be fair and reasonable. As a matter of good practice, the notice should be written, although verbal notice may technically suffice.

The notice must set out where and when the meeting is to be held. There is no general law requirement that a notice convening a board meeting must state the business proposed to be transacted. Business that is done at a meeting of which some directors have no or insufficient notice has been held to be invalid.

The quorum for a meeting of directors will usually be determined by the articles. The articles may provide that the quorum is one. Where the articles do not prescribe a quorum, or a quorum has not been fixed in accordance with the articles, the quorum will be a majority of the board, although in some circumstances the quorum may be determined by the usual practice of the board. A director may not be counted in the quorum if they are disqualified from voting on the resolution.

A quorum must be present at the start of, and throughout, the meeting. In the absence of a quorum no business should be transacted and any resolutions purporting to be passed will be invalid subject to the provisions in the articles, the board meeting should be adjourned until a quorum can be formed. The chairperson is responsible for determining whether there is a quorum.

The articles will often set out what will happen if the number of directors has fallen below that required for a quorum. A decision made at an inquorate board meeting may be ratified by a resolution duly passed at a quorate board meeting: at common law, unless a company’s constitution otherwise provides, a board of directors can, within a reasonable time, ratify the acts of a director or directors who, when they acted, had no authority to bind the company, but which acts were within the power of the board.

Articles will usually provide that resolutions will be passed by a majority of those present and voting. Boards do not necessarily need to pass formal resolutions for their decisions to be binding, but it is conventional for them to do so. Once a proper resolution of the board has been passed, it is the duty of all the directors, including those who took no part in the deliberations of the board and those who voted against the resolution, to implement it.

Articles will often provide that a director cannot vote at a board meeting on a matter in which he has a material interest (direct or indirect) that may conflict with the interests of the company.

Every company is required to take minutes of all proceedings at meetings of its directors, if the company fails to comply with section 248, an offence is committed by every officer of the company who is in default (section 248(3), CA 2006). It is good practice to ensure that, at the very least, the minutes:

Record accurately all resolutions and decisions
Contain enough information for the reader to have an understanding of the background to the various decisions
Depending on the importance of the resolution, contain the thought process that led to them being made

The company must retain minutes of meetings of directors held on or after 1 October 2007 for at least ten years from the date of the meeting (section 248(2), CA 2006).

If the company fails to comply with section 248, an offence is committed by every officer of the company who is in default (section 248(3), CA 2006).

A director, while in office, has the right to be informed about the company’s affairs and to inspect all the company’s books and records. The right must be exercised for a proper purpose, to enable the director to discharge his personal obligations to the company and his statutory obligations. Shareholders have no general right to inspect board minutes in the absence of an express provision in the articles (or another agreement to which the company is a party, such as a shareholders’ agreement).

Acknowledgement: Thomson Reuters online resource Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

by Ian Randall

Acting As A De Facto Or Shadow Director

Management

The Companies Act 2006 (CA2006) simply defines a director as including any person occupying the position of director, by whatever name called. However, general principles have been established in case law, including the recent Court of Appeal case of Smithton v Naggar ([2014] EWCA Ci 939).

A de-facto director (or director ‘in fact’) is someone who acts as a director but who has not been formally appointed (a person who has been formally appointed being a ‘de jure’ director or ‘director in law’). The matter is determined on an objective basis and irrespective of the person’s motivation or belief.

Relevant factors include:

whether there were other persons acting as directors • whether the individual has been held out as acting as a director, including using the title ‘director’ in communications, or has been considered to be a director by the company or third parties
whether the individual was part of the corporate governing structure • in what capacity the individual was acting.

A de-facto director is subject to the same duties and liabilities as a de jure director under the Companies Act 2006 (CA2006) and certain other legislation, including the Company Directors Disqualification Act (CDDA).

Acts of a de-facto director can include:

accepting responsibility for the company’s financial affairs
acting as sole signatory for the company bank account
negotiating with third parties on behalf of the board
recruiting and appointing senior management positions

A person may be a shadow director or a de facto director, depending upon the circumstances surrounding the role and there is some overlap between the two concepts

A shadow director is someone who is not appointed as a director but who gives directions or instructions that the directors of the company are accustomed to act upon.

A person however is not regarded as a shadow director solely because the company directors act on the advice given by that person in a professional capacity. There are various exceptions in relation to directors of a subsidiary acting on direction or instruction of its parent. Whether or not a person is a shadow director is a question of fact and dependent upon all of the relevant circumstances.

The question of whether or not a person is a shadow director may arise in a wide variety of contexts, for instance for management consultants (subject to the exception for professional advice), lenders and creditors of a company or a joint venture shareholder.

