In-House Lawyers Update - March 2010

Insolvency

Irish Reel Productions Ltd v Capitol Films Ltd [2010] EWCH 180 (Ch)

In this case, the High Court considered whether the costs of bringing a winding-up petition against a company should be paid as part of the subsequent administration of the company.

The Court held that Irish Reel's costs of bringing the winding-up petition were payable as an administration expense as Rule 2.12(3) of the Insolvency Rules states that: "The costs…of any person whose costs were allowed by the court, are payable as an expense of the administration." The Court concluded that "costs" included the cost of appearing at the hearing of the administration application and the costs of any winding-up petition which is also dismissed.

The decision provides useful clarification on the point which, until now, has had no direct authority.

Litigation

Ayela and another v Newham London Borough Council [2010] EWHC 309

In this case, the Court considered whether a local authority had the right to re-enter leased premises where the Claimants were in arrears of rent.  The Claimants argued that (1) the authority had waived its right to forfeit the lease; and (2) discretionary relief should be granted because their breach of the lease (unpaid rent) had been caused by the authority's defective rent collection and billing system.  

It was decided by the Court that the acts of the authority did not constitute a waiver of the right to forfeit for the arrears of rent and that a tenant is under an obligation to pay rent, whereas a landlord is not under an obligation to make facility to collect it.  The commentary from the judgment clearly confirms that the burden is on the Tenant to make payment and not for the Landlord to collect the rent. As a result the appeal was dismissed.  

Construction

Robinson v PE Jones (Contractors) Ltd  [2010] EWHC 102

In this case, the court considered the issue of whether a contractor owes concurrent tortious and contractual duties of care.

The Court held that although a builder can, in principle, owe concurrent duties in tort and in contract, on the facts of the case, the builder had excluded that tortious duty in its contract and, therefore, the home owner's claim was statute barred and failed.

However, the court stated that had the duty of care in tort not been excluded the claim would not have been statute barred (relying on section 14A of the Limitation Act 1980) because the owner did not have either actual or constructive knowledge of the defect for more than three years before he started proceedings.

This case serves as a reminder that a contractor may still be liable in tort after the contractual limitation period has ended. It also highlights the importance of excluding this liability in the standard contractors' contract.

Employment

Bateman and others v Asda Stores Ltd UKEAT/0221/09

In this case, the EAT upheld a tribunal decision that Asda was entitled to rely upon a statement in its employee handbook, reserving the right to vary contractual terms in order to introduce new pay terms, without the need to obtain affected employees' express consent.

Although Asda did consult with affected employees prior to introducing the change, the EAT's decision was that it could have imposed the change without consultation. However, unless it had consulted, it would perhaps have been difficult for Asda to make the changes without damaging its relationship of mutual trust and confidence with its employees.

The decision may have been decided differently if Asda had chosen to introduce a more radical change, to the employees' detriment.  The outcome of the case may have also been different if the employees had run "trust and confidence" arguments at tribunal level.

The decision is, however, a useful one for employers wishing to make changes to working practices to reflect the changing needs of their business. It seems that, providing the wording of a variation clause is clear and unambiguous and the employer ensures that there is no breach of trust and confidence, an employment contract may be varied without an employee's consent, even if there is a resultant financial loss to the employee.

FOCUS ON…Corporate

Change to definition of Subsidiary and Holding Company

In the case of Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399, the Court of Appeal held that a company no longer fell within the definition of 'subsidiary' under the 1985 and 2006 Companies Acts because its parent had granted a legal mortgage and the bank was now entered in the register of members as the registered holder of the shares (even though the parent still had voting rights and it was only done for the purpose of security).  The company was no longer a 'subsidiary' and could therefore not rely on the benefit of an indemnity clause in a contract between its parent and a third party.

Why is this a problem?

This decision does not affect parent-subsidiary relationships that exist by virtue of the parent holding the majority of the voting rights in the subsidiary.  It is also uncommon for a bank to become the registered holder of shares (as in Enviroco) because transfer of equitable title, rather than legal title, is more common.  However, there are wider implications - especially where a company ceases to be a 'subsidiary' because the shares are entered in the register of members in the name of a nominee.  If the 'parent' is no longer the registered member, the results could include:

• a change of control provision being triggered;
• an indemnity in a contract that purported to protect the group companies not being effective;
• a right to assign to subsidiary companies not being effective; and
• certain approvals or prohibitions involving subsidiaries in the Companies Act no longer applying.  An example of this would be approval for a substantial property transaction or loan to a director will not be needed if the company is no longer a subsidiary.

The effect may also be the same (i.e. the company will no longer be a 'subsidiary') in banking scenarios where (1) the bank perfects its security and meets the requirement of a legal mortgage (which may happen on enforcement or following event of default triggers); or (2) security documents grant or reserve the mortgagee bank the right to control the majority of the voting rights or to appoint or remove a majority of the board of directors of a relevant subsidiary.
 
Comment

It is important to consider the implications of this judgment where the parties intend a subsidiary to be a subsidiary even if the registered holder is a nominee or security holder. For further information and advice contact please contact a member of our Corporate Team. http://www.ashfords.co.uk

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