November Legal Alert
Case law: Court confirms limited companies can bring discrimination claims in some circumstances
A limited company which was a member of a Limited Liability Partnership (LLP) could bring an age discrimination claim when it was discriminated against by the LLP on grounds of its shareholder/director's age, the court has ruled.
A 62-year old individual was a member of an LLP. He was approaching retirement and, for tax reasons, set up a private limited company which became a member of the LLP in his place.
As a member of the LLP, the limited company agreed to provide the LLP with certain services, and satisfied this requirement by providing the individual to work for it. The company received a sum equal to the individual's former share of the LLP's profits as recompense.
However, there was no legal obligation for the services to be provided through the individual – legally, the company could have provided anyone to carry them out. The individual was neither an employee nor a worker, with no contractual relationship with the LLP.
When the individual reached the age at which he would have been forced to retire had he remained a member of the LLP, the LLP said the limited company should also retire as a member of the LLP, as if it were an individual that had reached that age. The company claimed age discrimination.
The LLP argued that only an individual could bring an age discrimination claim (or, in fact, any other discrimination claim) because such claims are based on 'protected characteristics' – for example, race, gender, disability, religion, etc - and only an individual can have a protected characteristic.
The court disagreed: a corporation can bring a discrimination claim if it suffers a detriment because it is associated with an individual with a protected characteristic, ie the discrimination is linked to an individual's protected characteristic. It is not necessary that the person with the protected characteristic is the same person who suffers the detriment.
- A limited company may bring a discrimination claim where it is discriminated against because it is associated with an individual with a protected characteristic, even if that individual has not suffered the detriment.
Case ref: EAD Solicitors LLP & 7 Ors v Abrams  UKEAT 0054_15_0506
New law: Private landlords in England must ensure smoke and carbon monoxide alarms are installed
Private landlords in England must ensure there are smoke and carbon monoxide alarms in properties let in certain circumstances, under new laws in force from 1 October 2015.
Private landlords, which includes landlords letting property under assured shorthold tenancies, must ensure there is a smoke alarm on every storey, if a room there is used wholly or partly as living accommodation.
They must also ensure there is a carbon monoxide alarm in any room which is used wholly or partly as living accommodation, if it contains a solid fuel appliance.
They (or their agent) must check that each alarm is working at the start of every new tenancy (although this does not include renewals or an existing tenancy, or statutory periodic tenancies that arise automatically because an existing fixed term tenancy has expired).
Various notices must be served on the landlord by the local authority first before they can be punished but, if the landlord fails to comply, there is a potential fine of up to £5,000.
- Private landlords in England should ensure that the necessary smoke and/or carbon monoxide alarms are fitted in their properties if they are required, including properties let under assured shorthold tenancies.
New guidance: Government guidance on zero hour contracts
Employers will welcome a new guide on zero hours contracts from the Department for Business, Innovation and Skills (BIS).
The new guide, Zero hours contracts: guidance for employers, was published on 15 October. It explains what zero hours contracts are, what employment rights apply, and when their use is appropriate and inappropriate.
The guide also discusses alternatives, and gives best practice examples. Finally, it discusses exclusivity clauses, purporting to restrict an employee from working for anyone else while the contract subsists.
Case law: Lower pension benefits for members' surviving civil partners and same-gender spouses are lawful
Trustees and employers will welcome a Court of Appeal ruling that pension schemes can lawfully provide lower pension benefits for surviving civil partners and same-gender spouses of scheme members.
An employee and member of a company pension scheme worked for his employer from 1980 to 2003, during which time he entered into a civil partnership. The pension scheme provided for continued payment of a pension to a member's spouse after the member died, but payments to surviving civil partners were calculated only by reference to the period after civil partnerships were legally recognised, in December 2005. Civil partners therefore received only a very small pension compared to spouses in the same circumstances. The employee claimed direct discrimination.
