Archived News - 2008
Commercial Law
Personal Law
Fines Should be Proportionate
A small firm and its director, who were originally fined £96,000 and £14,000 respectively following breaches of Health and Safety law which led to the death of an employee, have had their fines reduced to £80,000 and £10,000 by the Court of Appeal.
The case involved an employee of a vehicle-recovery firm. He died as a result of a workplace accident. The company and its managing director were prosecuted, the prosecution proving that the company and its management required and encouraged working practices which were known to be dangerous. The man’s death was the direct result of this approach and occurred when a vehicle which was being raised in an unsafe manner fell on him and crushed him.
On appeal, the Court of Appeal considered that the original judge had failed to take account of the relatively modest financial position of both the company and its managing director and therefore reduced the fines.
Says John Lennon, “The reduction in the fines was relatively small, still leaving the company and its managing director facing substantial liabilities in line with what the court believes to be appropriate in such severe cases. By the time the costs of the appeal hearing have been met, the actual reduction in liability is likely to be very modest. The courts have little sympathy for firms which take a cavalier attitude to or wilfully endanger their employees.”
Is a Director an Employee?
When a company becomes insolvent, whether or not a shareholder and director is an employee, within the meaning of section 230 of the Employment Rights Act 1996 (ERA), for the purposes of a claim for statutory redundancy payment from the Secretary of State for Trade and Industry, can be difficult to ascertain. The Employment Appeal Tribunal (EAT) considered this issue in the case of Nesbitt and Nesbitt v Secretary of State for Trade and Industry.
Mr and Mrs Nesbitt were directors of APAC Computer Training Ltd. They managed the company on a day-to-day basis and between them owned 99.99 per cent of the shares. From the start, they had written contracts of employment with the company, in the same form as those of other company employees. They were paid salaries commensurate with their roles as the senior managers of the business but did not receive directors’ fees or dividends.
In the course of 2006, the company became insolvent and on 3 July of that year the remaining employees, including Mr and Mrs Nesbitt, were made redundant by the liquidator. The couple applied to the Insolvency Service for redundancy payments under the insolvency provisions of the ERA. Their claims were rejected on the ground that they were not employees within the meaning of the Act.
The Employment Tribunal agreed with the Insolvency Service on the basis that the Nesbitts were in joint control of the company.
The EAT overturned this decision on appeal. In its view, the fact of the Nesbitts’ control over the company was not sufficient of itself to deprive them of employment status if they otherwise satisfied all the criteria for employment. Mr Justice Underhill stated, “I believe that the law is that the fact that a claimant under the employment protection legislation is a majority shareholder and a director of the company which employs him does not affect his status as employee unless the tribunal finds that the company is a ‘mere simulacrum’… and thus, by the same token, that the contract between it and the putative employee is a sham.”
In this case, apart from the level of control they had over the company, all the indications were that Mr and Mrs Nesbitt were employees. They had proper employment contracts (equivalent to those issued to other employees), they received all their remuneration by way of salary and they ‘behaved like employees’.
Says Sue Jones, “One of the relevant factors to be taken into consideration in cases such as this is the contract of employment. We can assist you to ensure that your employment terms make sure you have the appropriate contractual relationship with your company.”
Music While You Work
If you allow your staff to listen to music whilst working, the Performing Rights Society (PRS) has warned that you could be liable to pay a licence fee.
PRS is a not-for-profit organisation that licenses the public performance of music on behalf of its 50,000 composer, songwriter and music publisher members. It pays its members royalties for each time a piece of their music is played in public.
According to PRS, a tariff for music in the workplace applies to ‘the mechanical performance within the society’s repertoire as a background to work, meals, stand-down times and breaks at work’.
PRS is taking Kwik Fit, the automotive parts repair company, to court for violating musical copyright because it claims that the company’s mechanics play the radio loudly enough for it to be heard by colleagues and customers. In the view of PRS, this constitutes a ‘performance’ of the music, which requires the payment of royalties to the artists. PRS is claiming £200,000 in damages because Kwik Fit has refused to obtain the appropriate licences, claiming that the company has a policy banning the use of radios at its premises.
