European cross-border insolvency: an overview and update

Finance | 01 May 2010

The EC Regulation on Insolvency proceedings does not make particularly easy reading.1 It is a Brussels-made law in the form of a Directive, which took effect in all EU member states (except Denmark, which opted out) on 31 May 2002. Making sense of its provisions involves understanding some slightly unfamiliar concepts, some containing a rather circular logic. That is why there is a rapidly growing body of case law on the key issues. On the positive side, one issue that has been significantly clarified is the meaning of the debtor’s centre of main interests (COMI), the most fundamental concept of the EC Regulation.

Main proceedings

One of the broad objectives of the EC Regulation is to facilitate the interplay of the patchwork of different insolvency laws across the member states of the EU, so as to simplify the process of dealing with cross-border insolvencies. The basic premise of the EC Regulation is that there can only be one set of main proceedings in relation to a debtor (whether an individual or a company). The main proceedings are to be opened in the state where the debtor has its COMI. The EC Regulation allows insolvency proceedings to be instituted in other member states, but these must be secondary or territorial proceedings. Article 4 of the EC Regulation provides that:

‘The law applicable to insolvency proceedings and their effects shall be that of the member state within the territory of which such proceedings are opened.’

This applies to all types of proceedings whether main, secondary or territorial. However, Article 4 is subject to several important carve-outs, contained in Articles 5-15 inclusive.

Article 4(2) clarifies the extent to which the law of the insolvency proceedings is to apply in other member states by listing specific matters in Article 4(2)(a)-(m), including, for example:

  • the assets that form part of the estate;
  • the respective powers of the debtor and the liquidator;
  • the treatment of creditors’ claims;
  • the rules governing the distribution of the proceeds of realisations; and
  • the ranking of claims.

The intention of the EC Regulation is that there will be a single fund out of which all the ordinary unsecured creditors will eventually be paid and that unsecured creditors, wherever they are located in the EU, will be treated on an equal basis.

Secondary and Territorial Proceedings

According to Article 3(3), secondary proceedings can only be opened in another member state after the opening of main proceedings in the member state in which the debtor’s COMI is situated. Secondary proceedings must be winding-up proceedings and can only be commenced if the debtor has an establishment in that other state. The effect of the secondary proceedings is to apply only to the debtor’s assets in that other state. Territorial proceedings are basically secondary proceedings started in a member state in which the debtor has assets, but which is not its COMI and can only be opened prior to the opening of main proceedings (subject to the conditions contained in Article 3(2) and 3(4)). In contrast to secondary proceedings, territorial proceedings can be rehabilitation proceedings, as well as winding-up proceedings.

Exceptions to the application of the law of the state of the proceedings (Articles 5-15)

The rights of certain local creditors are, by the EC Regulation, specifically excluded from the effects of the opening of insolvency proceedings in another member state. These important carve-outs to the application of the law of the state in which the insolvency proceedings are opened are as follows. Article 5 (entitled ‘Third parties’ rights in rem’) provides that the rights of fixed and floating charge holders over both ‘tangible or intangible, moveable or immoveable assets’ will continue to be determined by the law of the member state where the assets are situated, not by the law of the main proceedings. Other carve-outs relate to:

  • creditors’ rights of set-off (Article 6);
  • the rights of suppliers under retention of title (Article 7);
  • contracts relating to ‘immoveable property’ (Article 8);
  • payment systems and financial markets (Article 9);
  • contracts of employment (Article 10); and
  • rights in ships and aircraft registered in public registers (Article 11).

Other carve-outs include:

  • for community patents and trade marks;
  • detrimental acts;
  • protection of third-party purchasers; and
  • Article 15 – the effects of insolvency proceedings on law suits pending.

Judicial clarification of Article 15: law suits pending

The recent Court of Appeal decision in Syska (Elektrim SA) v Vivendi Universal SA [2009] has clarified the effect of the EC Regulation where there are arbitration proceedings in place in another EU member state.

As stated above, the basic rule contained in Article 4 of the EC Regulation provides that the law applicable to insolvency proceedings will be that of the member state where the insolvency proceedings are opened. Article 4.2(f) provides for an exception in the case of lawsuits pending. Article 15 also deals with lawsuits pending and states:

‘The effects of insolvency proceedings on a lawsuit pending concerning an asset or a right of which the debtor has been divested shall be governed solely by the law of the member state in which that lawsuit is pending.’

The meaning and interaction of these two articles and Article 4(2)(e), which provides that the law of the insolvency proceedings shall determine the effects of the proceedings on current contracts, was not clear on the face of the legislation and Syska provides welcome clarification. Syska involved a Polish company called Elektrim that had an agreement with Vivendi Universal SA (Vivendi), under which Vivendi would acquire a Polish mobile telephone company. The agreement contained a clause providing for arbitration in London under English law, in the event of dispute. Vivendi commenced arbitration proceedings in London against Elektrim, claiming damages for breach of the agreement. After the commencement of those proceedings Elektrim was declared bankrupt in Poland. Following its bankruptcy, Elektrim objected to the arbitration proceedings continuing under the English jurisdiction. Unimpressed with that argument, the tribunal made a substantial award in Vivendi’s favour.

Subsequently, the High Court in England upheld the decision of the tribunal that the arbitration was a lawsuit pending within the meaning of Articles 4.2(f) and 15 of the EC Regulation, with the result that English law must be applied to determine the effect of the insolvency proceedings on the arbitration proceedings and whether the arbitration should continue. The Court of Appeal confirmed that the existing arbitration in London was a pending lawsuit within the meaning of Articles 15 and 4.2(f). The Court of Appeal referred to the distinction between, on the one hand, proceedings by way of execution or enforcement and, on the other, lawsuits to establish liability. The Court of Appeal held that in relation to an execution ‘the creditor satisfies their interest directly’, whereas, in the case of lawsuits to establish liability, the creditor ‘obtains a decision on the merits that does no more than allow them to join the body of creditors with an established claim’. The Court of Appeal also held that this principle is not restricted to lawsuits for execution of claims over the debtor’s assets or to proprietary claims only.

Elektrim, the debtor company, had argued at first instance that the arbitration agreement fell within the description ‘current contracts to which the debtor is party’ in Article 4.2(e) and, as such, fell to be governed by the law of the bankruptcy, that is, Polish law. Under the Polish Bankruptcy and Reorganisation Law the agreement would have been brought to an end. Syska therefore provides important clarification of the meaning of the phrase ‘lawsuits pending’ used in Articles 4 and 15. It includes arbitration proceedings existing at the time of commencement of insolvency proceedings in another EU member state and such lawsuits will continue to be subject to the law of the member state in which the suit is pending, as opposed to the law of the state of the insolvency proceedings.


The concept of COMI is central to the EC Regulation. Article 3.1 of the EC Regulation provides:

‘The courts of the member state within the territory of which the centre of a debtor’s main interests is situated shall have jurisdiction to open insolvency proceedings. In the case of a company, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary.’

Following the decision of the European Court of Justice (ECJ) in the well-known Re Eurofood IFSC Ltd [2005], there is a much clearer guide as to what is meant by COMI. In Eurofood the ECJ ruled that:

‘Where a debtor is a subsidiary company whose registered office and that of its parent company are situated in two different member states, the presumption [in Article 3(1)] whereby the centre of main interests of that subsidiary situated in the member state where its registered office is situated can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which location at that registered office is deemed to reflect.’

The judgment also stated that where main insolvency proceedings are opened by a court of a member state:

‘They must be recognised by the courts of other member states, without the latter being able to review the jurisdiction of the court of the opening state.’

This is simply a reiteration of the final sentence of paragraph 22 of the preamble to the EC Regulation.

Recognition of the main proceedings

In the recent MG Probud (Area of Freedom, Security and Justice) [2010] before the ECJ, another company registered in Poland was declared insolvent by a Polish court. Through a branch it had been trading in Germany and the Principal Customs Office of Saarbrucken in Germany seized assets of the company, based on an attachment order made by the local Saarbrucken court after the date of the order opening the Polish insolvency proceedings. The ECJ held that since there were no secondary proceedings in Germany, the German court was not entitled to make an order attaching the debtor company’s assets because under the law of Poland – the law of the main proceedings – no such action was permitted. MG Probud is straight forward and unsurprising, but it provides confirmation of the important principle that the courts of all member states must recognise the validity of the order of a court in another member state opening main proceedings and the primacy of those proceedings in their own jurisdiction.

Why is it important to establish the COMI of a company?

It is important from a restructuring point of view, as well from a formal insolvency point of view, to know where the COMI is. From a restructuring point of view, it is usually advantageous if companies within the same group have their respective COMI in the same jurisdiction. For obvious reasons, both lenders and suppliers will want to make a note of where they think the COMI of their customer is.

In Eurofood the judgment of the ECJ stated that:

‘Where a company carries on its business in the territory of the member state where its registered office is situated, the mere fact that its economic choices are or can be controlled by a parent company in another member state is not enough to rebut the presumption laid down in the Regulation.’

In Re Lennox Holdings plc [2008] Lewison J had to decide the COMI of two Spanish companies that were part of a group with an English holding company. The holding company was listed on the AIM market and supplied food products to expatriates living in Spain. The judge found that the COMI of both the Spanish subsidiaries was in the English jurisdiction and made administration orders in respect of them. The judge considered that the COMI was in England because that is where the strategic, operational and financial management of the company was conducted, where the board met and the accounts were audited by English auditors. Lennox shows that the Eurofood decision does not preclude a finding that the COMI of subsidiary companies can be in the member state from which their parent company directs their business, but presumably that fact must be transparently clear to its creditors, as well as to the judge.