An Employment Tribunal ruled that it was direct discrimination. It said that direct discrimination was prohibited by EU law, and relevant UK law should therefore be read as if it was compatible with EU law. This meant the scheme should be read as if the December 2005 cut-off did not apply.
The Court of Appeal disagreed and found that it was not possible to ignore the December 2005 cut-off if that went against the 'express legislative intention' of the UK law. The discriminatory treatment of civil partners was therefore lawful as the law is currently.
The 2013 law introducing same-sex marriages included an equivalent December 2005 cut-off for same-sex spouses' pensions.
- Employers should review whether their pension schemes provide equal benefits for civil partners and same-sex spouses and, if not, whether they wish to change them or not.
Case ref: O'Brien v Ministry of Justice, and Walker v Innospec  EWCA Civ 1000
New legislation: Directors with Directors' and Officers' Liability (D&O) insurance should check their cover following new director liabilities
Directors with D&O insurance should check whether it covers their defence costs if their company becomes insolvent - and its liquidators and administrators exercise new powers to sell the right to bring legal claims against them to third parties - following new liabilities for directors.
From 1 October, both liquidators and administrators of insolvent UK companies can transfer ('assign') the right to bring claims for wrongful or fraudulent trading (and certain other claims against directors) to third parties. Such claims will effectively become assets of the insolvent company which the liquidator or administrator can sell – probably to businesses which make a living pursuing such claims – to raise immediate cash for creditors.
D&O liability insurance usually covers the legal costs of successfully defending such claims if brought by a liquidator or administrator. However, they may not protect the director if a claim is sold to a third party who then brings the claim instead.
- Directors with D&O insurance covering their defence costs if they successfully defend claims by a liquidator or administrator should check whether such costs are also covered if they successfully defend a claim brought against them by a third party.
New guidance: Acas publishes four new sets of guidance for employers
Businesses will welcome four new sets of guidance from Acas covering a number of issues that arise in the workplace.
The first guidance, Sexual orientation discrimination: key points for the workplace, clarifies what amounts to discrimination on grounds of sexual orientation, and identifies how and where it is most likely to occur. It deals with issues such as coming out, civil partnership and same-sex marriage in the workplace, and how to handle sexual orientation issues and religion. It gives guidance on how to manage complaints, and deals with confidentiality issues.
The second, Employing young people, gives guidance on the law that applies to employees under 18, including working hours, rest breaks, pay, health and safety and age discrimination.
Acas has also published two guides to help employers with recruitment and induction: Recruiting staff and Starting staff: induction.
Case law: Financial settlements on divorce can be re-opened if one spouse has not made full and accurate financial disclosure
Spouses and civil partners must fully and accurately disclose their financial affairs in divorce or dissolution proceedings or risk settlements being set aside if the information is later found to be incomplete or fraudulent.
Two wives in unrelated divorce proceedings agreed to settlements with their husbands, who they later discovered had deliberately given false or incomplete information about their finances. The ex-wives applied to set the settlements aside.
The Supreme Court heard both applications together and ruled that their respective settlements should be set aside. It sent the cases back to the High Court to reconsider whether the wives' respective settlements should be amended.
- Spouses and civil partners must fully and accurately disclose their financial affairs in divorce or dissolution proceedings or risk any settlements being set aside if the information is later found to be incomplete or fraudulent.
Case law: Sharland v Sharland  UKSC 60
Gohil v Gohil  UKSC 61.
New practice: Directors at greater risk of being prosecuted personally if collective redundancy procedures not followed
Directors and others involved in planning and making collective redundancies should ensure their company complies with its obligation to notify the Department for Business, Innovation and Skills (BIS), or risk being prosecuted personally.
Employers proposing 'collective redundancies' (making 20 or more employees redundant within a 90-day period) are legally required to send a prescribed form to BIS within specified time limits. Failure to do so is an offence by the employer.
However, if the offence has been committed with the consent or connivance of any director, manager, secretary, other similar officer (or anyone else purporting to act in that capacity), or the failure is attributable to their neglect, that individual also commits an offence. On summary conviction, individuals can be fined up to £5,000.