Many of the CA2006 provisions applicable to de-jure directors apply also to shadow directors. The small business, enterprise and employment bill 2014 provides for the CA2006 to be amended so that the general duties of directors will apply as far as possible. The Bill also contains provisions to restrict the use of corporate directors by companies.

A shadow director is also subject to a number of other legislative provisions that apply to de jure directors; in particular, a shadow director may be liable for wrongful or fraudulent trading under the Insolvency Act 1986 and to disqualification provisions of the CDDA.

Both de-facto and shadow directors may be liable for offences under other legislation, including the Insolvency Act 1986 and criminal sanction where applicable.

Anyone who was a director or shadow director of a company at any time in the three years before the start of an insolvency may be disqualified under CDDA if found to be unfit to be concerned in the management of a company.

Matters which may result in a finding of unfitness include serious offences such as conviction for an indictable offence concerning the promotion, management or liquidation of a company or fraud in the winding up of a company, including fraudulent trading. However administrative failings, including failure to keep proper accounting records or to prepare and file accounts or submit annual returns to Companies House can also result in a finding of unfitness.

Following a report from an insolvency practitioner the Insolvency Service decides whether to take disqualification proceedings. If found unfit to be a director, the Court will disqualify the individual for a period of between two and 15 years. In addition, the individual may be ordered to pay the Insolvency Service’s costs, as well as their own.

The Insolvency Service may accept an undertaking from the person concerned that they will not act as a director for a specified period of between two and 15 years in lieu of Court proceedings.

A disqualification order against an individual will mean that the individual cannot:

be involved, either directly or indirectly, in the promotion, formation or management of a company
act as a member of an LLP
sit on the board of a charity, school or police authority
be a pension trustee
become a registered social landlord
sit on a health board or social care body
act as an insolvency practitioner

A register of individuals disqualified by court order or undertaking is maintained by Companies House and can be accessed through its website, free of charge

Where a Director is disqualified or provides an undertaking the Insolvency Service can apply to the court for a compensation order on behalf of the Secretary of State for Business, Energy & Industrial Strategy. The court can make a compensation order if the director is subject to a disqualification order or undertaking and their conduct has caused a quantifiable loss to one or more creditors of an insolvent company.

Where an individual has been a director for some time is also a shareholder and intends to exert some influence over the direction company is intending to take, simply resigning as a director does not remove the potential exposure to risk. There is a real chance that by being involved in decision making or as is more likely the case being involved in policy making the individual concerned is likely to be classified as either a “de facto” or “shadow” director in any event, rendering the decision to resign as a director simply moot.

Acknowledgement: Thomson Reuters online resource Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org

by Ian Randall

What are the ways of removing a minority shareholder?

Commercial

Disputes often arise between majority and minority shareholders, resulting in many instances, when the majority seek to expel a minority shareholder, but how can this be done? There are several possible ways of removing a shareholder, or forcing a sale of their shares, but care needs to be taken in each case, and a tactical approach is required, which means detailed legal advice should be taken.

Check the articles of association of the company to see if they contain drag along provisions which would enable the majority of the shareholders to force the minority to sell in the event of a buyout of the company.

Consider passing a special resolution (75% majority) to alter the articles to include provisions to force a sale of the shares, say for fair value. However, any alteration should not amount to an oppression of the minority and should not be unjust, and lead to further litigation.

Check if there is a shareholders’ agreement which contains a ‘buy-back’ clause which can be invoked if a shareholder leaves the company. This is sometimes known as a ‘bad leaver’ provision and will include a mechanism to value the shares.

Consider increasing the remuneration of the remaining directors, and reducing sums paid by way of share dividends. This may not be tax efficient but may be preferable to paying dividends to a shareholder who no longer participates in the running of the company. But take care, since you should be able to justify this course of action, define the business reason for the change.

Once you have assessed the Company’s, start negotiations with a view to reaching agreement for the purchase of the shares for fair value. First carry out a valuation of the shares. A minority shareholding will often be valued at a figure below what the shares would be worth based on a percentage of the whole. Check to see if the Articles contain a formula for valuing a minority shareholding.

Care should be taken to avoid a dispute which could end in costly litigation. A minority shareholder has the right to apply to the court claiming, ‘unfair prejudice’. The court will usually order a sale of the leaving shareholder’s shares at a determined value. Company litigation is expensive, and the costs would usually be paid for by the individual shareholders. However, the threat of such proceedings can be used to put pressure on the minority shareholder to reach agreement for the sale of their shareholding.

The company could consider bringing a claim against the departing director if it can show it has suffered some loss as a result of a breach of his duties as a director. Care should be taken, however, to check that the other directors have not themselves been in breach of their duties.

If the majority hold 75% of the shares, then you could consider the nuclear option of winding up the company. If a solvent company is wound up through a member’s voluntary liquidation (MVL), the company’s assets can be transferred into the name of Newco, which would not issue shares to the minority shareholder in Oldco.

