Hello and welcome once again to The Pinsent Masons Podcast, where we try to keep you abreast of the most important developments in global business law, every second Tuesday.
I’m Matthew Magee and I’m a journalist here at Pinsent Masons, and this week we try to keep up with the new Labour Government in the UK, which within days has lifted a long standing effective ban on onshore wind development in England and we find out why a whopping £18m court order against two former BHS directors could lead to UK company directors declaring insolvency earlier
But first, some business law news from around the world:
Treaty ratification brings litigation certainty in England
Expert warns businesses over WhatsApp communications
And German reforms could make it more attractive for arbitration proceedings
Businesses should be able to enforce English court rulings more easily in other countries after the UK ratified an international treaty on the cross-border enforcement of judgments. On 27 June, the UK government ratified a convention on the enforcement of foreign judgments which is known as Hague 2019. It will come into force on 1 July 2025. Richard Dickman, commercial disputes expert said: “When businesses are choosing where to resolve their disputes, they want as much predictability as possible about the enforceability of any judgment. Businesses which wish to use the English courts, but may still harbour concerns about enforcement in the EU after Brexit, will be able to feel more confident once Hague 2019 is in force between the UK and the EU.” The UK said that ratification will only apply in England and Wales but may be amended to include other parts of the UK later. Hague 2019 is particularly significant for the UK in the aftermath of Brexit as leaving the EU meant that many regimes for cross border enforcement ceased to apply to the UK, leaving parties to navigate other countries’ national laws on enforcement.
Financial services firms can expect UK regulators to follow their US counterparts in imposing significant penalties in cases where they fail to monitor and record staff communications on platforms such as WhatsApp, one expert has said. Melanie Ryan said that concerns over so-called ‘off-channel’ communications have already led to regulatory sanctions in US financial services – as well as in other regulated sectors in the UK. Off-channel communications are those which take place outside company of systems and are typically not monitored or recorded. Ryan said that regulators are increasingly concerned about them because they can lead to misconduct, including market abuse or anti-competitive behaviour. US regulators have clamped down on off-channel communications in cases involving JPMorgan, Morgan Stanley and Goldman Sachs, with JPMorgan agreeing to pay $200 million in fines in one case.
A new modernising law could make Germany more attractive for international arbitration proceedings. Significant changes to the current arbitration law include proposals to allow form-free arbitration agreements between businesses, the use of video calls for oral hearings and the electronic issuing of decisions. The government's draft is closely linked to another legislative reform, which aims to establish so-called Commercial Courts at several German higher regional courts, which will conduct proceedings entirely in English.
OK it was a manifesto commitment, but the new UK Labour government’s speed in simply removing an effective ban on onshore wind generation in England has signalled perhaps its appetite to move quickly, and its seriousness about changing industrial policy to meet climate mitigation goals. It’s a major policy change that will have implications for developers, funders, planners and the electricity grid. It overturns a set of policies that made it almost impossible to get permission to build wind power generation on land in England. Edinburgh based Gary McGovern explained to me how those restrictions worked before yesterday.
Gary McGovern: Going back in time to 2015 with the then Conservative government and under its localism agenda, onshore wind was seen as controversial in some parts of some constituencies and for political reasons in 2015 they introduced some policy tests uniquely applicable to onshore wind and not applicable to any other forms of renewable energy. Subsequently incorporated into the national planning policy framework, NPPF, and footnote in that document set out tests and that effectively set three policy tests that had to be passed by onshore wind farms in order for them to gain approval and those were firstly you had to be in an area which had been identified in a development plan. Now that's the local development plan policy framework that local planning authorities would draw up. It's fair to say the vast majority of local planning authorities were not in the business of allocating areas in their development plans for onshore wind, so that in and of itself was a massive block. If that wasn't enough of a barrier, there were then further tests, so any onshore wind farm proposal would need to be able to demonstrate that the impacts the negative impacts of that particular policy on the environment and local residents and so on had been satisfactorily addressed which again set quite high bar and then finally you also had to be able to demonstrate that the wind farm had community support. And exactly what that meant has long been argued over, but in practise only very small numbers of objections could be fatal to wind farm proposal.
Matthew Magee: These policy tests were also incorporated into law as part of the process of granting planning for nationally significant infrastructure projects, an approval process for major infrastructure. Except for onshore wind – that was excluded from the national process and could only be approved locally if it passed the three tests.
Gary: Those were the two changes which became known as the de facto ban on onshore wind in 2015/16 and effectively any applications that were in the system that time were either withdrawn or refused and thereafter for the best part of the last 10 years, onshore wind developers have not brought forward on showing farm proposals in England, and they've focused their development proposals in other parts of the United Kingdom.
Matthew: So you're saying for 10 years is literally not been a new onshore wind farm in England?
Gary: There have been, you could count on two hands I think the number of projects that have come forward Matthew. There's been maybe 40 or 50 turbines that have been approved that period, most of which are single small scale turbines rather than commercial wind farms.