In the past, prosecutions have usually only been brought against employers. However, in two recent cases charges have been brought against individual executive and non-executive directors. It seems that BIS may be taking a tough, new approach, actively targeting directors and other individuals in breach of the law. Note that there are very limited exceptions to the requirement to comply with these obligations.
- Directors and others involved in planning and making collective redundancies should ensure they comply with requirements to notify BIS, or risk being convicted of a criminal offence.
Case law: Sale of company shares in breach of forgotten agreement was valid
Company director, shareholders and buyers of shares should not forget any rights, obligations or encumbrances over those shares before undertaking transactions involving them - otherwise they risk litigation.
A company's articles of association contained a clause giving the directors power to refuse to approve any proposed transfer of shares in the company. At a board meeting the directors were told of a transfer of shares to a third party. No transfer forms were presented for board approval, and there was no formal resolution approving the transfers, but no objection was raised by any of the directors. All the directors appeared to have treated the transfers as a 'done deal', and it was accepted that they had unanimously approved and agreed the transfers, subject to transfer forms being lodged with the company.
Soon after the meeting, one of the directors (also a shareholder) claimed to have come across some old documents. These reminded him that the shareholders had, many years previously, agreed that shares in the company should not be transferred to a new owner unless offered to the other shareholders first – ie the company's shares were subject to 'pre-emption rights' on transfer.
However, none of the directors or shareholders had remembered the pre-emption rights at the time of the board meeting. Indeed, over the years various other transfers of shares had been approved by the board without regard to, and in breach of, the forgotten pre-emption rights.
The director/shareholder who had found the old documents raised the possibility that the transfers were invalid because the pre-emption rights had not been complied with and, at the next board meeting, when transfer forms for the transaction were put before the board for rubber-stamping, the directors purported to refuse to approve the transfers. Their reasons included the fact the shares being transferred had not been offered to the other shareholders first, as required by the previously forgotten agreements.
In the resulting legal action, the director/shareholder argued that the transfers should be unwound as they were in breach of the pre-emption rights. If his argument was successful, this would give him control of the company.
The other side argued that the legal doctrine of estoppel by convention applied. This doctrine says that if parties share a common but mistaken assumption that a particular set of facts applies, one of them cannot then turn round and try to undo actions carried out based on that assumption, if it would be unconscionable for them to do so – they are 'estopped' from doing so.
The director/shareholder said the doctrine of estoppel did not apply, because the directors had not 'wittingly' behaved as if there were no pre-emption rights on transfer, but 'unwittingly' - because they had all forgotten those rights existed.
The Court of Appeal ruled that the director/shareholder was estopped from relying on the pre-emption rights: it was irrelevant that the directors had unwittingly forgotten about the shareholders' agreement. It would also have been irrelevant if the directors had remembered the agreement - but not appreciated its effect, or had not remembered what it said.
The Court also found it relevant that the director/shareholder himself had previously benefited from transfers of shares in breach of the pre-emption rights. It would therefore be unconscionable to allow him to enforce those rights against other shareholders. The company was therefore ordered to register the third party as a shareholder in the company's register of shareholders.
- Company directors, shareholders and buyers of their shares should ensure they are aware of all rights and obligations that exist in respect of the company's shares before any transaction is undertaken.
- Any such rights, etc, should be clearly and unambiguously set out in writing, preferably in the articles of association or formal agreements, so they are less likely to be forgotten, and easier to enforce.
Case ref: Christopher Dixon & EFI Loughton Ltd v Blindley Heath Investments Limited & Others  EWCA Civ 1023
New legislation: Relaxed planning rules on changes from commercial to residential use to be made permanent
Commercial landowners, developers, architects and other property businesses will welcome news that temporary rules removing the need to make planning applications for certain changes of use of premises from business to residential are to be made permanent.