Shifting COMI

In Hellas Telecommunications (Luxembourg) II SCA [2009] the English court (Lewison J) had to decide whether the COMI of the company had been effectively transferred to England to take advantage of the more beneficial laws concerning restructuring. The judge decided that the COMI had moved, based on evidence of the following:

  1. the company’s head office and principal operating address was in London;
  2. it had notified its creditors that it had relocated to England and there had been a press release to that effect;
  3. it had an active bank account in London;
  4. it had registered under the Companies Act 2006 in England;
  5. negotiations between the company and its creditors had taken place in England; and
  6. the company’s senior creditors were prepared to approve a pre-pack sale following an English administration order.

The judge decided the evidence clearly pointed to the COMI being in England, despite the fact the company’s registered office remained in Luxembourg, where it retained a bank account and possibly a liability to pay tax. The judge also stated that there must be ‘clear, objective and ascertainable facts’ to rebut the presumption that a company’s COMI is in the jurisdiction of its registered office, and that the purpose of COMI was to enable creditors to know where the company was located and where they may deal with it. The judge decided that the company’s COMI had to be determined as at the date of the hearing, which was 29 November 2009. Hellas confirms that the English court will recognise the deliberate shift of COMI, from the state where the debtor company is registered, to England, for the purpose of restructuring and to take advantage of English law in the restructuring. Hellas demonstrates that it is not necessary to shift the registered office itself to rebut the presumption contained in Article 3(1) of the EC Regulation that the COMI is the place of the registered office.


  1. 1) Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings.


Technology, Media and Telecoms | 01 May 2010

On 24 March 2010, the Office of Government Commerce (OGC) published guidance (‘Implementing e-tendering’ (the Guidance)) on the implementation of e-tendering as part of the public procurement process. The release of the Guidance comes at a time when, in light of the current economic climate, Alistair Darlings’ spending cut targets in the 2010 Budget and the recent general election, saving money is a priority for the government.

E-tendering is one way in which the public sector can reduce the costs of the procurement process and drive down costs of government suppliers by promoting competition among tenderers. However, the benefits of e-tendering may be limited by European legislation, which aims to promote an open and competitive supply marketplace, but contains strict rules that govern the procedures concerning the award of public contracts.

The release of the Guidance comes in the wake of the Glover Review, which recommended that:

  • the government should issue all tender documentation electronically by 2010;
  • businesses should be permitted to tender electronically for all public sector contracts by 2010; and
  • the whole tendering process should be electronic by 2012.

Further, the use of e-tendering solutions is an enabler of the European i2010 eGovernment Action Plan, which aims to ensure all public administrations across Europe have the capability of carrying out 100% of their procurement electronically (where legally permissible). Member states are committed to this target.

What is e-tendering?

At a basic level, e-tendering solutions provide a platform for suppliers to access invitations to tender (ITT) and other associated tender documents electronically, and allow them to return their completed bid documents securely. Returned tender documents are then automatically released to authorised staff in the procuring organisation, after the closing date for submission.

More complex e-tendering solutions offer the capability to assist in contract notice creation, foster collaborative work in producing ITTs and associated documents, and provide a forum for suppliers and the procuring organisation to request and clarify information. Some platforms host evaluation tools that can assist in the management and control of the tender evaluation and award process, which arguably pushes the boundaries of e-tendering towards a complete e-procurement solution.

benefits of e-tendering

The Guidance advises that procuring public organisations should see several benefits in using e-tendering, which offers advantages over the traditional procurement process, with the ultimate aim of securing value for money from goods and services purchased. Further, in the current economic climate, the advantages of e-tendering for both the public sector and potential suppliers are more pertinent than ever.

Public organisations

Advantages include reductions in:

  • tender cycle times;
  • timescales under public procurement rules;
  • time and cost of distributing tender documents; and
  • time and cost of receipt, recording, and distribution of tender responses.

Improvements will be found in:

  • speed and accuracy of prequalification and evaluation;
  • speed and ease of response to queries from all suppliers during the tendering process;
  • transparency and integrity of audit trail;
  • provision of management information; and
  • storage and archiving of tender documentation.


Advantages include reductions in:

  • tendering costs;
  • time on completing tender responses;
  • overheads on printing, copying, collating and postage services;
  • lead times; and
  • response times for sharing information with the procuring authority.

Such perceived benefits and savings should enable the government to achieve some of the £11bn savings in public spending across Whitehall that was announced in the 2010 Budget.

Public procurement rules

The level of savings may, however, be limited by the rules governing public sector procurement. Directive 2004/18/EC, which outlines the procedures for the award of public sector contracts, has been implemented in England and Wales by the Public Contract Regulations 2006 (the 2006 Regulations), and many public sector contracts will be governed by them.

E-tendering is subject to the same requirements under the 2006 Regulations as procurement activities carried out through traditional paper-based methods (Regulation 44 (1)). The 2006 Regulations require that, if an e-tendering solution is used, tenders submitted electronically must be stored in a way that ensures the integrity of the data is maintained and that the tender can only be accessed after the time limit for the submission of tenders has expired (Regulation 44 (3)). Submission of a tender by e-mail will not conform to the 2006 Regulations unless technical means are implemented to stop those with access to the receiving electronic mailbox from opening tenders before time limits have expired.

The 2006 Regulations also provide that, where a public sector procurer requires bidders to use an e-tendering solution, the equipment used must be non-discriminatory, generally available, and interoperable with information and communication technology products in general use (Regulation 44 (4)). Although the 2006 Regulations provide no definition as to the meaning of ‘generally available’ or information technology ‘in general use’, the Guidance advises that this could be achieved through use of passwords and/or token-protected access to a secure internet site, only requiring the supplier to need internet access from a standard computer.

Contracting authorities are required to ensure that:

  • any e-tendering system will not allow tender material to be accessed before the due date and time;
  • only authorised persons can access the material;
  • any authorised access is detected and recorded; and
  • the opening of tenders requires more than one authorised person (Regulation 44 (5)).

It is these requirements that prevent a public body from merely requesting bidders to submit tenders by e-mail, as most e-mail platforms do not provide these extra tracking and security capabilities. Therefore, when implementing an e-tendering solution, public bodies should be careful to ensure it meets the criteria laid out in the public procurement rules.

The Public Contracts (Amendments) Regulations 2009, which came into force in the England and Wales on 20 December 2009, implement the European Remedies Directive 2007/66/EC by amending the 2006 Regulations in relation to the process for notifying bidders after a procuring authority has decided which supplier should be awarded a contract. The new provisions in the 2009 Regulations, which apply to contract award procedures that commenced after 20 December 2009, state that contracting authorities must issue an award decision notice to tenderers that includes:

  • the award criteria;
  • the reasons for the decisions, including the characteristics and relative advantages of the successful tender;
  • the score obtained by the recipient and the operator to be awarded the contract; and
  • the successful operator’s name.

Public sector authorities will therefore need to consider the requirements of the 2009 Regulations and ensure that an e-tendering solution meets these provisions, so that they are not susceptible to challenges relating to unfair contract awards.


While the advantages of rolling out e-tendering across the public sector in terms of the efficiencies and savings it will enable cannot be underestimated, the public procurement rules will need to be observed, and the additional hurdles could inhibit the adoption and impact of e-tendering solutions.

To comply with the legislation, contracting authorities will have to implement specialised e-tendering platforms and not just maintain an ‘electronic mailbox’. Whether such platforms need to be bespoke or an ‘off-the-shelf’ solution will depend on the requirements of the public body involved.

The Guidance is available on the OGC’s website at

Withholding tax on cross-border transactions: a judicial conundrum

India | 01 May 2010

Internationally, most countries require that those who pay interest, dividends and royalties to foreign recipients must withhold the income tax at the time of payment and must deposit the same amount with the treasury. Similarly, under s195 of the Income Tax Act 1961 (the 1961 Act) the Indian domestic tax laws cast a vicarious obligation to withhold tax on payments to non-residents if the same amount can be charged as tax. The provisions of s195 of the 1961 Act are:

  • the liability to withhold vests at ‘the person’, whether an individual, a company, a partnership firm, the government or a public sector bank;
  • that the payee should be non-resident or a foreign company;
  • that payment should constitute either ‘interest’ or ‘any other sum chargeable to tax’ under the provisions of the 1961 Act (excluding the income chargeable under the title ‘salaries’); and
  • that tax is required to be withheld at the time of credit or payment of the sum to the non-resident, whichever is earlier.

Section 195(2) of the 1961 Act states that when a person responsible for paying a sum, chargeable to tax to a non-resident, considers that the whole of that sum would not constitute income chargeable to tax, they may make an application to the tax officer to determine, by general or special order, the appropriate portion of the sum that is chargeable. Tax shall be deducted only on that proportion of the sum that is chargeable.

Further, to regularise the outward remittances from India and simultaneously ensuring the collection of tax, the payer of income is required to furnish the chartered accountant certificate to the authorised dealer (Circular No 759 dated 18 November 1997, Circular No 9 and 10 of 2002).