For those who allow music to be played at work, the situation is complicated by the fact that you may also need a licence from Phonographic Performance Ltd. (PPL). PPL collects and distributes airplay and public performance royalties in the UK on behalf of over 3,500 record companies and 40,000 performers.
The cost of a licence depends on how the music is used. For further information, see the PRS website at http://www.mcps-prs-alliance.co.uk/Pages/default.aspx and the PPL website at http://www.ppluk.com/.
New Money Laundering Regime
Business owners are reminded that the new Money Laundering Regulations 2007 came into effect on 15 December 2007. These replace the existing money laundering legislation. The aim of the new regime is to further restrict criminal access to the financial system, thereby deterring crime and terrorism.
The Regulations apply (with certain exceptions) to the following types of business:
- credit institutions;
- financial institutions;
- auditors, insolvency practitioners, external accountants and tax advisers;
- independent legal professionals;
- trust or company service providers;
- estate agents;
- high value dealers; and
- casinos.
It is the ‘high value dealer’ who is probably least likely to be aware of the impact of the new law. The legislation defines a high value dealer as ‘a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods), when he receives, in respect of any transaction, a payment or payments in cash of at least 15,000 Euros in total, whether the transaction is executed in a single operation or in several operations which appear to be linked’. Clearly, this definition will cover many businesses supplying high value goods where the customer wishes to pay in cash. At the time of writing 15,000 Euros is approximately £11,000.
A simple summary of the new rules can be found at http://www.hm-treasury.gov.uk/media/2/6/moneylaundering_guide150807.pdf.
If you would like advice on how the new Money Laundering Regulations affect your business, please contact Michael Cutler.
Retention of Title Can Include Commingled Goods
Retention of Title (ROT) clauses are often used in contracts for the supply of goods. The effect of the ROT clause is that the goods which have been supplied remain the property of the supplier until paid for in full by the purchaser. If the buyer goes broke or fails to pay for the items, the vendor has the right to recover its property.
For discrete items such clauses are relatively straightforward, as the items which are the subject of the ROT clause are easily identifiable. Problems arise, however, when the goods subject to the ROT clause are incorporated into something else. Clearly the vendor does not own the other goods, so is the ROT clause valid?
Normally, in such cases, if the goods subject to ROT have been converted into a new product or products, the ROT clause fails. However, a recent case showed an exception to the rule. It involved a company that supplied 217 tonnes of zinc in the form of ingots to another company. Zinc is normally supplied in ingot form. The company which purchased the zinc ingots melted them and mixed them in a tank with zinc from another supplier. There was a total of 265 tonnes of zinc in the tank.
The supplier claimed that 217 tonnes of the molten zinc in the tank belonged to it under the ROT clause. Despite the fact that the actual zinc it had supplied could not be distinguished from that supplied by others, the judge agreed. Crucially, the zinc in the tank was essentially the same material (though slightly less pure) than the material originally supplied. The zinc was still identifiable and thus the ROT clause held good.
Says John Lennon, “When selling goods, retention of title clauses are almost always worth including if there is a risk of non-payment and the goods themselves will be identifiable enough for the clause to be enforceable. If you supply goods, it might be worth checking that your current terms of trade incorporate best legal practice. We will be pleased to advise you.”
Taper Takes Toll
One of the more important changes announced in the recent pre-budget report was that Capital Gains Tax (CGT) taper relief, which was introduced in 1998, will be abolished with effect from the end of the current tax year. Under the new regime, all capital gains will be taxed at a flat rate of 18 per cent. Currently, capital gains are taxed at the marginal tax rate of the taxpayer, but the amount subject to CGT is reduced by the taper relief applicable, meaning that for a higher-rate (40 per cent) taxpayer benefiting from full taper relief, an effective CGT rate of 10 per cent would apply.