The temporary rules allowed changes from B1 use (business – offices, research and development premises and light industry) to C3 use (dwellinghouses) without the need for planning permission. They were intended to regenerate commercial land, reduce the number of empty commercial properties, bring more domestic properties onto the market and reduce the environmental impact of activity on land.
The rules were to expire in May 2016, but the Government has now said it will make them permanent. However, further changes will be made when the new, permanent rules are introduced, including:
- A three-year time limit, within which such conversions must be completed (including for conversions which have already received approval). There is currently no indication of what 'completed' will mean.
- Allowing demolition of industrial buildings, to be replaced by residential new builds.
No changes are planned to the existing prior approval criteria. However, there are special changes in relation to exemptions, which will affect particular areas such as the City of London and the Central Activities Zone.
A new regime will also be introduced allowing conversion of light industrial buildings and launderettes to new residential homes.
- Commercial landowners, developers and other property professionals should consider whether to resurrect conversion projects currently on hold, due to uncertainty whether the scheme would be extended, and consider new conversions.
Case law: Court clarifies directors' duties on sale of assets before insolvency
Directors of companies who dispose of assets or a business while in financial difficulties should comprehensively review all alternative courses of action, show they honestly believe the course of action they take is in the company's best interests, and take advice where appropriate.
A company was in financial difficulties. The company's director (and majority shareholder) took advice from business advisors who set out three options:
- he could arrange the sale of the company's assets to an associated company;
- the company could go into liquidation and the liquidator could sell the assets as a going concern;
- the company could go into liquidation and the liquidator could sell the assets on the open market.
The advisors recommended a valuation of the company's assets, and a valuer was instructed. The valuer valued the assets on the open market at £24k, and the assets as a going concern at £37k, together with a maximum possible £15k for goodwill - amounting to a total of £52k.
However, the valuation of the goodwill was subject to reservations about the company's business model and its future profitability if sold as a going concern. In the event, the court found that the goodwill was probably worth about £5k. Also, the main assets of the company were stock, much of which was subject to retention of title clauses.
The director transferred virtually all of the company's assets to an associated company of which he was also the majority shareholder and a director. The agreed price was £47k plus VAT of £9.4k. However, payment was deferred.
When the company went into liquidation, the liquidator accepted the sale and agreed a payment schedule for the associated company to make the deferred payments. However, the associated company also went into liquidation, at which point it still owed the original company just over £20k. The liquidator of the company claimed the balance from the director, alleging he was in breach of the following duties and obligations to the company:
- to promote the success of the company;
- to exercise due skill, care and diligence.
The liquidator argued that there had been a breach of these duties because:
- the director had put the interests of the associated company before those of the company when arranging the sale;
- the sale was not for the best price available;
- sale of the assets for a deferred payment was a high-risk move and not in the best interests of the company's creditors;
- the director should have given a personal guarantee for the deferred payments.
The director, however, contended that:
- He had taken professional advice and followed it.
- He had considered whether or not the sale was in the best interests of the company and its creditors and honestly believed it was.
- He had consulted two of the company's major suppliers who had told him they would be prepared to give credit to the associated company if the sale went through. He had therefore taken steps to ensure the associated company could make the deferred payments.
- The sale to the associated company avoided the extra legal costs that the other options would have incurred.
- The director was not obliged to go for the option that attracted the highest sale price. He was entitled to factor in the advisor's advice that sale of the assets as a going concern might not be achieved, so it was a riskier option, and if the liquidator had sold the assets at auction a lower sum would have been realised.
- Payment of the sale price had to be deferred, otherwise the sale could not have gone ahead.
- No one had asked for, or advised that the director give a personal guarantee for the sale price, but he would not have been able to give it in any event as he was already a significant creditor of the company himself, and was himself in financial difficulty. The sale would not therefore have gone ahead if he had been required to give a guarantee.
- The liquidator had accepted the contract after his appointment and agreed a schedule for the deferred payments.