The non-compliance of the above mentioned provisions of withholding taxes may attract the following consequences on the payer:

  • levy of simple interest is 1% per month from the date on which the tax was deductible to the date on which the tax is deducted and 1.5% per month from the date on which the tax was deducted to the date on which the tax is paid (s201(1A) of the 1961 Act, as proposed via the Finance Bill 2000);
  • levy of penalty ranging from 0% to 300% of the withholding tax amount; and
  • in case the payer is regarded as an assessee in default then there may be a levy of simple interest at 1% per month for the period of default and a penalty for an amount not exceeding the amount of withholding tax liability.

Considering the rigorous consequences for not complying with the withholding tax provisions, it is imperative that non-residents evaluate the applicability of the provisions depending on the facts of the case.

The first and main source of litigation, in such deals as cross-border transactions, lies in the interpretation of the word ‘any person’, as used in s195 of the 1961 Act. This term casts an obligation on the person making a payment to withhold tax at the time of remittance to a non-resident. It can be argued that the provocation of Indian tax laws cannot have ‘extra-territorial jurisdiction’ to include non-residents (Star v Deputy Commissioner of Income Tax [2006]). The revenue department challenged this interpretation in many cases pending adjudication at various levels at judiciary.

Section 195 of the 1961 Act also uses the words, ‘any other sum chargeable under the provisions of this Act’. In Transmission Corporation of Andhra Pradesh v Commissioner of Income Tax [1999], the Supreme Court made the following observations:

  1. The scheme of s195 and s197 leaves no doubt that the expression ‘any other sum chargeable under the provisions of this Act’ would mean the ‘sum’ on which tax is leviable.
  2. The scheme of withholding tax applies not only to the amount paid that wholly bears ‘income’ character, such as salary and dividends, but also gross sums, the whole of which may not be income.
  3. The withholding tax provisions for the tentative deduction of income tax, subject to regular assessment and the rights of the parties, are not, in any way, adversely affected.
  4. In the event that the payer is not certain to whether the payment constitutes an element of income, they can approach the tax authorities under s195(3) and s197.

Recently, Karnataka High Court in Samsung Electronic Co Ltd [2009] interpreted the dicta of the judgment of Transmission Corporation to rule that the withholding tax provisions are applicable on all payments made to non-residents unless the assessing officer has issued a certificate of lower or nil withholding under s195(2) and s197 of the 1961 Act.

This position seems to have been further exasperated by the withdrawal of Circular No 23 of 1969, which had prevented the Income Tax Department from disputing the issue of withholding tax on the payment that was covered within it.

Additionally, Karnataka High Court, in its earlier verdict in Jindal Power [2009], which dealt with engineering procurement construction contracts, categorically ruled that amounts that are not considered to be income are not subject to withholding tax under s195 of the 1961 Act. Jindal Power was not cited during the hearing of Samsung Electronics and therefore the latter may be construed to have been decided per incuriam.

The Supreme Court staged the judgment of Karnataka High Court via its ad-interim order (dated 18 December 2009) in GE India Technology Centre (P) Ltd v Commissioner of Income Tax [2010].

The decision in Samsung caused jitters among the taxpayers on the issue of demons of withholding tax on payments to non-residents. The taxpayers were finding it difficult to comply with the onerous compliance on all cross-border payments until the Delhi High Court took a constructive approach of s195(2) of the 1961 Act, and the dicta of the apex court in Transmission Corporation and Van Oord.

Recently, the Delhi High Court offered some relief on the issue of payments to non-residents in Van Oord. The Court also expressly dissented from the views of Karnataka High Court on the aspect of the applicability of withholding tax provisions on all sums payable to non-residents.

The Delhi High Court made the following observations:

  • Where an application is made under s195(2) of the 1961 Act and the Revenue determines that the payment is liable to tax in India, the payer will be obliged to withhold tax on this payment.
  • Since the Revenue has refunded the taxes that are withheld by accepting the return filed by the non-resident, the taxpayer will not be obliged to withhold tax in subsequent years.
  • The High Court held that Van Oord India was not liable to withhold tax on the reimbursement of mobilisation and demobilisation charges to VOMAC.

Further, very recently, the Chennai Special Bench of Tribunal in ITO v Prasad Production Ltd [2010] held that if the payer is of the bona fide belief that no part of the payment is chargeable to tax, then the provisions of s195 of the 1961 Act are not applicable. The Tribunal has chosen not to follow the judgment of Karnataka High Court in Samsung.

All eyes are now on the the Supreme Court as it hears the appeals against Samsung and other rulings revolving around the issue of withholding tax on payments to non-residents.

The judicial conundrum has created technical impediments in cross-border transactions. The liability to withhold tax becomes imperative in the negotiation process and the liability to withhold, and the consequences for not complying with the withholding tax provisions, must be evaluated on a case-by-case basis.


With the swelling inflows of foreign exchange and the lure of the Indian market has created, the Indian courts should wipe the dust from the mirror so that the foreign investors can decide their modus operandi while investing in Indian markets.

Changes to the PBS

Human resources | 01 May 2010

On 18 March 2010 the UK Border Agency (UKBA) announced changes to Tier 1 (General), Tier 2 (General) and Tier 2 (Intra-Company Transfer) of the points-based system (PBS). These changes came into effect on 6 April 2010.

These changes will give employers food for thought, particularly when transferring employees from overseas branches to the UK.


Migrants must still be able to score 75 points for their age, qualifications, previous earnings and UK experience, and a further 20 points for their English language ability and maintenance ability. However, the points have been recalibrated (see table on p31).

The most notable change to the points spread under Tier 1 (General) is that the minimum academic qualification needed to score points is now a bachelor’s degree, rather than a master’s degree. Since 1 April 2009, migrants who have not held a master’s degree have been prevented from applying under Tier 1 (General).

In addition, migrants who are earning a minimum of £150,000 may be eligible under Tier 1 (General) without the need for any academic qualification.

Migrants will also be able to score points for a higher age threshold – up to 39 years old. Previously, migrants were unable to score points for age if they were 32 years old or over.

Applicants will initially be granted leave under Tier 1 (General) for two years, rather than the current three years. After two years, Tier 1 (General) migrants will be able to apply to extend their leave for a further three years, taking them up to the five years required for indefinite leave to remain (or, as it will be known then, probationary citizenship).


The points have also been recalibrated under Tier 2. Migrants must still be able to score 50 points for their sponsorship, qualifications and prospective earnings, and a further 20 points for their English language ability and maintenance ability (see table on p32).

Guidance issued by the UKBA on 6 April 2010 provided clarification on when a change of employment application is required for a Tier 2 migrant whose job within a company is changing. The UKBA has confirmed that a change of employment application will not be required if the migrant’s new role remains within the Standard Occupational Classification (SOC) code that their original certificate of sponsorship was issued under. Exceptions to this will be if the migrant’s salary is reduced to below the salary stated on their original certificate of sponsorship, other than acceptable reductions (eg company-wide reductions or reductions due to maternity or adoption leave). Additionally, if the migrant changes from a job that is on the shortage occupation list to a job that is not on the shortage occupation list, a new certificate of sponsorship may be required.

Importantly, the UKBA is introducing three new subcategories to Tier 2 (Intra-Company Transfer):

  1. Tier 2 (Intra-Company Transfer) Established Staff;
  2. Tier 2 (Intra-Company Transfer) Graduate Trainees; and
  3. Tier 2 (Intra-Company Transfer) Skills Transfers.

Established Staff

This replaces the previous Tier 2 (Intra-Company Transfer) category for current employees of multinational companies with company-specific knowledge who are being transferred from abroad to the UK. Under the Established Staff category the following changes will apply:

  • migrants must now have worked abroad for at least 12 months, rather than the previous six months; and
  • this route will not now lead to settlement (also known as indefinite leave to remain or permanent residency).

This change to the rules regarding settlement is believed to be particularly short-sighted. Migrants will be less inclined to invest in the UK if they will not be eligible to apply to remain permanently. For example, a long-term effect may be on the UK’s housing market.

As a result of this change to the rule for settlement for Tier 2 (Intra-Company Transfer) migrants, it is important that employers make it clear to employees transferring from abroad that, if it becomes their intention to settle in the UK permanently, they must change their immigration category from Tier 2 (Intra-Company Transfer) as soon as possible. Given the relaxing of the requirements for Tier 1 (General), it may be a better option if they were to come to the UK as a Tier 1 migrant. This has benefits for both the employee and the employer, as Tier 1 does not require resident labour market testing or sponsor reporting duties.

Graduate trainees

The Tier 2 (Intra-Company Transfer) Graduate Trainee sub-category allows multinational companies to transfer graduate recruits to the UK branch for training and career development. The recruits must be sent as part of a structured graduate training programme, with clearly defined progression towards a managerial or specialist role. The applicant must have been employed by the company overseas for at least three months before coming to the UK and it is only open to migrants who are working in specific graduate occupations.

The Graduate Trainee sub-category is for migrants who are coming to the UK for training and career development only, and will therefore be issued with a visa for a maximum of 12 months, with no option to extend. At this stage, the UKBA is limiting this sub-category to a maximum of five places per employer per year. The UKBA is expected to review this five-per-year limit once the sub-category has been tested.

Skills transfer

The Tier 2 (Intra-Company Transfer) Skills Transfer sub-category will enable migrants who have been recently recruited overseas by a multinational company to transfer temporarily to the UK to acquire or impart skills and knowledge relevant to their new role. Unlike, the Established Staff and Graduate Trainee sub-categories, no previous company experience is needed and it is only open to migrants who are working in specific graduate occupations.