This will clearly have a significant effect on the amount of the after-tax receipts when business assets are sold but, more particularly, may also affect the structure of some deals. It is common to tie in the management of businesses being taken over, for a period, to ensure continuity of the business under its new owners. Taper relief assisted this process, since it was possible to structure such deals so that the management of the ‘sold’ business received shares and then benefited from taper relief after the shares had been held for two years. This will no longer be possible.
For people who would benefit from taper relief, ensuring deals are completed by 5 April 2008 is worth considering. In most cases, unless a deal is already in negotiation, the timescale between now and the end of the tax year is too short for the process of marketing the business to sale to be completed – and in any event, most exit routes are better if there is forward planning and proper preparation of the business for sale.
At the time of writing, it looks as though the Government will yield to pressure and provide limited CGT relief through the reintroduction of retirement relief. Watch this space.
For advice on planning the exit from your business, please contact Sue Jones.
The New CGT Regime – Who Wins and Who Loses?
The changes announced in the Capital Gains Tax (CGT) regime in the Chancellor of the Exchequer’s pre-budget report are more far-reaching than has generally been understood. In this article, we look at the impact of the changes and work out who are the winners and losers.
Losers
- Business asset owners
- Where a person disposes of a business asset held for more than two years, the effective rate of CGT for a higher-rate taxpayer will increase from 10 per cent to 18 per cent due to the abolition of CGT ‘taper relief’ from 6 April 2008.
According to the Tax Faculty of the Institute of Chartered Accountants in England and Wales, the abolition of indexation relief will significantly increase the CGT charge for those who hold assets acquired before 6 April 1998.
Particularly badly hit by the changes will be those who hold business assets for the longer term, for example farming businesses and furnished holiday lettings businesses.
Winners
- Non-business asset owners
- The current taper period for non-business assets is ten years, which complicates the situation somewhat. The application of non-business taper relief means that the minimum effective CGT rate on such assets is 24 per cent for a higher-rate taxpayer, so many higher-rate taxpayers with non-business assets are likely to be better off disposing of assets after 6 April 2008 and paying CGT at 18 per cent. However, the benefit or otherwise depends on the amount (if any) of the available ‘nil-band’ below which CGT is not payable (currently £9,200 per annum).
For basic-rate taxpayers, the effects are limited but mean that the effective tax charge on non-business assets held for five years or more rises.
What to do now
We strongly recommend that clients holding assets, especially business assets, consider their CGT position as soon as possible. Draft legislation is expected to be available at the beginning of 2008, so precise planning should be possible then. At the time of writing, a number of anomalies had been uncovered in the proposals, which are under discussion between the relevant professional bodies and HM Revenue and Customs.
We can advise you on tax-efficient strategies for holding and disposing of capital assets.
Animal Danger for Owners
Owners of animals that are known to be potentially dangerous are usually aware that if their animal causes an injury, they will most likely be held responsible. However, owners of animals not normally considered dangerous may well assume that they will not be held liable for an injury caused by their animal, for example if their animal causes an accident.
A recent case has brought further clarification to the law and spells out a warning for animal owners.
The case concerned a horse which reared up and threw its rider, a 17-year-old girl. The girl suffered a serious head injury as a result. The horse had no history of misbehaviour and the girl was considered competent to ride it. The girl sued the owners of the horse for negligence, or in the alternative, claimed that the owners were strictly liable for the injury under the Animals Act 1971.
The court rejected the allegation of negligence. However, it accepted that the owner of the horse was strictly liable under the Act.
The Act places strict liability on the keeper of an animal that does not belong to a dangerous species if the animal causes harm where the following points are satisfied:
- where the damage is of a kind which, unless restrained, the animal was likely to cause or which, if caused, is likely to be severe; and
- where the likelihood of the damage or its being severe is due to the characteristics of the animal which are not normally found in animals of the same species or are not normally so found except at particular times or in particular circumstances; and
- where those characteristics are known to the keeper of the animal.
All three of these must be present for the animal’s keeper to be liable under the Act. The court considered that it was clear that an accident involving a horse rearing is likely to be severe and that in certain circumstances horses are likely to rear if not restrained. The court accepted that in certain circumstances horses are likely to act unpredictably and that the owners, as experienced keepers of horses, would know this. Accordingly, the court found the owners liable.
