08 Apr Company legal updates – by HHBA Member Caroline Buchan
Some legal headliners
There are lots of topics that might be relevant to a business right now and I’ve tried to pick the most pertinent ones. If there’s anything you want to know more about please drop me a line. I’ve deliberately not focussed on employment law matters as there is already lots of material out there from other members and I don’t want to overwhelm everyone!
Online Board meetings
- Use suitable technology like Zoom so you can see who is attending and if they want to ask a question.
- Know who’s attending – Make sure you know who’s expected to attend the meeting and who has sent apologies so you can ensure there’ll be a quorum. If all or some attendees are joining by telephone, take a register. You’ll also need to pay attention to anyone who leaves the meeting or drops off the call early to note this in the minutes and be sure a quorum is still present.
- The chair should ask directors to share any comments on the previous minutes or updates on action items that aren’t covered elsewhere on the agenda before or after the meeting. Directors should be able to do this either by email
- Ask whoever is chairing to get people’s comments and questions in turn to avoid people speaking over each other. If it’s a telephone meeting ask the chair to get everyone to say their name before they make their comment so that you know whose speaking. If you can’t hear what someone is saying, don’t be afraid to interrupt and ask them to speak more loudly or repeat what they said. If you can’t hear them, the chances are other attendees can’t either and they could be making an important point.
- Ask the chair to summarise the key points and any actions after each item before moving on to the next.
Take good minutes
For boards and their committees, minutes aren’t just a useful reminder of what was discussed and agreed – they’re a legal requirement. Board minutes need to demonstrate that directors have fulfilled their legal and fiduciary duties and can be used both defensively and offensively in any court proceedings. With organisations likely to be making difficult and unprecedented decisions in the current environment that could have long-term implications for the company and wider society, it’s perhaps more important than ever that board minutes accurately evidence that the directors carefully considered the impact on all the stakeholder groups set out in Section 172 of the Companies Act 2006 in their decision making.
AGMs and general meetings
Those companies required by law to hold Annual General Meetings (AGMs – which can be where accounts are approved) will temporarily be extended greater flexibilities, including holding AGMs online or postponing meetings (this measure follows the announcement granting companies affected by COVID-19 an automatic 3-month extension to file accounts following a fast-track online service – see below).
Hybrid meetings and fully virtual online meetings will usually be valid where there are no restrictions under the Company’s Articles. You may need to review and revise your Articles of Association to allow for hybrid and/or fully virtual meetings. Updated Articles should be approved by special resolution of the members (possibly using a written resolution at this time) and filed at Companies House.
It is imperative that shareholder rights are not eroded by not being able to attend physical meetings. The chair must therefore be satisfied that adequate facilities are available throughout the meeting to ensure that members attending the meeting by all means (including the means of an electronic facility or facilities) are able to:
(a) participate in the business for which the meeting has been convened;
(b) hear all persons who speak at the meeting; and
(c) be heard by all other persons attending and participating in the meeting.
Take advice on your contracts. Can anything be done to suspend performance for a period of time in order to allow the market to return to normal? If not, can the contract be terminated entirely? Many contracts will contain wide force majeure provisions or business continuity / disaster recovery obligations. Force majeure will only excuse non-performance of a contract if the contract contains a force majeure clause. It is not a free-standing common law concept and will not otherwise be implied into a contract.
Whether to trigger these and the proper way to do so requires careful advice. There is no one-size-fits-all analysis. All will turn on the specific terms of the force majeure clause, the effects of the relevant event on contractual performance, and whether there are alternative means of performance.
In the current context, key language to look for would be references to “epidemics,” “pandemics”, “infectious diseases,” “quarantines,” or the catchall phrase of “any event beyond the reasonable control of the parties.” These have characteristics of events outside the parties’ control. Whether the viral outbreak falls within a force majeure clause will turn on the proper construction of the wording of the clause. It is likely to be the knock-on effects of the pandemic which will be in issue, which gives rise to questions of causation, for example, the Lockdown, “quarantine”, “embargo” or “government action”.
