Present

The Risks of Gifts

This is the next in my series of blogs for the Directors Friend.

SUMMARY:

In respect of a risk under Section 238 of The Insolvency Act 1986 (the “Act”) a director must be very mindful where they are transferring company monies to themselves without good reason and / or supporting accounting records. In the following case, the directors had to personally repay significant sums that they were found to have gifted to themselves.

BACKGROUND:

In a recent case (Nicholson and Anor v Sukhjit Ghuman and Others [2016] EWHC 3509 (Ch)) HHJ Barker QC heard the Applicant Joint Liquidators only in a case. The Respondents did not attend.

This was a case that sought to make the first and second Respondents liable for their actions as directors of a company. The claims (amongst others) brought included for undocumented payments to one of the Respondents in the sum of £174,000 and undocumented payments to the other Respondent in the sum of £38,000.

The claims were claimed as transactions at an undervalue. The claims were also claimed as preferences, breaches of duty as directors by way of section 212 of the Act as misfeasance and the claim for £174,000 was also pleaded as an unlawful distribution.

THE LAW:

The Judge did not consider it necessary to have regard to the Applicants secondary cases. I can actually do little better than to set out what the Judge succinctly said at paragraphs 12 to 14 (inclusive):

  • Transactions at an undervalue are addressed in section 238 of the Act.
  • It is a precondition that the company should have entered into administration or gone into liquidation, and the claim is made at the suit of the office holder
  • The issue is whether, at a relevant time, the company gave away or disposed of assets (including money) for no consideration or for significantly less valuable consideration.
  • A relevant time is two years before the onset of insolvency.
  • In this case, it is not necessary to ascertain the precise date for the onset of insolvency because a winding up order was made in July 2010, and no transaction at an undervalue is alleged to have occurred before 2009.
  • Section 238(5) of the Act provides that:

The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied—

(a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and

(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.

  • Section 240(2) adds a further condition, namely that at the time of entering the transaction at an undervalue the company should either be unable to pay its debts as they fall due or should become unable so to do in consequence of the transaction.
  • This insolvency condition is presumed where the recipient, or other transacting party, is connected with the company. So, the evidential burden is on that party, here Mr. and Mrs. Ghuman, to demonstrate that company's solvency.

THE JUDGE’S FINDINGS:

The Judge had no hesitation in finding that the Respondents were directors of the company at all material times.

As to evidence of insolvency the Judge was mindful of the evidenced increasing debt to H M Revenue & Customs (‘HMRC’) owed by the company. The Judge found that HMRC was used as a source of funds or working capital. The Judge found that that pointed to an inability to pay debts as they fell due. That was especially so when there was no evidence that the company had made any provision to pay PAYE or NIC.

The Judge found that on the evidence that there was no documentation at all in the company books and records to explain the payments. Absent clear independent or documentary corroborating evidence the Judge was unable to make a finding that the payments were remuneration as asserted by one of the directors.

The Judge concluded that the payments were gifts and consequently transactions at an undervalue.

COMMENTS:

The well-advised director will note the number of different ways in which a claim against them is likely to be pleaded. This maximises the opportunity of the office holder to succeed on one or other of the heads of claim and for an adverse costs order to follow against the director.

Insolvency is typically (as in this case) evidenced by reference (amongst other indicators) to the (increasing) debt to HMRC.

In addition, the case shows that absent documentation or evidence to the contrary that personal liability for transactions at an undervalue is likely to follow with the additional adverse costs consequences.

WHAT TO DO NOW:

If you are faced with worrying insolvency issues with your company, a claim for transactions at under value and/ or other worrying claims for personal liability please talk to me today.  That is in order to protect your position without delay.  The earlier that you speak with me on +44 (0) 1992 558411 the more that I can help.

I am a Hertfordshire / London based solicitor and a full member of the Insolvency Lawyers Association (‘ILA’). Membership of the ILA is a public mark from insolvency peers that a member has the requisite knowledge, skill and experience to advise you.

Until the next time...

THE DIRECTORS FRIEND


The Power of Trade Marks for Your Small Business – A David Vs. Goliath Story

In 1999 an SME called Comic Enterprises Ltd (“CEL”) registered a series of trade marks which featured the words “The Glee Club”. They ran and operated entertainment venues under this name with some success, expanding their business and opening venues across the UK. The venues predominantly hosted stand-up comedy but they also featured live and recorded music shows.

In 2009 the Twentieth Century Fox Film Corporation launched their television show in the UK under the name “Glee”. The programme featured a so-called ‘Glee Club’ in an American High School. The show was successful in the UK and became very well known, particularly due to the music it featured, which included covers of popular songs. CEL noticed that the success of the show was causing significant confusion in that members of the public began to believe that their clubs were associated with the TV show, which had a negative effect on their target market. They began trade mark infringement and passing off proceedings against Fox in September 2011. They were successful in their claim for trade mark infringement and substantial remedies were awarded, a decision which was recently upheld in the Court of Appeal.

An important point for SMEs to note is that whilst CEL were successful in their claim for trade mark infringement, their claim for passing off failed on the basis that there was no actionable misrepresentation. Therefore if CEL had failed to register their trade mark the result would have been completely different.

This case highlights the increasing importance of intellectual property protection for SMEs. If your brand is vital to your future success then it is essential that you put in place adequate protection before infringement occurs and that you take action promptly when it does.

If you have any queries or would like to discuss any of the issues raised in more detail then please do contact Donna Bromyard, a Solicitor in our Business Services Team on 01992 558411 or email donna.bromyard@breezeandwyles.co.uk

 


Safeguarding design is a priority for smaller business

Cheaper registration fees are an opportunity for small businesses and designers to secure greater protection for their intellectual property in future, as well as being a route to protection in the UK post-Brexit.

registered design is one of the options available from the Intellectual Property Office, alongside trade marking, patenting and copyright.