The owners appealed. In the Court of Appeal the case turned on whether the behaviour of the horse was ‘normal’. The Court held that normal means ‘conforming to type’ and that rearing is natural behaviour for horses in certain circumstances. The owners’ appeal was therefore rejected.
“The implications of this case for animal owners are potentially far-reaching,” says Karen Eves. “If the likely result of an accident is severe and it occurs because of the normal behaviour of the unrestrained animal in particular circumstances, then the owner is likely to be found liable, even if the behaviour of the animal is unusual.”
At present, the practical solution to the problem this raises for animal owners is probably to be found in their insurance policies, which should be read carefully. MP Stephen Crabb is proposing changes to the Animals Act which would mean that strict, non-fault based liability would only be applied to genuinely dangerous animals and that an owner’s liability for damage caused by a non-dangerous animal would be limited to cases of fault via common law negligence claims or under health and safety legislation. The Government is reported to be sympathetic to a change in the law.
Broken Homes – Split Houses
A recent House of Lords case has emphasised that when there is a break-up of a relationship and there is joint legal ownership of the house, the division of the value of the house will depend on what the couple’s intentions were. All of the relevant circumstances need to be taken into account. In the case in point, the fact that the couple maintained separate financial arrangements was germane to the decision.
But what is the case when the owners of the house are not a couple, for example where the property is owned jointly between family members of different generations? In one such case, a woman died and the property she lived in was owned jointly by her and her son. There had been no declaration of what proportion of the house each owned. Each had contributed equally to the household expenses and mortgage until the mother and son had quarrelled, at which time he moved out and the mother then met all of the mortgage payments herself. The son claimed a beneficial interest in the property and this was contested by the woman’s other beneficiaries.
The judge hearing the case considered that the purpose of buying the property was to provide a home for the mother, who could not obtain a mortgage on her own. Mother and son had kept their finances separate and the solicitor who acted for them on the purchase considered that there was no intention that the property should be beneficially jointly owned. Furthermore, the judge considered that the mother would not have wished to deprive her other children of a share in her property.
The court therefore ruled that the son had no beneficial interest in the property.
In another case, a divorced couple bought a property with a view to being reconciled. The property was put into the husband’s sole name. When the relationship failed again, he left and his ex-wife remained living in the house. The court ruled that because the husband had given his ex-wife assurances that she could remain in the property as long as she wished, it could not be sold by her ex-husband without her consent.
Says Nessie Orosco-Yousaf , “Houses are usually the major asset of a family. It is therefore advisable to make sure that any details regarding the ownership of, and people’s rights to, the family home are put down clearly in proper form when the property is acquired. This may save a great deal of expensive argument later.”
Child Custody – Expert Evidence Crucial
A judge who in her verdict in a child care case failed to give adequate reasons for departing from the clear evidence of experts recently found her decision overturned by the Court of Appeal.
The case dealt with the residency arrangements for four children whose parents were getting divorced. The mother of the children had a long history of addiction to amphetamines. At the custody hearing, evidence was given to the court that she had tested negative for use of amphetamines at the time of the hearing, but there was evidence of earlier use. The mother claimed that she had ceased to use drugs altogether.
A psychologist, a psychiatrist and a social worker submitted reports suggesting that a residence order should be made giving custody of the children to their father.
Surprisingly, the judge ordered that the children should reside with their mother on weekdays during the school term-time. The father appealed against the decision.
The Court of Appeal was of the view that the judge had placed a disproportionate amount of weight on the mother’s evidence and had not given a good reason for taking a decision which differed so sharply from the opinion of the experts. The Court ruled that the residence arrangements should be referred back to another judge to determine.
Says Alison Whistler, “It is not often that judges ignore clear expert evidence in such cases and, when they do, it is incumbent on them to give sufficient reasons for so doing. It is very important to use an expert who is good at presenting evidence clearly. We ensure that clients relying on experts for evidence use those who are well-qualified and experienced.”