A visa will be issued for a maximum of six months with no option to extend.

While this sub-category appears to go some way to bridging the gap between the old training and work experience work permit and the current Tier 2 system, the UKBA has emphasised that, although the migrant is transferring temporarily to the UK, their role is still based abroad. If it were not for the need for skills transfer, the role in the UK would not exist.

In addition, the restriction to graduate occupations means that the possibility of a period spent in the UK for skills transfer is still not available to a new recruit hired at a senior level.


With these changes it can be predicted that there will be a trend towards more employer-sanctioned applications under Tier 1 and less applications under Tier 2. It is unknown whether this was the intention of the UKBA when they implemented these changes, but as always with the constantly shifting PBS, employers are encouraged not to become too comfortable with the easing of requirements under Tier 1.

Who’s watching you? Rise of corporate monitoring

Crime, fraud and licensing | 01 May 2010

The new zealous and robust approach adopted by the Serious Fraud Office (SFO) to combat corporate fraud and corruption offences has been increasingly described as the Americanisation of the organisation. The US Department of Justice (DoJ) and Securities and Exchange Commission (SEC) (equivalent to the SFO and Financial Services Authority (FSA) here) have made anti-corruption enforcement history – the biggest of scalps being Siemens who lost out financially to the tune of €2.5bn.

new approach to corporate compliance and enforcement

In mid-2009 two sets of guidelines were issued (‘Approach of the Serious Fraud Office to dealing with Overseas Corruption’ (the SFO’s guidelines) (21 July 2009) and ‘Attorney General’s Guidelines on Plea Discussions in Cases of Serious or Complex Fraud’ (18 March 2009)). As a response to the De Grazia Review (by US lawyer Jessica De Grazia), which excoriated the SFO’s poor prosecution record, the organisation has not only stepped up enforcement of overseas bribery offences, it has adopted a wholly new US-style approach, encouraging:

  • corporate self-regulation;
  • self-reporting if wrongdoing is uncovered; and
  • continued monitoring.

This mirrors a style of enforcement more familiar to US companies.

The SFO’s guidelines set out several factors that it takes into consideration when deciding the appropriate route to take. These include whether any existing board members have personally connived in the corrupt activity or derived personal benefit from it. The SFO’s guidelines are similar to US government guidelines, the ‘Holder Memo’ (Memorandum from Eric Holder, Deputy Attorney General US DoJ), published in 1999 in an attempt to recognise and address uncertainty surrounding the same issue.

In cases where the reported wrongdoing is perceived to be of too serious a nature to justify a civil settlement, the SFO took the view that it could nevertheless engage in negotiations with the corporate, and other US regulators and prosecutors, to carve out a global plea agreement. That approach was adopted in SFO v BAE Systems plc (2010) and R v Innospec Ltd [2010], but has come in for criticism. On 26 March 2010, Thomas LJ’s sentencing of Innospec, reminded the SFO that it had no power to agree corporate pleas with both the company and the US prosecutors, nor could it expect the courts in the UK to rubber-stamp agreements. In his sentencing remarks, Thomas LJ also expressed the view that it would rarely be appropriate for criminal conduct by a company to be dealt with by way of a Civil Recovery Order (CRO).

The assurance that, by self-reporting, the errant company will stand more of a chance of obtaining a civil settlement, or the equivalent of a US-style deferred prosecution agreement (DPA) or non-prosecution agreement (NPA), is a major incentive for the company. But the SFO is now somewhat restrained by its inability to enter into global plea agreements.

Despite the Innospec ruling, if the SFO decide that it is more sensible to take the civil path against the companies and prosecute only individuals where appropriate to do so, part of any negotiated deal with the offending corporate will be the agreed placement of a corporate monitor for a set number of years. The corporate monitor will watch over the activities of the board and its senior managers, and will report back to the SFO on corporate crime and compliance issues.

US Approach

In the US, the government’s approach to the appointment of a corporate monitor is now well established and has evolved over the past 25 years. Initially the court, as a result of post-judgment action, appointed an overseer to ensure compliance with any cease and desist orders. More recently the appointment of a corporate monitor has become a standard step taken by the DoJ and by the SEC in the US, before any court verdict is announced. The monitor’s ambit is dictated by the terms of the DPA or the NPA under which the government agrees settlement terms with the corporate, but retains the right to prosecute any subsequent breach of such terms.

The first landmark case was US v Prudential Securities Inc (1994), after which the use of an independent expert, whose role was to monitor the compliance of the company as part of the DPA, was increasingly relied on in settlements.

The incentive for corporations to settle before going to trial was bolstered by the George W Bush administration when it adopted a policy that allows companies to quietly avoid criminal prosecution in exchange for a probationary agreement to make certain internal reforms.

In SEC v WorldCom Inc (2002), the monitor’s efforts were initially directed at preventing corporate looting and document destruction, but then expanded to that of overseer initiating controls and corporate governance. In 2008 the DoJ issued guidelines relating to the appointment and use of corporate monitors, which set out nine basic principles (‘Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations’, 7 March 2008). The guidelines were issued in response to increasing criticism levelled at a lack of transparency in the selection process and cost levels of corporate monitors.

As there are no equivalent guidelines for this new process issued by the SFO, the principles are instructive as to the likely scope and role of any corporate monitor appointed in this jurisdiction (particularly as, increasingly, deferred prosecution settlements are likely to be made in conjunction with authorities in other jurisdictions).

The principles, in summary, are as follows:

  • Selection – monitors should be appointed on merit, with the specific factual situation in mind and to ensure the avoidance of any conflict.
  • Independence – a monitor is an independent third party, not an employee or agent of the corporation or of the government.
  • Role – the monitor’s primary responsibility should be to assess the corporate’s compliance with the DPA or NPA. They do not have responsibility to the shareholders. As such, while they can provide their input, the responsibility for compiling and implementing an effective compliance programme remains with the corporate.
  • Communication – open communication between the government, the corporate and the monitor is expected, and, in some circumstances, written reports may be made to both parties.
  • Corporate action – where the corporate does not adopt suggested recommendations, this should be reported to the government, along with the reasons given. This may be taken into account by the government when considering whether the corporate has fulfilled its obligations under the DPA or NPA.
  • Other misconduct – the DPA or NPA should set out the types of previously undisclosed and/or new misconduct that should be reported directly to the authority (including, in some circumstances, without the knowledge of the corporate).
  • Duration – this will depend on several factors to be considered in each case, including the seriousness of the wrongdoing, the corporate culture and the involvement of senior management.
  • Flexibility – the term may be extended or reduced depending on the process.

Application in the UK

The SFO does not have the power unilaterally to impose a corporate monitor. Therefore, such appointment has to be as part of a civil agreement between the parties and/or through the criminal courts. There is little doubt that both the SFO and the company have strong incentives to settle the case without the need to involve the criminal courts. For the government, corporate criminal cases are difficult, complex and expensive to prosecute. Corporations usually have access to greater resources than the average criminal defendant, which increases the likelihood of a vigorous defence. For the company, the advantages of settling early and avoiding charges are significant too, limiting amongst other things, severe reputational losses.

According to the SFO guidelines, one of the aspects that the SFO will consider following a self-report is whether:

‘At the end of the investigation… the corporate [will] be prepared to discuss resolution of the issue on the basis, for example, of restitution through civil recovery, a programme of training and culture change, appropriate action where necessary, and at least in some cases external monitoring in a proportionate manner.’ [Emphasis added.]

The SFO further sets out that monitoring will be by:

  • ‘an independent, well-qualified individual nominated by the corporate and accepted by us’;
  • that ‘the scope of the monitoring will be agreed [with the SFO]’; and
  • that it will be ‘proportionate to the issues involved’ (paragraphs 4 and 14 of the SFO’s guidelines).

Such is the extent of the existing SFO guidance in this area.

The few cases where a monitor has been appointed in this jurisdiction offer little by way of further instruction. A brief look at recent law provides an overview of the sort of cases in respect of which a monitor might be appropriate.

SFO v Balfour Beatty plc (2008)

The SFO reached a civil settlement with Balfour Beatty under its new civil recovery powers in 2008, in the first case of this kind. Balfour Beatty self-reported payment irregularities by its subsidiary in relation to a construction project in Egypt. Balfour Beatty agreed to a settlement payment of £2.25m, together with a contribution towards the costs of the CRO proceedings. It also agreed to introduce certain compliance systems and to submit these systems to a form of external monitoring, for an agreed period.

R v Mabey & Johnson Ltd (2009)

The SFO and the company entered into a criminal plea negotiation that was agreed by the criminal court. This was the SFO’s first criminal conviction for overseas corruption since the implementation of the Anti-Terrorism, Crime and Security Act 2001. It was also the first time that the appointment of corporate monitor was approved by the criminal courts. The company pleaded guilty to the making of corrupt payments in Ghana and Jamaica, and to the breach of a United Nations embargo on trade with Iraq. Penalties of approximately £6.6m were imposed (which incorporated fines, a sum for confiscation, reparations to the countries impacted and a contribution to the SFO’s costs). Also included in this sum was a provision of £250,000 for the appointment of an independent corporate monitor for a period of three years.


The company pleaded guilty to conspiracy to corrupt in this jurisdiction and entered pleas to violating the Foreign Corrupt Practices Act (FCPA) 1977 in the US. A global settlement was agreed between prosecuting bodies and the offending company.