The party must prove the following:
- The occurrence of an event identified in the clause;
- It has been prevented or hindered (as the case may be) from performing the contract by reason of that event; – it will be more difficult to show that an event has “prevented” performance compared to a material “delay”;
- Its non-performance was due to circumstances beyond its control; and
- There were no reasonable steps that could have been taken to mitigate the event or its consequences. Businesses relying on force majeure should also ensure that they comply with any notice or mitigation provisions – i.e. working around the problem.
It is necessary to show that performance of the contract is physically or legally impossibility and not merely that performance have become more difficult or unprofitable. If performance is not possible by any alternative means after the original or intended means for performance becomes impossible, that is a classic force majeure case
Claiming force majeure or frustration is a serious step, and may put an end to otherwise successful long-term partnerships. Given that COVID-19 is a global issue, it is likely that business partners, customers and competitors are facing similar issues. If parties wish to continue working together in the future, it may be that a collaborative rather than confrontational approach is preferable.
Where you consider that a contracting partner is about to breach their contract in some way, take preventative action. While the courts are operating a much reduced service at the moment, urgent court applications are still possible and if you need to obtain interim orders to prevent financial harm being caused to you or your business it is important to act quickly and decisively.
Complying with legal notice clauses at this time may be difficult. Review the relevant clause and, if necessary, seek agreement to modify it to permit notice to be sent electronically. Timing is also crucial. Some clauses require notice to be sent immediately and a delay in notifying your counterparty of force majeure may invalidate your attempt to rely on it. Clauses may also require evidence of the force majeure event to be included in the notice.
In the absence of a force majeure clause, the doctrine of “frustration” may be available. This applies if an event, for which neither party is culpable, occurs. The event must make it impossible (commercially or physically) for a party to fulfil a fundamental obligation of the contract. Alternatively, it must radically transform the obligation. Where frustration does apply, the contract is void, meaning neither party has to comply with future obligations. However, the standard for establishing frustration is high.
If the breakdown in your contractual relationship is caused by a breach of contract by the other contracting party then you may have a damages claim against them. In order to preserve that claim for when the courts re-open for all business, make sure to properly terminate the relationship. Remember that proving any case involves persuading the court that you are right on the basis of evidence. Correspondence with the party in breach needs to be carefully drafted so that there is a documentary record. Keep a careful record of events.
Future-proof new contracts
New contracts face particular challenges in this pressing crisis. A careful review of the force majeure provisions should be contemplated for any new contract. Reliance on the last version of a contract or standard terms may not provide sufficient protection in the future.
Electronically signed contracts
Electronically signing simple contracts is an acceptable practice under English law. The signing of “deeds” is more complicated but still possible if certain requirements are met. The principle issue with deeds is the requirement for a witness to be present. The prevailing view is that the witness must be physically present at the time of signing. Therefore deeds should not be executed via remote “witnessing” (for instance via FaceTime, Zoom or Skype). Certain documents always require a wet-ink signature, including documents that require registration at H.M. Land Registry and documents upon which stamp duty is payable.
Consider whether documents really need to be executed as a deed or can be signed as a simple contract. An agreement that is supported by consideration can be signed electronically as a simple contract, meaning that a witness is not required.
Business interruption policies
A key step to take before making any decision on contract termination is to consult with insurers about the impact force majeure or frustration may have on any business interruption policies.
Most insurers have waived unoccupancy terms for three months. Not all insurers and you would need to check with your own insurer/broker. Avoid changing insurers at this time as the new company will not be so generous. Indeed an increasing number are not accepting new business. If you move to a new insurer then you won’t even get the current thirty days as you would have to declare the position when you take out the new policy.
This link may also be of use: https://www.uckfieldchamber.co.uk/2020/04/06/what-does-your-insurance-policy-say-re-covid19/
Wrongful trading, Insolvency and director’s duties
At the time of writing the UK government has announced the suspension of wrongful trading rules. This means that businesses which are unable to meet debts due to the impact of coronavirus may potentially be able to avoid being forced to file for voluntary liquidation or bankruptcy.
It is usually an offence for a company director to continue to trade if they have no reasonable belief that the business will be able to avoid insolvent liquidation. Where wrongful trading is found to be the case, the liquidator can potentially pursue the directors personally for the debts of the business when it fails.