Matthew: As of Monday 8 July, that all changed when chancellor Rachel Reeves outlined a raft of economic policies, including changes to planning for onshore wind in England.
Gary: So as of yesterday with immediate effect, footnotes 57 and 58, so the footnotes that provide those three policy tests have been deleted and swept away, so they no longer apply with immediate effect. In terms of the national planning policy framework that puts onshore wind back on a par with every other form of renewable energy development, namely having in principal policy support stated in the policy document and no longer having to clear these three impossible hurdles. What hasn't changed yet but is trailed as something that they are looking to do is to reverse the changes to legislation that were made which excluded onshore wind from the national consenting regime.
Matthew: And that mechanism, the deletion of those footnotes, I mean that's just within the executive power of the government, they can, you know, there's no parliamentary scrutiny of that, there's no other scrutiny, they can just do it?
Gary: They can and ironically, when the policy test was imposed in the first place that was just done by way of a written ministerial statement with no consultation. So there's an interesting mirror there, but no, it's within their power. It's certainly in relation to the policy to do that and notably and memorably pre election, the Energy Secretary, Mr Miliband, have used the phrase with one swoop of the pen in discussing how they would do away with the de facto ban.
Matthew: You might imagine, then, that there will be a sudden surge of activity as 10 years of pent up demand is released. Not so, says Gary, as there are human, infrastructural and meteorological hurdles to get over.
Gary: There is demand. Is there going to be a gold rush? I suspect not Matthew. You know, a lot of developers do not have teams necessarily set up. So, in 2015/16 when the ban was introduced you know a lot of people left the sector. Some time and delay, sort of, rebuilding teams will be delays around finding suitable sites. Not everywhere in England will be suitable. There are particular challenges facing around the UK, but particularly in England around grids capacity constraints. And so final locations where there's capacity in the grids for projects to connect in will be challenging. Another challenge people face in England is wind speeds. You don't necessarily get the same wind speeds that you might get, say in Scotland, some parts in Scotland where you're very high wind speeds not replicated, and in parts of England.
Matthew: This policy wasn’t landed on in isolation. Gary says it’s part of the government’s wider commitment to carbon reduction and climate mitigation, a set of policies which could affect lots of areas of business.
Gary: You know, this is all part of an overarching strategy to decarbonise the grid as quickly as possible, but in doing so, to try and do that as cheaply as possible and one of the arguments for allowing onshore wind proposals to go ahead, is that alongside solar, onshore winds is one of the most mature and cheapest forms of renewable technology that can be deployed and it can be deployed quickly or at least much more quickly than offshore wind for. So, in the context of targets that government has set for itself to achieve climate emission reductions and decarbonise the grids, you know, by 2030/2035, supporting technologies that can be delivered relatively quickly and relatively cheaply is beneficial to consumers.
It’s never easy when a company goes out of business. There are three groups of people particularly affected – employees, company owners and those who have lent the company money, creditors. There is, though, a good and a bad way to do it and doing it in a way that is fair to those three groups is in the UK a closely regulated process under insolvency law. It can pretty safely be said at this stage that the way that UK department store BHS went out of business in 2015 and 2016 will be studied by insolvency practitioners and company directors for all the wrong reasons. The iconic high street staple was sold by controversial high street mogul Philip Green for £1 to Retail Acquisitions, run by Dominic Chappell, someone with no retail experience who was later jailed for ‘brazen’ non payment of tax. Two of the directors of Retail Acquisitions, Lennart Henningson and Dominic Chandler, have been ordered by the High Court in London to pay an eye-watering £18 million between them to BHS’s liquidators to be shared among its creditors. More could come as sums relating to a further charge have not yet been decided. A case against Chappell is still to come. London based corporate restructuring expert Charles Maunder outlined what was at stake in this case, which stems from the moment the business was sold to Chappell’s company.
Charles Maunder: People will probably remember that in March 2015 that business was quite controversially sold by Philip Green out of his Arcadia group to a business called Retail Acquisitions Limited, which was owned and controlled by a quite controversial character named Dominic Chappell. And after that time it only really continued to trade for about another 12 months before it collapsed into administration with very significant losses to creditors and the pension fund as well. So it's a judgement that analyses the conduct of the directors during that one year period and considers whether they should have any personal liabilities for various alleged breaches of conduct during that time.
Matthew: Henningson and Chandler fell foul of the laws governing how a company should be run in those last weeks and months before going out of business, or where there is a risk of going out of business. This is the insolvency process and it’s pretty technical and complicated with all sorts of different kinds of ways of defining the state of a company and vehicles for rehabilitating its fortunes. It’s basically, though, a way of regulating the balance that directors should strike between two groups of people: the shareholders who own the business and the creditors who are owed money by it. The way you prioritise their competing interests is meant to change as the company gets into deeper financial trouble. Basically a healthy company should be run in the interest of its shareholders. One on the brink of collapse should be run in the interest of its creditors – typically bank lenders, though sometimes also including tax authority HMRC, landlords and employees’ pension funds. In between those two states the priorities should shift in relation to the seriousness of the company’s financial distress, which will always be a matter of judgement and highly contestable. Charles first talks us through what wrongful trading is, and then how that was applied in this case.