As part of its plea agreement, Innospec agreed to hire an independent monitor to review and evaluate internal controls, record-keeping, and compliance practices. Monitors, who are generally attorneys, have become commonplace in plea agreements and deferred prosecution agreements, stemming from FCPA 1977, money-laundering and other charges. While the DoJ frequently assists in selecting a monitor, they leave it up to the company to set a fee.

The appointment of the monitor and the likely cost was criticised by the district judge in the US. This indicates the ongoing difficulties with the appointment and control of independent monitors in the US, and it is a problem that is also likely to arise here.

The SFO appears to have agreed to share that monitor’s reports, although for what purpose (since it had prosecuted the company) it is difficult to comprehend.

Practical Considerations

It is still early days in the UK. Monitors are being appointed post charge, or as part of a civil deal, rather than early on, post self-report and with a view to assisting with settlement. The recent judgement in Innospec will inevitably force the SFO to look at several issues again and will predictably steer it further towards a US-influenced approach.

It is likely that the concerns that have arisen in the US are also likely to resonate here. Key considerations are likely to be:

  • Appointment – does the appointed individual have the necessary experience and sector understanding to enable them to properly assess and evaluate the corporate’s policies and systems?
  • Cost – is the level of projected cost proportionate to the level of seriousness of the wrongdoing?
  • Duration – is the length sufficient to enable the corporate to demonstrate that its compliance procedures are being properly implemented and not too long to cause financial difficulties?
  • Role and scope – is the scope sufficiently clear as to the role of the monitor, including which aspects of the day-to-day operation of the company they will be expected to be appraised of to fulfil their duties? Is the scope sufficiently tightly worded to avoid any unnecessary duplication of duties?
  • Fiduciary duties – does the monitor have duties towards vulnerable shareholders, whose assets they are monitoring?
  • Confidentiality – is the monitor bound by confidentiality as between the SFO and the corporate (this may be directed by the obligations of the company to report to its shareholder as to the progress being made)?


Corporate monitors assist with the elimination of corporate wrongdoing and will predictably become more common in the UK, as new approaches to dealing with corporate offences, particularly bribery and corruption, evolve. The role of the those at the top of a company and their duties to prevent wrongdoing has been emphasised by the ‘Walker Review of Corporate Governance of the UK Banking Industry’ (by Sir David Walker) and by the Financial Reporting Council. The FSA has also increased the pressure on, and raised expectations of, non-executive directors of FSA-regulated firms. Looking further down the track, the emergence of a market for specialist non-executive directors or professional supervisors to monitor compliance is not an unrealistic prospect.

What a nuisance! Key environmental cases from the past year

Projects, energy and natural resources | 01 May 2010

The law of nuisance was first developed by the courts of England and Wales hundreds of years ago, long before the industrial revolution, at a time when England was predominantly a rural society. Throughout the intervening period there has been great change to our society and the law of nuisance has been adapted by the courts to respond to those changes. Leading text Clerk & Lindsell on Torts (18th edition) sums up the evolutionary nature of the common law of nuisance:

‘As new interests in matters, such as privacy or pollution are recognised, and new forms of interference emerge from the complexity and interdependence of modern society, the principles of tort can be used to provide an appropriate response.’

The law of nuisance is as relevant today as it ever has been. IHL174 (pp19-22) underlined the legal principles of the law of nuisance (in the context of noise). This article takes a look at some of the most interesting nuisance cases of the past year, from the damage caused by Europe’s biggest peacetime explosion to the flooding of private homes from a new development.

Human rights and private nuisance: Dobson & Ors v Thames Water Utilities Ltd & Anor [2009]

Since the House of Lords’ landmark judgment in Hunter v Canary Wharf Ltd [1997], it has been settled law that a proprietary interest is required to bring a claim in private nuisance. Those without an interest in the land affected by the nuisance cannot claim compensation at common law. However, Hunter was decided before the Human Rights Act (HRA) 1998 came into force. There has subsequently been some debate over the impact of HRA 1998 and, in particular, Article 8(1) of the European Convention of Human Rights, on the remedies available to those who, despite the fact that they have no property interest, are still affected by a nuisance.

The interaction between damages for private nuisance and damages under HRA 1998 came under scrutiny in the Court of Appeal decision in Dobson. As a statutory water undertaker, Thames Water is a public authority and is therefore subject to HRA 1998. The claimants alleged that Thames Water’s negligent operation of the Mogden Sewage Treatment Works gave rise to problems from odours and mosquitoes, but some of the potential claimants could not bring an action in nuisance because they had no interest in the property in which they lived (despite being affected by the odours and mosquitoes to the same extent as those with a property interest). The Court of Appeal was asked to consider whether those without a proprietary interest could be compensated under HRA 1998 in circumstances when individuals with a proprietary interest in that property had already received compensation as a result of the nuisance claim. Thames Water argued that this would make them doubly liable for the same loss, having already compensated the land owner. The Court of Appeal was also asked to consider whether the Court was able to top up the amount of compensation in the event that damages in private nuisance were lower than those available under HRA 1998.

The Court of Appeal confirmed that it was possible for those without a proprietary interest to be compensated under HRA 1998, even if others in their home had already been compensated in damages under private nuisance. However, whether compensation was appropriate would depend on each individual case and the fact that others in the home (such as a partner or parents) had received damages in nuisance would be a factor. On the issue of top-up damages the Court was less equivocal. The Court considered that damages under HRA 1998 will almost always be lower than those available in private nuisance and therefore it was highly improbable, if not inconceivable, that HRA 1998 would require the award of a further sum for breach of Article 8 on top of damages for private nuisance.

Dobson opens the door for claims against public bodies for compensation under HRA 1998 even if the claimants have no interest in the property. At the time of writing the High Court trial is in progress and it will be interesting to see the level of damages awarded (if any) under HRA 1998.

Tortious liability for major disasters: Colour Quest Ltd & Ors v Total Downstream UK Plc & Ors (Rev 1) [2009]

Colour Quest, better known as the Buncefield Litigation, arises from the Buncefield oil storage depot explosions in December 2005 that caused large-scale damage to neighbouring land and considerable disruption to business. Residents, businesses and insurance companies commenced legal proceedings in negligence, private nuisance, public nuisance and under the rule in Rylands v Fletcher to recover their losses from those in charge of the oil storage depot, with damages estimated at £750m. The site operator was a joint venture company between Total UK (60%) and Chevron (40%), but the claims were brought against the parent companies, Total and Chevron, as well as the joint venture company.

As a preliminary issue, the High Court was asked to address the liability of each of the defendants. Steel J concluded that Total was the de facto operator of the site and was therefore at fault for the disaster. Total appealed, claiming that it was entitled to recover a contribution from Chevron under the terms of an indemnity between the two companies, but the Court of Appeal held that Chevron had not indemnified Total against the consequences of its own negligence.

The appeal also considered whether Shell UK, as the beneficial owner of some of the pipelines and vessels at the Buncefield site, was entitled to recover in negligence, private nuisance or under the rule in Rylands v Fletcher for the economic losses it had suffered as a result of not being able to use the damaged vessels and pipes. Total accepted liability for the fuel in the pipes (which was legally owned by Shell), but refused to compensate Shell for the consequential losses arising from the business disruptions, valued at around £100m. At first instance the High Court held that Shell was not entitled to recover as it was not the legal owner of the damaged property, but the Court reversed that decision and ruled that, as a beneficial owner, Shell could recover in negligence for the economic losses as the legal owners were also joined to the claim, and therefore could recover the economic losses on behalf of Shell and hold those sums on trust. The Court of Appeal did not address the question of whether a beneficial interest in the property was sufficient to recover consequential losses in nuisance.

The Buncefield Litigation demonstrates the importance of ensuring that liability for major accidents is considered by those entering joint ventures and other commercial arrangements, and serves as a reminder that the courts may look beyond the wording of the agreements to identify the person with de facto control of operations on site when considering liability.

nuisance liability for birth defects: Re Corby Group Litigation[2009]

The High Court found that Corby Borough Council was liable in public nuisance, negligence and breach of statutory duty for birth defects suffered by Corby residents whose mothers were exposed to toxic materials in the atmosphere during the Council’s clean up of the town’s heavily contaminated former British Steel plant in the 1980s and 1990s. The claim related to birth defects, including shortened or missing arms, legs and fingers suffered by a group of children born between 1986 and 1999. It was alleged that the birth defects had been caused by the pregnant mothers’ ingestion or inhalation of harmful substances generated by the reclamation works and spread in various ways throughout Corby.

The claimants could not bring a claim in private nuisance, as damages for personal injuries are not recoverable in private nuisance. Instead, the claimants pleaded public nuisance. The Council applied to strike out the claims in public nuisance on the basis that damages for personal injury were not recoverable in public nuisance either (relying on the judgment of the House of Lords in Hunter). The Court of Appeal did not agree with the Council and held that Hunter had not reversed the long-established principle that public nuisance could give rise to damages for personal injury.

The claimants must now return to court to establish a causal link between the reclamation works and the birth defects on a case-by-case basis. Corby District Council was not covered by insurance, and therefore any damages and costs will ultimately be picked up by the taxpayer. This is a reminder of the importance of checking the existence and extent of insurance policies to see whether those policies would cover environmental claims.

The Council’s appeal is due to be heard this spring. The principal grounds for appeal centre on whether the harm caused by the restoration works was truly a foreseeable consequence of the Council’s actions.