The High Court ruled that the director had acted in what he honestly believed to be the best interests of the company and its creditors, and with due skill, care and diligence.
Whilst it was true that the £47k sale price was less than the valuation as a going concern (£37k plus £15k), it was more than the open market value of the assets (£24k). The director therefore had to decide the chances of achieving a sale of the assets as a going concern. He was entitled to take into account the advisor's reservations about the business model and its ability to sustain profitability, and the costs of the alternative options.
- Directors of companies who dispose of assets or a business while in financial difficulties should ensure they comprehensively review all alternative courses of action, and can show that they honestly believe their chosen course of action is in the company's best interests, and take advice where appropriate.
Case ref: John David Hedger (the Liquidator of Pro4Sport Ltd) v David Adams  EWHC 2540
Case law: Employees protected by TUPE rules on transfer of activities from subsidiary to parent company
Parent companies winding up a subsidiary and integrating the subsidiary's business into its own activities, or transferring an activity from a subsidiary to another group company, should consider whether this amounts to a TUPE transfer. If so, the subsidiary's employees may be protected by the TUPE rules.
A Portuguese airline had a subsidiary operating charter flights which was wound up voluntarily. A number of the subsidiary's employees were made redundant.
Several months later, the parent company took over a number of the subsidiary's contracts with tour operators and started operating charter flights on its subsidiary's old routes using the former subsidiary's planes, office and other equipment, and took on some of its subsidiary's old staff.
A number of the subsidiary's employees who had been made redundant argued that their jobs should have transferred to the parent company under the TUPE rules. These are rules designed to protect employees in certain circumstances - by preserving their jobs and terms and conditions of employment - when a business or undertaking they work for is transferred from an old employer to a new one.
The European Court of Justice (ECJ) agreed with the employees. The test was whether enough elements of the previous economic entity (the subsidiary) had transferred to the parent to allow it to pursue an identical or analogous activity. It found that the parent had taken over the assets necessary to continue the subsidiary's activities and had actually continued those activities. Also, customers had transferred to the parent, and staff had been assigned roles they had carried out for the subsidiary. The test had therefore been satisfied. The ECJ said it was irrelevant that the subsidiary's activities were no longer in a separate organisational structure but had been integrated into the parent's operations.
The same reasoning could have applied if the subsidiary had not been wound up, but its activities simply transferred to another company in the same group.
- Parent companies winding up a subsidiary and integrating its business into its own activities, or transferring an activity from a subsidiary to another group company, should consider whether this amounts to a TUPE transfer, so that the subsidiary's employees are protected by the TUPE rules
Case ref: Ferreira da Silva e Brito and others v Estado portuges, Case C-160/14
Case law: Employees temporarily laid off on change of contractors may be protected by TUPE rules
Businesses taking over a contract for work previously done by another contractor should consider whether it is obliged by the TUPE rules to take over the contractors' staff, including any temporarily laid off, following a legal ruling.
Employees worked for the employer on a construction project which was being completed in phases. They were laid off when a phase was completed, while the employer negotiated the contract for the next phase. When the employer failed to win the contract the employees claimed their jobs should have been transferred to the business that did win it under TUPE rules.
The TUPE rules are designed to protect employees in certain circumstances – by preserving their jobs and terms and conditions of employment - when a business or undertaking they work for is transferred from their current employer to a new one.
One of the circumstances in which TUPE applies is when there is a service provision change - including when a contract is re-assigned to a replacement contractor. However, in order for TUPE to apply on a change of service provision there must, immediately before the transfer, be an 'organised grouping of employees' which 'has as its principal purpose the carrying out of the activities concerned on behalf of the client'. In those circumstances, the employment contracts of the employees assigned to the organised grouping of employees will pass to the transferee.
Here, the employers argued that the employees had not been an organised grouping of employees immediately before the transfer because they were not employees at all at that time – they had been laid off. Therefore TUPE did not apply.