Charles: Wrongful trading is and always has been the greatest risk to directors when they're trading a company at risk of insolvency and it potentially gives personal liability to directors and that liability arises if they continue to trade a business at a time they know or ought to have known that a company no longer has a reasonable prospect of avoiding insolvency. And once that trigger point has been crossed, their only defence to wrongful trading is that they then took every step with the view to minimising losses to creditors as they ought to have taken. And typically, although there are exceptions, that would involve at that point in time putting the company into a protective insolvency procedure in order to protect those creditors interests. The key is when that trigger point is for stopping, or throwing in the towel if you like, at the point at which the company should no longer continue to trade. And there's a balance to be found between the interests of your creditors whose interests might be protected from company going into solvency and the interest of your shareholders, whose interests definitely are not and that's what the old wrongful trading test typically and does continue to mean for companies and directors. The ruling was, well, first of all on the wrongful trading point, the liquidators on behalf of the company cited 6 different knowledge dates when they believe that the company or the directors should, knew or ought to have known that the company had no reasonable prospect of avoiding insolvency. The judge analysed each of those dates in quite detail and found that only on the last of those dates which was September 2015, the directors concluded or ought to have concluded that the company no longer had a reasonable prospect of avoiding insolvency and it held that the increase in net losses of the company after that date is the amount by which the directors should be potentially liable for for wrongful trading. And that was a significant amount on the wrongful trading amount. The losses were very significant, it's a big business, it was a long period of time, and in fact, an unusually long period of time between that last knowledge date in September 2015 and the commencement of insolvency in March 2016, so seven months. So the number was a big one and he held that the two directors in question should each be liable for 15% of that increase in net deficit, which was about £6,500,000 each and that was the award against each of them personally.
Matthew: Doing this wrong raises the spectre of wrongful trading, a really important concept in insolvency in the UK. So this case dealt both with wrongful trading, which is quite normal in a case like this though not usually involving such astronomic sums. But it also involved the first ever successful prosecution for misfeasance trading, which is altogether more unusual.
Charles: On the misfeasance trading, the judge found that at a point rather earlier in time, knowledge date 3, that the directors breached their duties to act in the best interest of creditors by agreeing to a particular expensive loan that they entered into that time, how they didn't properly consider the interests of creditors at the point they entered into that loan and that therefore, what they should have concluded at the time is, rather than entering into that loan, they should have put the company into an insolvency process and therefore, from that point in time, they were conducting misfeasance trading. And potentially, and I stress the word potentially because the judge hasn't actually ruled on this yet, that they should be liable for all the losses of the company accruing after that point in time, which is earlier than obviously the wrongful trading point and therefore is an even larger number. If interpreted in one way, this new case would suggest that the trigger point for having to put a company into insolvency may be significantly earlier in the distress curve than practitioners previously thought.
Matthew: The fact that Henningson and Chandler have been found to have acted too late will weigh on directors’ minds if their companies experience financial difficulty, says Charles
Charles: Although misfeasance has always been an issue which we've been advising directors they need to be aware of and cognisant, the key driver of a director deciding that the company should stop trading should go to administration to date has always been the wrongful trading test i.e. there's no reasonable prospect of avoiding insolvency. And I think it will remain the key decision point, but there may need to be a difference in emphasis of how directors conduct themselves at an earlier stage in the decline curve in a distress situation in light of it enter into transaction or any new contract they need to be considering is this in the best interest of the company and when I'm thinking about the company, what do I mean? I mean, the best interests of the relevant stakeholders, which might be creditors, it might be shareholders, it might be a balance of the two. What it will do though is make directors much more nervous about entering into new liabilities when they're comfortable on the wrongful trading test because they think they've still got a reasonable prospect of avoiding insolvency, but they know creditors interests are engaged and therefore they need to be considering them. I think it will make directors more nervous and what you don't want because I think it's contrary to the rescue culture, is directors throwing in a towel earlier than they ought to do, because that has other implications. It has, obviously, it's bad for the business it may cause losses to their shareholders that they didn't need to lose and of course there are implications for jobs and all the rest of it, of stopping trading of a business when they otherwise may have carried on and found a way to rescue it.
Matthew: Thanks for listening. Thanks for spending the time with us – we know you’re busy and we know there is a deluge of information out there, so we appreciate your time and attention. If you think this podcast might be useful to others please do review it, share it with friends and contacts, and rate it wherever you get your podcasts. And remember you can get up to the minute business law news and analysis from our team of reporters around the world at pinsentmasons.com and you can make sure that you hear about news relevant to you every week if you sign up for updates at www.pinsentmasons.com/newsletter. Thanks for listening and see you next time.
The Pinsent Masons podcast was produced and presented by Matthew Magee for international professional services firm, Pinsent Masons.