Planning consent and private nuisance: Watson & Ors v Croft Promo-Sport Ltd [2009]

It is a long-established principle that planning consent cannot authorise a nuisance. A local planning authority may authorise an activity, but a court may still impose restrictions (or even a complete ban) if it upholds a claim by aggrieved neighbours for nuisance caused by that activity.

However, the grant of planning consent and its subsequent implementation can change the character of a location, which is one of the considerations a court must take into account when deciding whether a nuisance is occurring in the first place. Therefore, an activity that would have been an actionable nuisance prior to the planning consent may no longer be a nuisance once development has commenced (see Gillingham Borough Council v Medway (Chatham) Dock Co Ltd [1993]).

The interaction of these principles creates uncertainty for developers, landowners and potential claimants, as the recent Court of Appeal decision in Watson demonstrates. Watson did not change the boundaries of the law of nuisance, but it did provide a reminder of the interaction between the planning regime and the tort of private nuisance.

The defendant was a motor racing operator, with planning permission to race on 210 days of the year. The neighbours considered that the noise was excessive and brought a claim in private nuisance.

The High Court held that the planning consent had not altered the character of the (predominantly rural) area and found that the noise from the motor racing was a nuisance. However, the High Court also considered that the neighbours could be adequately compensated in monetary terms and refused an injunction. Both parties appealed.

The Court of Appeal upheld the High Court’s finding that a nuisance was being committed but, holding that the lower court was wrong to refuse an injunction, it imposed an injunction limiting the racing to 40 days of the year. The judgment provides helpful guidance on the circumstances where monetary compensation may be considered to be an adequate remedy in lieu of an injunction.

Businesses should be aware that planning permission does not provide absolute certainty when interference (such as noise or odour) from a development may affect the local community. Developers should actively engage with stakeholders at an early stage in the planning process to reduce the chances of private claims by affected neighbours once the development is in operation.

Statutory nuisance and environmental permits: Ethos Recycling Ltd v Barking & Dagenham Magistrates Court & Anor [2009]

The Divisional Court has provided clarification on the issue of whether local authorities can serve statutory nuisance abatement notices without the permission of the Secretary of State in circumstances where the Environment Agency (EA) could take enforcement action under an environmental permit. The question has divided commentators for many years, but had never previously been considered by the courts.

In Ethos, dust arising from a recycling facility was causing a nuisance to neighbouring properties. The EA was using its enforcement powers to improve the dust suppression facilities on site and, during the same period, the local authority served an abatement notice that also required steps to suppress the dust to prevent a nuisance from recurring. The recycling operator appealed the abatement notice, arguing that it had no legal effect because the local authority required the consent of the Secretary of State to serve an abatement notice pursuant to s79(10) of the Environmental Protection Act 1990. The Magistrates’ Court held that s79(10) only required the permission of the Secretary of State to commence summary proceedings and the issuance of an abatement notice did not constitute summary proceedings.

The recycling operator judicially reviewed the decision of the Magistrates’ Court and the Divisional Court had an opportunity to provide clarity on this issue. Scott Baker LJ and Cranston J concluded that summary proceedings constituted proceedings issued at court and not the issue of an abatement notice. The Divisional Court found that the local authority was the natural recipient of complaints from people affected by a nuisance in its area and had an obligation to issue an abatement notice to prevent the continuation or recurrence of the nuisance, even though there was also ongoing regulation by the EA.

Those affected by nuisances from sites regulated by environmental permits may now feel empowered to put further pressure on their local authority to take action even when the EA appears to be using its own enforcement powers. Local authorities can no longer say ‘it is not a matter for us’. An appeal of the decision in Ethos is to be heard over the summer.

Nuisance from flooding: Lambert & Ors v Barratt Homes Ltd (Manchester Division) & Anor [2009]

Lambert demonstrates the risk to developers and landowners that can arise from the flooding of neighbouring properties as a consequence of a development. It continues the current trend in the courts for holding parties liable for damage caused by flooding where the potential consequences were known and where steps could have been taken to address the problem.

Lambert concerned the flooding of homes following a residential development on an adjacent site. A claim was brought against both the developer and the local authority. The claimant’s argument was that the developer was liable because it had filled in a drainage ditch during the development and this had caused the flooding. The claim against the local authority was that the water originated from the higher land owned by the local authority and the local authority was liable because it was aware of the problems. Therefore it had a measured duty of care to take steps to abate the nuisance, even though there was no suggestion that it had caused the problem.

The court found that the developer had caused the flooding by obstructing the drainage ditch and was therefore liable. The court also found that the local authority was liable because it had a measured duty of care to take steps to prevent the flooding occurring. By failing to take action, it was liable for the damage caused to the neighbouring properties. The defendants are seeking an appeal and this will be watched with interest.

Lambert is the most recent in a series of cases that demonstrates a clear judicial trend to find landowners liable for failing to take steps to alleviate flooding, even when the landowner has not caused the problem. The courts have held that landowners have a duty to take steps to alleviate flood risk once they are aware of the problem. The duty is measured, not absolute, and the costs of the steps required to alleviate the problem and the means of the landowner are all factors that are taken into consideration. However, for both local authorities and developers with deep pockets, the courts are likely to consider that there will be sufficient funds available to carry out preventative works once the problem has been identified.

Flooding litigation is a complex area of the law of nuisance and one that is constantly evolving. In Latimer v Carmarthenshire County Council (2007, unreported), a homeowner brought a claim against a local authority for flooding originating from an inadequate culvert. The general rule is that a party that culverts a watercourse has an absolute duty to ensure that it remains sufficient for carrying the water. However, in Bybrook Barn Centre Ltd & ors v Kent County Council [2000], the local authority was found to have only a measured (rather than absolute) duty to improve a culvert that it inherited when factors outside of its control led to an increase in water flowing through it. Latimer reverted to the general rule in circumstances where a local authority had itself caused the additional floodwater that contributed to the flooding, so it had an absolute, rather than a measured, duty of care to ensure that the culvert was maintained or improved to a sufficient degree to carry those floodwaters away from neighbouring properties.

Developers and local authorities should be aware of the risks of flooding litigation brought by neighbours aggrieved by new developments, and the increased surface water run-off that may result from those developments.

EFRBS: attractive alternative for high earners?

Corporate and commercial | 01 May 2010

6 April 2006 saw the introduction of the Employer Financed Retirement Benefit Scheme (EFRBS), replacing the now defunct Funded Unapproved Retirement Benefit Scheme. An EFRBS is an unregistered (ie not registered with HM Revenue & Customs) pension scheme commonly used to provide retirement benefits to high-net-worth individuals (defined as those earning over £150,000 per annum for the purposes of this article). It is commonly used as a retirement vehicle to incentivise and reward key employees, directors or shareholders.

The employer will usually establish a trust that has the purpose and power to enable the employer to provide retirement benefits to employees. Employees cannot make contributions to the EFRBS. There are two types of EFRBS: a funded EFRBS and an unfunded EFRBS.

Types of EFRBS

Funded EFRBS

The employer will contribute funds to the trust in advance of the employees’ retirement. These funds are then allocated for the benefit of those employees. The EFRBS can invest this money, as the trustees see fit, in a wide range of assets. It provides a way to ring-fence money and assets in a separate fund away from the company so that such money is not vulnerable to downturns in the employer.

Unfunded EFRBS

In an unfunded EFRBS the employer will not make any contributions in advance of retirement. The employer will only contribute to the EFRBS during the retirement of the employee. Unfunded EFRBS may also be set up under trust. However, if the trust is established for this purpose the employer may have to make a nominal contribution to the trust. It is possible for the unfunded element of the pension to be secured by a third party and/or the employer to resolve any doubts the employee may have regarding the availability of funds at the time of their retirement.

How an EFRBS benefits from being unregistered

An EFRBS, being an unregistered arrangement, is not subject to the restrictions placed on registered pension schemes and as such is a more flexible investment vehicle. For example:

  1. Unregistered pension schemes benefit from less restrictive investment opportunities than registered pension schemes. EFRBS may invest in stocks, shares, commercial property, residential property, cash deposits, fixed interest investments, equities, derivatives, unit trusts and investment trusts.
  2. An EFRBS can lend and borrow money, invest in unquoted companies and effect transactions with connected parties, for example scheme members or the employer, as long as these transactions are on a commercial basis.
  3. There is no requirement for an EFRBS to set a specific retirement age (although after 6 April 2010, benefits can only be taken from age 55 onwards).
  4. Contributions made to an EFRBS are not subject to either the annual allowance or the lifetime allowance; the annual allowance (currently £245,000 and rising to £255,000 for the 2010/11 tax year) being the annual limit on tax-free pension savings and the lifetime allowance (£1.75m for the current tax year, rising to £1.8m for the 2010/11 tax year) being the total value of an employee’s pension in all registered schemes they may build up without paying extra tax.



The tax implications associated with payments made to individuals under an EFRBS will be dictated by the nature of such payment. This article outlines the key tax considerations for employers and employees.

Corporation tax

The employer will not be entitled to a corporate tax deduction until ‘qualifying benefits’ are paid out of the EFRBS. Qualifying benefits are provided where there is a payment of money or transfer of assets otherwise than by a loan and include pensions, annuities, lump sums or other payments out of the EFRBS.

Income tax and national insurance contributions (NICs)

Where the statutory conditions are met, there would be no income tax liability or NICs for any individual when the company contributes funds into an EFRBS. The employers contributions into an EFRBS will not be subject to income tax in the employees’ hands, until a qualifying benefit is paid out of the EFRBS.