Family Gifts Part of Marital Assets
When couples divorce, their assets can be considered to arise from two sources. There are the assets created during the marriage, which are called ‘marital assets’, and those which are brought into the marriage by the spouses individually, termed ‘non-marital assets’.
The normal assumption is that marital assets will be divided more or less equally, but that assumption does not hold as regards the non-marital assets. Needless to say, there is often a dispute over whether assets are marital or non-marital.
Recently, a man appealed against an order which ‘ring-fenced’ assets that had been given to his ex-wife by her family. These were regarded by the judge as non-marital assets and, as such, not to be divided equally between the couple. The assets had been held in the wife’s sole name. She had not worked for many years in order to look after the couple’s two children, who are now adults.
The husband had continued to work and had acquired various assets. His wife had received £70,000 from her father and a further £12,000 from an inheritance. She had used this money to reduce the mortgage on the couple’s property. She also owned a 50 per cent share in her parents’ home and had been given an investment bond worth in excess of £114,000. Her ex-husband believed that she would inherit the bulk of her parents’ estate, said to be worth more than £1m.
At the end of their marriage, the husband was retired. He was earning about £5,000 per annum and also had a pension. His wife was working at a school, which gave her free board as well as a wage of £1,000 per month. The judge ruled that the couple’s assets, which now included two houses, should be divided equally, except for the bond and the share in her parents’ home, both of which were reserved for the wife.
The husband argued on appeal that this was unfair. He claimed he had introduced assets at the start of the marriage and had made the major contribution to the creation of the assets of the marriage. He also claimed that the judge had failed to take proper account of his wife’s expectations with regard to her parents’ fortune. The Court of Appeal accepted these arguments in part.
On the question of the expected inheritance, the Court could not agree that the husband had suffered any loss that needed to be compensated for, especially as his ex-wife’s parents were free to direct their estates in whatever way they thought best. However, the Court agreed that ring-fencing the wife’s other assets was unjustified.
Hearing Loss Damages of £3,500
A factory worker whose hearing was damaged because of exposure to noisy machinery has been awarded £3,500 in compensation.
Stuart Capell, 61, worked for Alcoa Extruded Products (UK) Ltd. as an extrusion operative from 1974 to 2005. During this time he was exposed to excessive noise from presses and surrounding machinery. His employers did not offer him any hearing protection until the mid-1980s.
Mr Capell realised his hearing had been affected after he had a medical in 2005. He was diagnosed with noise induced hearing loss which is a permanent condition.
Whilst the law on controlling noise levels at work was tightened up when the Control of Noise at Work Regulations 2005 were introduced in April 2006, employers have been required to protect workers from damage to their hearing for decades.
Research suggests that as many as 170,000 people in the UK have suffered deafness, tinnitus or other ear conditions as a result of exposure to excessive noise at work.
Meanwhile, the Health and Safety Executive estimates that more than a million workers are exposed to potentially damaging levels of noise at work.
Not only can prolonged exposure to excessive noise cause hearing damage but it is also a safety hazard. A noisy environment can hamper communication as well as cause psychological stress to workers.
The Control of Noise at Work Regulations 2005 place a number of duties on employers. These include implementing noise prevention measures as well as providing workers with ear protection.
If you have suffered damage to your hearing as a result of exposure to high noise levels at work, you could be entitled to compensation. Contact John Lennon to discuss your claim.
House Owner Pays Price for Contract Failure
Failure to make contractual terms clear is a sure recipe for trouble and in construction contracts, where the sums of money involved can be substantial, getting the contract terms agreed up front is always sensible.
In a recent case, a woman arranged with a property developer that the developer should carry out refurbishment work on her property. The development of the property was to proceed in three stages and it was agreed that the developer would start the first phase as soon as the necessary planning permission and building control permission were obtained.
The woman made up-front payments to cover professional fees and to fund the commencement of the works. Unsatisfied with the subsequent progress, she demanded an account of how the money had been spent and decided that now was the time to have a formal contract. She refused to make further payments until a schedule of payments based on progress achieved was agreed. The developer refused to continue without further progress payments. He sent a solicitor’s letter to the woman demanding payment of the sums due.