It protects the visual appearance of a product including the shape, texture, materials, colour and pattern and gives the right to prevent others from using the design for up to 25 years through a renewal process every five years.  And since the Intellectual Property Act was introduced two years ago, it has been a criminal offence to copy a registered design intentionally.

The reduction in fees for registered designs sees the cost of a single online application cut by £10 to £50, with bigger savings for multiple applications. An application containing 2-10 designs will cost £70, and each extra block of up to 10 designs an additional £20.  The savings are huge for multiple design registrations: as an example, a batch of 40 designs registered online will cost £130 under the new system, compared to £1620 under the old fee rates.

Commercial Solicitor Donna Bromyard of Hertford town solicitors Breeze & Wyles said:  “This reduction opens the door to much more affordable protection for small businesses seeking to safeguard their business ideas and designs.  They can more easily afford to register different options, such as line drawings, coloured drawings and photographs, which could boost their chances in challenging any copycat competitor.”

She added: “The recent ruling by the Supreme Court, which saw the designer of children’s sit-on suitcase Trunki lose their infringement case against the cheap look-alike Kiddee case, has highlighted the need for a more comprehensive approach to registration of designs”.

The Trunki design was protected with six computer-aided design drawing representations of the exterior of the case from various angles and perspectives. The Supreme Court ruling pointed to the lack of ornamentation on the surface of the Trunki as depicted in the registration, and how this differed from the decoration present on the body of the Kiddee case.

“The Trunki design had been registered under the EU Registered Community Design process, but the outcome of the case translates directly to the UK design registration process,” explained Donna.  “And the lesson is to safeguard your designs with multiple depictions and types of image to give maximum protection.”

The UK process protects designs solely in the UK, so for businesses looking to protect designs in Europe the EU Trade Marks (EUTM) and Registered Community Designs (RCD) will continue to be valid in both the UK and the rest of the EU until Brexit is completed. Post Brexit, UK businesses will still be able to register a Community Design, which will cover all remaining EU Member States, but it will not be valid in the UK.

Also, the government has said it intends to ratify the The Hague System for the International Registration of Industrial Design in a national capacity, to enable continued access for UK designers post Brexit.  This allows registration of up to 100 designs in over 65 territories through one single international application.

Donna added:  “In the run-up to Brexit, it’s important that businesses consider their options for both new or existing design registrations, as to whether they need to protect their design in either the UK and Europe, or in both.”

PMS International Group Plc v Magmatic Limited [2016] UKSC 12 (“Trunki”)

ENDS

Web site content note: 

This is not legal advice; it is intended to provide information of general interest about current legal issues.

References

http://www.legislation.gov.uk/ukpga/2014/18/contents

 https://www.gov.uk/register-a-design

https://www.gov.uk/government/news/good-news-for-designers

https://www.gov.uk/government/news/ip-and-brexit-the-facts

http://www.wipo.int/hague/en/

https://www.supremecourt.uk/cases/docs/uksc-2014-0147-judgment.pdf


Courts move towards higher tariffs on health and safety breaches

Two high profile health and safety court rulings have caught the headlines this month, but the penalties imposed reflect the expected shift towards higher tariffs and businesses need to sit up and take notice say experts.  

First, fashion retailer Hugo Boss UK Limited was fined £1.2 million with costs of nearly £47,000 following a prosecution relating to a fatal incident at one of the brand’s outlets in June 2013, when a small child died after a free-standing mirror fell on him.

Then, Oscar's Wine Bar in South Yorkshire was fined £100,000 and ordered to pay £40,000 in costs after a barman gave a potentially lethal liquid nitrogen cocktail to a teenage girl, resulting in her having her stomach removed.

Under the existing 2010 sentencing guidelines, concerns have been expressed around the inexperience and inconsistency of magistrates and judges leading to fines being imposed that are too low relative to the harm caused, culpability and means.   As a result, following recent consultation, it’s expected that the Sentencing Council will soon publish guidelines that take account of these factors.

Courts would first consider harm and culpability factors so as to categorise the seriousness of the offence. This would be put together with the financial standing of the company, with organisations banded from micro to large, to produce a predicted compensation figure.

Said Brendan O’Brien Company expert with Breeze & Wyles Solicitors Limited: “These are both tragic cases, for which no amount of compensation could replace the loss of life or health, but the level of fine is much higher than generally seen in the past, and it seems that the courts are acting in the spirit and ethos of the expected new guidelines, even though nothing has been published yet.”

He added: “Businesses need to sit up and take notice.  No one wants to be responsible for such accidents, and the best way to avoid that is by making sure that health and safety systems are not just in place, but properly managed and regularly reviewed.  Employees need to have safety at the forefront of their daily activities, and be aware of how it helps to protect both fellow workers and customers.

“If the employee manual and employment contracts aren’t clear, then now is the time to review them. Having really robust health and safety policies, regularly reviewed and properly carried out in practice, will go a long way towards providing a defence against any criminal liability, and may provide a defence or at least mitigation against a negligence claim.”

ENDS

Web site content note: 

This is not legal advice; it is intended to provide information of general interest about current legal issues.

https://www.sentencingcouncil.org.uk/about-us/our-work/health-and-safety-offences-corporate-manslaughter-and-food-safety-and-hygiene-offences/

http://www.sentencingcouncil.org.uk/wp-content/uploads/web__guideline_on_corporate_manslaughter_accessible.pdf

 

https://consult.justice.gov.uk/sentencing-council/health-and-safety-offences-guidelines/supporting_documents/healthandsafetyoffencesconsultationguideline.pdf