The Employment Appeal Tribunal (EAT) disagreed. It said that a temporary cessation of employment because of holidays, sickness, etc, did not necessarily stop an employee from being part of an organised grouping under the TUPE rules. By analogy, a temporary lay-off to negotiate a new contract should not necessarily stop an employee being part of an organised grouping either.
The EAT remitted the matter back to the Employment Tribunal for further consideration.
- Businesses taking over a contract for work previously done by another contractor should consider whether it is obliged by the TUPE rules to take over the previous contractors' staff, including any who have been temporarily laid off while the old employer tries to negotiate further work from the client.
Case ref: Inex Home Improvements Ltd v Hodgkins & Ors UKEAT/0329/14/JOJ
Case law: Employer should not force disabled employees to undertake roles they are unable to carry out
An employer should not inadvertently force a disabled employee to take on or return to a role it knows they cannot undertake, and should make sure that it proactively helps the employee find alternative posts, following a recent ruling.
A nurse was unable to carry out ward work because of her disability, so her employer relocated her to the Outpatients Department. Her role there ceased to be available and she was instructed to find another post or return to ward-based duties, or the employer would initiate its sickness management procedure - which could result in termination of her employment. She claimed indirect discrimination.
It is indirect discrimination if an employer operates a provision, criterion or practice (PCP) which puts people with a disability (including the employee who is complaining about it) at a substantial disadvantage compared with people who do not have that disability. In that case the employer must make 'reasonable adjustments' for disabled employees to remove the substantial disadvantage. Whether an adjustment is 'reasonable' depends on the circumstances.
However, your PCP will not be unlawful if it is a proportionate means of achieving a legitimate aim. The nurse alleged that the instruction given to her amounted to a PCP which required her to return to a post her employer knew she was unable to undertake.
The Employment Appeal Tribunal agreed, and found she had not been offered a real choice but had effectively been instructed to return to her post - or risk termination of her employment.
It also ruled that the employer had not made reasonable adjustments because it had failed to proactively look for an alternative post for the employee, leaving her to find her own.
- An employer should ensure it does not require a disabled employee to take on or return to a role that it knows they cannot undertake, and that it proactively helps the employee find alternative posts.
Case ref: Wolfe v North Middlesex University Hospitals NHS Trust UKEAT/0065/14/MC
Case law: Occupiers not liable for injured trespassers, even though injuries foreseeable, because property was properly maintained
Occupiers should carry out regular risk assessments to identify reasonably foreseeable activities on their properties - even unlawful activities such as trespass - and carry out inspections and maintenance to ensure there are no defects that could breach their duties to trespassers.
A group of youngsters had trespassed on a school roof for a long period during a weekend. One boy climbed a fence on the upper roof separating a flat section from a pitched section of roof. He jumped down, choosing to land on a glass skylight which broke. He fell through and was seriously injured, and claimed the Council was liable as an occupier of the premises.
Occupiers' liability law says an occupier can be liable to trespassers if there is 'any risk of their suffering injury on the premises by reason of any danger due to the state of the premises or to things done or omitted to be done on them'.
The High Court ruled it was reasonably foreseeable that youngsters might climb on the roof, and could access the upper roof where the skylights were. It also found that the fence was a natural point for jumping down onto the relevant part of the roof. It also criticised the school's risk assessments and procedures in relation to trespassers.
Generally, however, it found that the state of the roof was satisfactory – it was not of itself a dangerous place. The skylights were not defective, and it was clear from looking at them that they were not meant to be walked on, let alone jumped on. However, the boy had deliberately jumped onto one of the skylights, mistakenly judging that it would hold his weight.
The boy's injuries were therefore the consequence of his own actions. The outcome could have been different if the skylights had not been obvious, or they had been defective in some way.
- Occupiers should carry out regular risk assessments to identify reasonably foreseeable activities on their properties - even unlawful activities such as trespass - and carry out inspections and maintenance to ensure there are no defects that could breach their duties to trespassers.
Case law: Buckett v Staffordshire County Council, Case no 3SO90263
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