Each side accused the other of repudiating the original contract and eventually the dispute ended up in court.
The court had to decide the following issues:
- Was there a binding contract or contracts?
- If there was a binding contract or contracts, what were the contractual terms?
- If there was a binding contract or contracts, was either party to the dispute in breach of the contract(s)? and
- If there was a breach of contract, what damages resulted?
The court concluded that the woman had entered into two separate contracts with the developer. The first was with regard to the first phase of the works. She had repudiated this contract when she regarded the developer’s breach of the contract as a repudiation of it. Her response had not been the correct one. She had herself created a repudiatory breach of contract by failing to pay the second instalments due under the contracts. The developer was therefore entitled to damages for the profits he would have made had the contracts been completed and paid for as agreed.
This case shows how what may seem to be a reasonable reaction – in this case declining to make payments when a development falls behind schedule – can lead to difficulties. In this case, the problem was compounded by the woman’s response to the solicitor’s letter sent on behalf of the developer. Had the original contract contained a clause which linked payments to the meeting of specific targets, then each side would have known where it stood and the dispute could probably have been avoided.
The time to get a contract right is at the beginning. We can help you negotiate a building contract that ensures your interests are protected. Contact John Lennon for advice.
Lover Awarded £1m from Estate
The long-term lover of a man who had promised to marry her but died before they could wed has received more than £1m from his £3m estate.
Multimillionaire Henry Bahouse and former dental nurse Cyd Negus had a ‘flamboyant lifestyle’ before he committed suicide in 2005. His will made no provision for 50-year-old Ms Negus, who therefore claimed for financial provision to be made for her from his estate.
Mr Bahouse’s family contested the claim, arguing that Ms Negus had already received the proceeds of a life assurance policy, taken out by Mr Bahouse for her benefit, and a half share in a Spanish property. Together, these were worth in excess of £600,000. According to Ms Negus, she and Mr Bahouse were intending to get married and even hoped to start a family.
According to Mr Bahouse’s family, the couple were on the verge of breaking up and Mr Bahouse had no intention of marrying Ms Negus.
In the view of Deputy High Court Judge Roger Kaye QC, Ms Negus had become a housewife ‘in all but name’ and had a reasonable basis for believing that her future financial needs would be met by Mr Bahouse. There had been no diminution in the couple’s love for one another. He awarded Ms Negus the ownership of the flat she had shared with Mr Bahouse (valued at approximately £400,000) and a lump sum of £240,000. The balance of the estate, worth about £2m, went to Mr Bahouse’s family – mainly to his son Gordon. The court action cost the Bahouse family approximately £100,000 in legal costs.
Says Michael Cutler, “If a person has been supported financially by another, under some circumstances a claim can be made on the estate after the death of the person providing the financial support. In such cases, the court, not the will of the deceased, determines how the estate is to be divided. If you have been financially reliant on another person who has died and have not been made a beneficiary under their will, you may be entitled to make a claim on the estate. Contact us for advice.”
Reduced Earning Capacity in Marriage Warrants Compensation
A recent case, in which a man’s ex-wife sought an increase in the financial provision originally made for her following their 1988 divorce, has raised an interesting issue regarding the calculation of the division of the financial spoils on the break-up of a marriage.
Although there were a number of issues raised, there were two points of primary interest. The first was that in the original settlement, even though the couple had been married for 24 years, the woman was awarded only 26 per cent of the capital of the marriage. She was, however, awarded 35 per cent of her husband’s income at that time.
Subsequent to their divorce, the woman’s ex-husband was able to increase greatly the value of his assets, becoming a multimillionaire. She had found a job after their divorce, but her argument that she should have an increase in her financial settlement was based not only on her increased financial need (by the time the case was brought, her only income was a pension of approximately £15,000 per year), but on the basis that she should be compensated for her reduced earning capacity during the marriage because she had not worked whilst bringing up their children.
The court accepted this line of reasoning and awarded her a six-figure settlement.