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

by Ian Randall

Payment for Construction Works

Contracts

Payment for construction works is usually paid in instalments, however on very small projects alternative payment methods such as payment upfront or payment on completion may be utilised. Payment in construction is statutory protected under Part two of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA). All construction contracts entered into before October 2011 must comply with the act and after October 2011, they must also comply in line with the amendments made in Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (LDEDCA).

This act provides details of payment provisions and should a contract not include or is missing information on necessary payment provisions then the rules of The Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) 2011 (The Scheme) will apply. If a project is due to take longer than 45 days then under Section 109 (1) of the (HGCRA), the contractor is entitled to instalments, stage payments or other periodic payments.

Section 110 (1) of the HGCRA provides information on the dates for payment and states that the contract should provide ‘an adequate mechanism for determining what payments become due under the contract’ (1996).

For a contract to be valid under the HGCRA the following items must be addressed and included: what amount is due and when, the final date for payment (interim and final), the payment notice outlining the amount due and how it is determined, the default notice and the pay less notice. They must also adhere to a strict time frame, which if not outlined in the contract, will follow the timings in the Scheme. The time frames will vary depending on the specified contract and can be amended for individual projects. The statutory dates between the due date and final date for payment in ‘The Scheme’ is 17 days.

Under the HGCRA, a payment notice must be provided for each payment in the contract that contains the notified sum which can be issued by a ‘specified person’ for example the Client, Architect or Contract Administrator and must be issued within 5 days of the due date. A pay less notice can be issued if the payer feels less than the notified sum should be paid or if the contractor requires less than that
outlined on their interim application for payment. However, the timing is critical, and it will not be valid if not served on time. The amended HGCRA states that the pay less notice must include the calculations to show the reductions and reasoning.

The contractor also has the right to suspend works under the Section 112 of the HGCRA if they are ‘not paid in full by the final date for payment and no effective notice to withhold payment has been given’. It should also be noted that ‘pay when paid’ clauses were removed from contracts as per Section 113 of the HGCRA and Paragraph 11 of the Scheme (2011).

It is important that all parties to a contract are aware of the provisions and the specified dates. If the contract does not state specific dates this will not exempt a party to paying as the dates strictly outlined in the Scheme in line with the relevant acts will be enforced.

Acknowledgement is given to Bradley Mason of Bradley Mason LLP

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of
something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

by Ian Randall

Shareholder Remedies

Commercial

Private Limited companies are owned by the members, these shareholders are there at the beginning when everything is hunky dory, and perhaps lodge significant funds, but if overtime these initial members are side-lined or a dispute arises between the members what can the shareholder do.

This blog post gives a bite sized overview of the three methods which shareholders may use to enforce their rights, namely (1) the presentation of an unfair prejudice petition under section 994 CA 2006; (UP) (2) the bringing of a derivative action under section 260 CA 2006 (DA) and (3) the presentation of a petition for the winding up of the company on just and equitable grounds under section 122 (1) (g) IA 1986. (WUP)

For an (UP) Claim, the members (Shareholders) of a company and persons to whom shares have been transferred (voluntarily or by operation of law) who are not yet registered as members (section 994(1) (2), CA 2006) including where they hold shares as nominees or trustees for others. Or the Secretary of State for Business, Innovation and Skills on the basis of investigations or reports (section 995, CA 2006).

For a (DA) the members of a company and persons to whom shares have been transferred (voluntarily or by operation of law) who are not yet registered as a member including where they hold shares as nominees or trustees for others (section 260(5), CA 2006).No minimum number of shares need be held but the size of the shareholding is
relevant to the court’s decision whether or not to permit a derivative claim to be brought.

For a (WUP) the list is considerably larger than the other two options and includes; The company; The directors (pursuant to a board resolution passed by a majority or unanimously absent such a resolution); Prospective or contingent creditors; and shareholders and others liable to contribute to the assets of a company who satisfy the requirements of section 124, IA 1986.

For an (UP) claim a shareholder may bring a claim for the following issues; Actual or proposed acts or omissions of the company which constitute the conduct of the company’s affairs in a manner that is unfairly prejudicial to the petitioner’s interests as a member including:

Breaches of fiduciary duty on the part of the company’s directors prejudicing the interests of members
Mismanagement which is serious having regard to the scale of financial loss arising and the frequency and duration of the relevant acts and omissions
Improper failures to pay dividends/payment of excessive remuneration
Breaches of the articles/ shareholder’s agreements
Exclusion from management or failure to provide information in the context of a quasi-partnership or where the understandings or agreements between the parties render such conduct inequitable.