The payments of qualifying benefits out or under an EFRBS are not subject to NICs provided that they could have been paid under a registered pension plan. In circumstances where the employment relationship between the employer and employee has ceased, there should not be any NICs charge on the benefits paid from an EFRBS, provided that the benefits are within the limits of benefits that can be paid under a registered scheme. Registered pension schemes may only pay a tax-free lump sum retirement benefit of up to a maximum of 25% of the value of the scheme benefits. Therefore, in order to avoid any NICs charge from arising, the lump sum must not exceed 25% of the fund.

Relevant benefits and other benefits paid out of the EFRBS will, if the beneficiary is UK tax resident, be subject to UK income tax at the appropriate rates at that time, taking into consideration the individual’s level of taxable income. The payment of an annuity or pension will be taxable as pension income.

Inheritance tax (IHT)

There is no IHT on the creation of an EFRBS or on the death of a member and the funds held within the EFRBS should not be included in any of the beneficiaries’ estates for IHT purposes.

Depending on the particular circumstances of the EFRBS, IHT charges may apply on the value of the fund on each tenth anniversary of the establishment of the EFRBS. The maximum rate of charge on a ten-year anniversary is 6% of the value of the assets.

Specific benefits for high earners

Contributions to EFRBS are not caught by the new pension rules (brought in by the Budget 2009) that can trigger a tax charge on individuals in respect of contributions made by the company. Accordingly, high earners are able to avoid the 30% pension input tax charge that is generally applicable in respect of employer contributions to registered schemes made on their behalf by having the employer contribute to an EFRBS.

In addition, if an employee has, or is likely by retirement to have, benefits that exceed the lifetime allowance, an unfunded EFRBS may be a viable option for providing retirement benefits in excess of the lifetime allowance. The rate of tax payable on benefits paid under the EFRBS (currently 40% and rising to 50% for the 2010/11 year) is less than the penal 55% tax that is payable on lump sums in excess of the lifetime allowance payable from a registered scheme.


An EFRBS can provide a viable means by which an employer can motivate key high earners in its business, or make tax-efficient loans to itself or its employees, without incurring any NICs on its contributions. High earners can receive their incentives or rewards on retirement while avoiding the 30% pension input tax charge that they face in respect of contributions to registered pension schemes. Given the savings that can be made through this form of pension scheme it is unsurprising that the EFRBS is becoming an increasingly popular option for the provision of benefits for high earners.

All change for the new financial year

Corporate and commercial | 01 May 2010

With the AGM season in full swing, this article takes stock of rule changes that public companies have been dealing with when presenting their accounts and holding their AGMs. Before looking at the changes it is worth remembering that the legal and governance regimes do not apply in their entirety to all companies.

Company definitions

There are various categories – traded, quoted and public – which appear to be fairly similar, but there are some important differences:

  • A quoted company is a company whose equity share capital is listed on the Official List, officially listed in an European Economic Area (EEA) state, or is admitted to dealing on either the New York Stock Exchange or Nasdaq.
  • A traded company is a company that has any shares, which:
    1. carry voting rights at general meetings; and
    2. are admitted to trading on a regulated market in an EEA state.
  • A public company is any company that is recognised as such under the provisions of the Companies Act (CA) 2006.

Alternative Investment Market (AIM) companies do not fall under the definitions of quoted or traded in CA 2006, because the AIM market is not regulated or part of the Official List. Therefore, it is only the provisions of CA 2006 relating to public companies generally that will apply to them.

recent changes

The changes that companies have been dealing with this year stem from many factors:

  • Various provisions of CA 2006 now apply to financial years starting after 6 April 2008. In particular, many of the Companies Act (CA) 1985 requirements were contained in various schedules to CA 2006, but are now found in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the 2008 Regulations), which were brought into force pursuant to CA 2006. The 2008 Regulations apply to all public companies whatever their size.
  • Disclosure and Transparency Rules (DTR) 7 applies to financial years beginning on or after 29 June 2008 for those companies subject to the DTRs (this does not include AIM companies, as they are only required to adhere to DTR 5, which covers vote holder and issuer notification rules).
  • The Shareholders’ Rights Directive as implemented by the Companies (Shareholders’ Rights) Regulations 2009 (the 2009 Regulations), which came into force on 3 August 2009. Most of the new provisions brought in under the 2009 Regulations apply to traded companies only.

more significant new developments

DTR 7 requires issuers subject to the DTR regime to include corporate governance statements in their directors’ reports (or as a separate statement). This overlaps with existing provisions of the Listing Rules and Combined Code, so the introduction of DTR 7 should not result in a material change to the information on corporate governance as contained in last year’s annual report, and accounts for those companies that are subject to those regimes.

Quoted companies must make their annual accounts and reports available on their website until the accounts and reports for the next financial year are made available (s430, CA 2006).

The threshold for the disclosure of political donations, and expenditure and charitable donations, has been raised from £200 to £2,000, and now includes a disclosure requirement for donations to independent election candidates (the 2008 Regulations).

Transactions with related parties must be fully disclosed with details of the amount of the transaction, the nature of the related party relationship and ‘any other information necessary for an understanding of the financial position of the company’. The exemption from disclosure is now only for transactions with wholly owned subsidiaries, whereas previously transactions with 90%-owned group companies were exempt. Additionally, related party transactions disclosed in consolidated financial statements may need to be repeated in the notes to the parent’s individual financial statements, whereas previously there was an exemption from disclosure in parent financial statements. These provisions, which are contained in the 2008 Regulations, have also led to a change to Financial Reporting Standard 8, so that the definition of ‘related party’ ties in with the International Accounting Standards Board definition.

Members of quoted companies now have new rights to raise questions about the work of a company’s auditors at any meetings concerning the accounts. If there is sufficient support (5% of the total voting rights or 100 members each holding shares with an average of £100 paid up), members can require publication of a statement on the company’s website concerning any matter to do with the audit of the accounts. The statement can also be dealt with as part of the business of the meeting and it can be received up to one week before the meeting (s527, CA 2006).

Shareholders of traded companies now have the right (if they have sufficient support) to request items of business to be placed on the AGM agenda as long as the items are not defamatory, vexatious or frivolous. The request can be made up to six weeks before the meeting or, if later, the time at which notice is given of the meeting. If the notice of AGM is sent out more than six weeks in advance of the AGM, the notice must set out the rights of shareholders to table business. This new right is in addition to the existing right of members to require the circulation of AGM resolutions (the 2009 Regulations).

Following the final parts of CA 2006 coming into force (on 1 October 2009), references in the resolutions, typically proposed at the AGM, to give directors authority to allot shares and to give a limited disapplication of rights of pre-emption on allotment should be in line with the new CA 2006 provisions. Thus the old section 80 authority should now have references to s551 of CA 2006 and the disapplication of pre-emption rights in what was s89 of CA 1985 should now refer to s561 of CA 2006.

There are several provisions that will not apply until the 2010/11 financial year, such as the requirement for a statement setting out how pay and employment conditions of employees of the company, and of other undertakings within the same group as the company, were taken into account when determining the directors’ remuneration for the relevant financial year (the 2008 Regulations).

Supreme Court warns: agree first, start work later

Corporate and commercial | 01 May 2010

There is a situation more common than most people would think, particularly in the construction industry whereby parties commence work under a letter of intent, pending the negotiation and execution of a full written contract, setting out all the detailed terms and conditions governing contract performance. This often occurs where projects are time and cost sensitive.

The recent RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Company KG (UK Production) [2010] clearly demonstrates the perils of beginning work without agreeing the precise basis on which it is to be done and finalising a contract to that effect.


In January 2005 RTS Flexible Systems Ltd (RTS) won a tender for a project worth £1.68m to supply Molkerei Alois Müller GmbH & Company KG (UK Production) (Müller) with an automated system for packaging its yoghurt pots.

While negotiation of the full contract terms was on-going, Müller sent RTS a letter of intent (LOI) that set out the contract price and requested RTS to commence work immediately to meet Müller’s deadlines. The LOI also stated that the full contractual terms would be based on Müller’s standard MF/1 contract, and contemplated that the full terms and the relevant technical specifications would be finalised and signed within four weeks from the date of the LOI. RTS commenced work, the LOI expired but no formal contract was executed. Despite this, the work by RTS continued.

By 5 July 2005, a final draft contract was produced, which contained a clause stating that the contract would not become effective until each party had executed and exchanged a counterpart. No execution or exchange of counterparts of the draft contract was ever made.

On 25 August 2005, the parties had a meeting to discuss the project and certain variations to the delivery plan were agreed. RTS continued its work in the absence of any signed formal contract. Ultimately, a dispute arose between the parties leading to litigation.

A preliminary issue before the court was whether RTS and Müller had entered into a contract and, if so, on what terms.

High Court

Clarke J (the trial judge), at first instance, held that the parties had entered into a contract after the expiry of the LOI, based on conduct and negotiations that took place prior to the draft contract. He declined to uphold the draft contract of 5 July 2005 (which included Müller’s MF/1 terms) because:

  1. not all the essential terms of the 5 July 2005 contract were agreed; and
  2. by the effect of its counterpart clause (which the court viewed as a ‘subject to contract’ provision), the 5 July 2005 contract cannot have been validly concluded as no signed counterparts were exchanged.