Suspending the regulation will allow directors of companies to continue to trade (paying staff and suppliers etc.) even if the business could become insolvent and not be found at fault of wrongfully trading companies when they ought to have realised that there was no prospect of avoiding insolvency. This means that directors should not be personally liable.
The legislation will apply retrospectively from the beginning of March. All other checks and balances that help to ensure directors fulfil their duties properly will remain in force. The more serious offence of fraudulent trading and other offences under the Insolvency Act 1986 appear to remain in force as do your director’s legal duties.
Given that lending below £250K ought to be made available by banks without the need for directors’ guarantees or security, taking on more debt now and restructuring that debt after the crisis has ended could be preferable to closing down, which brings with it the risk of directors guarantees being called up or, if you are a tenant, dilapidations liabilities.
Not all insolvency options mean the end of your business. Speaking to insolvency practitioners at an early stage can allow your business to continue. The administration procedure is business rescue. If your business goes into administration it gets offering almost complete protection from creditors as a result of a statutory moratorium allowing it, where possible, to trade through this difficult period and come out the other side.
Cybersecurity and Data Protection
During this time, all the more ‘traditional’ risks are likely to be magnified. Employees are working at home, possibly having shifted larger than normal amounts of confidential documents from the office to home, may also be surrounded by others.
This is vital at a time when many businesses have had to let their employees work from home. There will be a number of members who can advise. This is a starter from the ICO for information: https://ico.org.uk/media/for-organisations/documents/2617548/ico-data-security-guide-to-the-basics.pdf
- Use of personal devices – what IT security is in place to take into account remote working on a large scale and for a prolonged period.
- Use of third party technologies – review employee use
- Consider whether a data protection impact assessment is required.
- Update Company policies on remote working if needed – remind employees to be alert to security issues and of best practices and expectations to ensure secure working from home.
Nothing has changed with respect to direct marketing rules. Businesses should be careful not to include marketing information in COVID-19-related communications that it is entitled to send to individuals, e.g. service communications. This could amount to a breach of the ePrivacy rules to the extent any of those individuals have opted-out of receiving direct marketing.
Filing Company Accounts
On 25 March 2020, Companies House announced that businesses are now able to apply for a 3-month extension period to file accounts during the coronavirus pandemic.
Under normal circumstances, companies that file accounts late are issued with an automatic penalty. Under the new measures however, companies are able to apply for a 3-month extension. Those that cite issues due to the coronavirus will have the extension automatically and immediately granted.
To apply to extend your company’s accounts filing deadline, visit the Companies House website. The application should take 15 minutes to complete.
The key points to note when considering applying for an extension are that:
- you must apply for the extension before your normal filing deadline
- companies that have already extended their filing deadline, or shortened their accounting reference period, may not be eligible for an extension;
- if you do not apply for an extension and your accounts are filed late, an automatic penalty will be imposed
- if your extension application is successful, you must file your accounts before the new due date or the company will receive a late filing penalty. Appeals will be treated on a case-by-case basis
Due to coronavirus restrictions, Companies House has suspended all of its same day services. It is now dealing with filing applications on a first come first served basis.
Finally, some bullets to consider for planning for when we come out the other side – hopefully into a braver new world:
- Acknowledge the challenge
- Who are you serving?
- How would you behave if you were the best in the world at what you do?
- Consider your reputation – is how you’re behaving at this time a reputational benefit or risk?
- Build trust with clients and customers – provide consistent quality content that adds value – be a supportive presence
- Review your strategy – this can simply mean your approach to building something, not necessarily the tactic itself
- Innovate – consider other marketplaces, get creative and on trend – consider digital products such as online courses and E-books
- Review your Articles and shareholder agreement to reflect recent changes such as online meetings
- Assess vulnerabilities and mitigate risks including working from home risk assessments
- Communicate with your team
- Build stable foundations and structure, good business and accounting practices
- Review standard Ts&Cs and audit your commercial contracts
- Check insurance arrangements
- Check whether payments being made for supplies are vatable
- Inform HMRC and any other relevant governmental or regulatory body of office closures
- Carry out a review of board effectiveness
8th April 2020
The Board Support
At the Chambers of Miss C Buchan
Tel: 01444 482222