For a (DA) claim, then the claims are all causes of action which may be available to the company against directors, third parties as well as directors and third parties together arising from acts or omissions constituting negligence, default, breach of duty and/or breach of trust by a director or shadow director of the company (section 260(3), CA 2006).

When considering a (WUP) then a potential claim revolves around the circumstances rendering it just and equitable for the company to be wound up, the categories of which are not closed but include:

Loss of substratum rendering the carrying out of the purpose for which the company was incorporated impossible and the sole remaining activity of the company is the getting in of
its assets and winding up of its affairs
Deadlock which was not contemplated by the shareholder’s when the company was incorporated (compare with deadlock built into the articles to protect one or more shareholder’s)
Justifiable loss of confidence in management arising from mismanagement which is serious (for example want of probity or fraud) or confounds proper and legitimate expectations
Exclusion from management or failure to provide information in the context of a quasipartnership or where the understandings or agreements between the parties render such conduct inequitable.

The relief available to the shareholder claiming under an ‘Unfair Prejudice’ (UP) cause of action would be such order as the court thinks fit to remedy any unfair prejudice, taking into account the interests of other shareholders and creditors, including:

Ordering the purchase/sale of the petitioner’s shares at a price and on terms to be determined by the court
Regulating the conduct of the company’s affairs for the future
Requiring the company to refrain from, or to carry out, an act including amendments to the articles of association
Authorising proceedings to be commenced in the name of the company (even where the requirements for a derivative action are not satisfied) (section 996, CA 2006).

Raising a (DA) claim is slightly more complex and the relief available includes Permission from the court; to bring or continue a claim on behalf of the company commenced by the applicant (section 263, CA 2006); to continue a claim commenced by the company or by another member in a manner amounting to an abuse of process which has not been prosecuted diligently where it is appropriate for the applicant member to continue the claim (sections 262 and 264, CA 2006);

However, such permission may be limited (for example until disclosure) or conditional (for example no compromise or discontinuance without permission of the court). The court may also order the member pursuing the derivative claim to be indemnified for costs where: It would have been reasonable for the company’s directors to have pursued the claim; The derivative claimant’s only interest in the claim is as a shareholder; or All benefit from the action will accrue to the company.

For a ‘Winding-Up Petition’ (WUP) claim the relief is the court ordering the “Winding up of the company.”

For an (UP) claim then the seriousness of the unfairly prejudicial conduct identified by the applicant and the interests of other shareholders and creditors, and the insolvency of the company, which will preclude the bringing of a petition unless such insolvency was occasioned by the unfairly prejudicial conduct or the petitioner is prejudiced other than by losing the value of his shareholding in some other capacity connected with his status as a shareholder.

When considering a ‘Derivative Action’ (DA) claim A court must refuse permission to bring or continue a derivative claim where a person acting to promote the success of the company would not seek to continue the claim or the proposed or past act or omission is capable of authorisation/ratification and has been authorised by the company before it occurred or subsequently ratified (section 263(2), CA 2006).

A court may grant or refuse permission to bring or continue a derivative claim taking into account; The applicant’s good faith; The importance that a person acting to promote the success of the company would attach to the claim; The likelihood of authorisation or ratification; Whether the company has decided not to pursue the claim; Whether a personal remedy is available to the member seeking to pursue a derivative claim; The views of members of the company who have no personal direct or indirect interest in the claim (sections 263(3) to (4), CA 2006)

When considering a (WUP) claim the court will consider the seriousness of the just and equitable grounds identified by the applicant and the interests of other shareholders and creditors. Whether it is preferable for there to be an orderly winding down of the company’s affairs.

Nothing is ever simple and straightforward when considering the application of the law, and an (UP) claim is no exception to this truism, and the following problems may be encountered with the claim, namely; a refusal by the petitioner of a fair offer to purchase his shares; Express provision for an exit route in
the company’s articles of association or in a shareholder agreement.; Misconduct on the part of the petitioner; Delay in presenting the petition and/or acquiescence in the alleged unfairly prejudicial conduct.

For a (DA) claim, the bars to prosecuting the claim include the fact that the bringing or defending the claim is not in the best interests of the company; and that the actions complained of have been authorised or subsequently ratified by the company.

With a (WUP) claim the claim will not continue where the is an absence of any tangible benefit to the petitioner of the making of a winding up order (for example, the insolvency of the company in the context of a shareholder’s petition); or the availability of an alternative remedy which the petitioner unreasonably refuses to pursue.

Whilst there are inherent protection for a shareholder, built into the Companies Legislation, they are perhaps of little practical consequence to the majority of shareholders, and this point alone prescribes the necessity of having a clear and well drafted shareholders agreement, which incorporates appropriate dispute resolution procedures.

Acknowledgement: Thomson Reuters online resource Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.

by Ian Randall

Owllegal Limited

Ian Randall