Court of Appeal

RTS appealed the trial judge’s decision. The Court of Appeal, citing Goff J’s remarks in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984], held that the counterpart clause had the effect of preventing a contract from coming into existence until a written agreement was signed.

In particular, Waller LJ said that the factors that influenced Goff J to conclude that there was no binding contract in British Steel applied with equal force to the facts in RTS Flexible Systems. Those factors were:

  1. Where a supply of goods contract is made, it is generally subject to standard terms and conditions, which are usually the standard terms of the seller.
  2. If the buyer asks the seller to begin work pending the parties entering into a formal contract and the seller acts on that request, it is difficult to infer that the seller is assuming any responsibility for their performance, except for the responsibility that will rest on them under the terms of the contract that both parties confidently anticipate they will shortly enter into. It would be an extraordinary result if, by acting on such a request in those circumstances, the seller were to assume an unlimited liability for their contractual performance, when they would never assume such liability under any contract that they entered into.

As a result, the Court of Appeal found no contract had come into existence after the expiry of the LOI.

Supreme Court

Müller appealed the Court of Appeal’s decision. The Supreme Court unanimously held that the parties had reached a binding agreement on or about 25 August 2005 on the terms agreed on 5 July 2005, with subsequent variations on 25 August 2005 and that the counterpart clause had been waived by the conduct of the parties.


Lord Clarke, in delivering the judgment, made it clear that in determining whether there was a binding contract between the parties and, if so, on what terms, the test was whether a ‘reasonable and honest businessman’ would conclude from the parties’ words and conduct that they intended to create legal relations and had agreed on all the terms that they regarded or the law required as essential for the formation of legally binding relations (ie terms without which the contract as a whole would be unworkable or void for uncertainty).

Further, Lord Clarke stated that where a contract is being negotiated ‘subject to contract’ and work begins before the formal contract is executed, it cannot be said that there will always or even usually be a contract on the terms that were agreed ‘subject to contract’. That would be too simplistic and dogmatic an approach. The court was not to impose binding contracts on the parties that they had not reached. All would depend on the circumstances of each individual case.

The contract and its terms

The Supreme Court agreed with the trial judge that it was unrealistic to suggest that the parties had no intention to create legal relations given that:

  1. the full contract price and all other essential terms were agreed;
  2. substantial works were carried out by RTS at the request of Müller;
  3. a no-contract solution would involve RTS agreeing to proceed with detailed work and to complete the whole contract on a non-contractual basis, subject to no terms at all; and
  4. the agreement was subsequently varied in important respects on 25 August 2005, without any suggestion that there was not a contractual variation.

The Supreme Court accepted the trial judge’s findings that the parties did not proceed on the basis of all the terms and conditions having been agreed conditions, and that not all of the schedules were agreed, but took the view that such failure did not prevent the contract from having a binding effect. The Supreme Court applied the ‘reasonable and honest businessman’ test and found that the parties had reached an agreement on all of the essential terms on 5 July 2005. The agreement was subsequently amended on 25 August 2005.

Subject to contract

The Supreme Court held that the requirements for signature and exchange of counterparts had been waived by the parties’ correspondence and conduct. This distinguished RTS Flexible Systems from British Steel on the grounds that all the terms that the parties treated as essential were agreed and the contract was being substantially performed without a formal contract being signed or exchanged, whereas in British Steel the parties were still negotiating terms that they regarded as essential. Lord Clarke found that the only reasonable inference to draw in RTS Flexible Systemswas that the parties had, in effect, agreed to waive the ‘subject to contract’ provision encapsulated by the counterpart clause.


at-a-glance guide

RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Company KG (UK Production)[2010] is a reminder to commercial parties and those advising them of the danger of beginning work before a contract has been finalised. The key points to take away from this decision are as follows:

  1. Whether a court will hold that a binding contract has been made will depend on all the circumstances of the individual case, but the test it will apply is an objective one from the perspective of the ‘reasonable and honest businessman’.
  2. The fact that work has commenced does not automatically mean that the parties must have entered into a binding contract. However, it is definitely an indicator of that position.
  3. By starting to perform your part of the contract, you may waive the protection offered by a ‘subject to contract’ provision.
  4. Businesses should review boilerplate counterpart clauses to check if they may be construed as a ‘subject to contract’ provision.

Canadian international trade and investment priorities: Budget 2010 and the Throne Speech

Canada | 01 May 2010

On 4 March 2010, the federal government announced its budget for 2010 (Budget 2010). Several of the measures proposed by the government relate to international trade and investment. Included in the budget are commitments to:

  • eliminate a large number of custom tariffs on manufactured goods;
  • continue the negotiation of international trade and investment agreements;
  • enhance border efficiency; and
  • fund specific industries to strengthen their position in the international market.

In addition, the Speech from the Throne (Throne Speech), which outlines the government’s agenda for the coming year and was issued the day before Budget 2010, made several references to international trade and investment-related matters. Not all of these issues were mentioned in Budget 2010, but they nevertheless indicate policy directions that the government will take.

Tariff Reduction for Manufacturers

In Budget 2010 the government commits to eliminating remaining customs tariffs on machinery, equipment and goods imported for further manufacturing in Canada. This commitment is expected to reduce both cost and paperwork for manufacturers. 1,160 such tariffs had been eliminated by 5 March 2010 and a further 381 will gradually be eliminated by 1 January 2015. The government claims that this elimination will cause Canada to become a ‘tariff-free zone for manufacturers’ and will liberalise $5bn (€3.69bn) of imports. [The currency in this article is in Canadian dollars unless otherwise stated.] Moreover, the government expects that these tariff eliminations will save Canadian manufacturers $300m (€221.26m) annually in duty and will create 12,000 jobs.

Industry-Specific Measures

In Budget 2010 the government has pledged $7.2m (€5.26m) to Fisheries and Oceans Canada to support the new Catch Certification Office, which, similar to a pre-existing program in the EU, will issue export permits to Canadian exporters to certify to international buyers that fish and seafood products have been legally harvested in Canada.

Budget 2010 pledges $75m (€54.8m) over the next three years to the cattle processing industry to facilitate the purchase of new, cost-effective equipment for use in cattle processing plants. More than half of that amount is to fund the development and commercialisation of technologies for the removal of specific risk materials, and the subsequent use and handling of those materials.

The Throne Speech commits the government to assisting the forestry industry in developing new markets and to continuing to support the supply management (the management of price through production and import controls) of poultry and dairy products.

Foreign ownership restrictions on Canadian satellites are to be removed. The government believes this will contribute to a competitive Canadian marketplace and will encourage foreign investment. The government claims that the removal of barriers to foreign ownership will allow Canadian business to establish ‘strategic global relationships’ and, consequently, to participate more fully in foreign markets. In the Throne Speech the government suggests that foreign ownership restrictions in the uranium industry would also be reduced. However, no further detail is provided in Budget 2010.

Finally, Budget 2010 will provide $8m (€5.84m) over two years to the International Science and Technology Partnerships Program. This program is to fund research and development projects jointly undertaken by Canada, with such partners as China, India and Brazil.

Border Efficiency

The efficiency and security of the Canadian border receives attention from the government in Budget 2010. Among the infrastructure projects to which the government commits funds, the Windsor-Detroit international crossing, a critical gateway to Canada for US trade, will receive $10m (€7.31m) over the next three years.

In addition, Budget 2010 commits $87m (€63.56m) over the next two years to more general border efficiency endeavours, such as the upgrade of vehicle and cargo scanning equipment, and the upgrade of information systems used in border service operation. To maximize the flow of goods across the border to the US, while protecting national security against the threat of terrorism, the government also commits to more effective co-ordination of the Partners in Protection and NEXUS programs with US authorities, and to ensuring that fees ‘more closely reflect costs’. To a similar purpose, Budget 2010 will provide $37.9m (€27.69m) over the next two years to develop a ‘comprehensive air cargo security program’ in conjunction with Canada’s major trading partners.

International Agreements

Budget 2010 contains some limited discussion of Canada’s ongoing negotiation of international trade and investment agreements. While it stresses Canada’s intention to push forward in the Doha round of World Trade Organisation negotiations, in the Throne Speech the government expresses disappointment with the results of those negotiations. As a consequence, the government has committed to pursuing bilateral free trade agreements, such as the Comprehensive Economic and Trade Agreement, which is currently being negotiated with the EU, and exploratory talks with India, as well as implementing recently concluded agreements with Colombia, Panama and Jordan. Similarly, the Throne Speech commits to implementing free trade agreements that have been completed with Peru and the European Free Trade Association.

The Throne Speech further suggests that the government will continue to build on the procurement agreement recently completed with the US, giving Canadian suppliers access to US state and local government procurements, though no further mention is made of this in Budget 2010. The government also announced an investment of $8m per year on an ongoing basis towards the environmental restoration of the Great Lakes, pursuant to Canada’s obligations under the Canada and US Great Lakes Water Quality Agreement.


Budget 2010 and the Throne Speech propose several changes to laws affecting international trade and investment, such as the elimination of tariffs on importation of machinery for manufacturing in Canada and focused bilateral free trade agreements with key markets. As details of the implementation of these government priorities emerge, it would be prudent to keep a critical and close watch on how the government proposes to act on its international trade and investment agenda, and what laws and regulations it intends to put in place to breathe life into its plan. Given the high cost and beneficial impact of these policies, strategic intervention during the policy and legal implementation of the priorities may be warranted.