Enviroco – share charges and subsidiaries

Given the interest this case is generating, I have rewritten this post, providing more detail on the Enviroco case and its effect on company structures, with an explanation of the importance of the difference between a holding company controlling a subsidiary through  ”membership” as opposed to voting rights.

This case considered whether a particular company was a subsidiary that fell within the scope of an indemnity.  In considering that,  it held that the transfer of legal title to the company’s shares by way of security to a bank’s nominee caused the company to lose its status as a Companies Act subsidiary.  The problem arose because the holding company in the case did not hold more than 50% of the voting rights in the subsidiary.  It controlled voting rights through an agreement with other shareholders but, in order for this to give rise to a holding company/subsidiary relationship, the holding company had to be a “member” of the subsidiary: section 736(1)(c) Companies Act 1985.  Because the holding company had transferred legal title to the shares by way of security to the bank’s nominee, it was no longer a “member”. The Court of Appeal’s decision meant that the “subsidiary” could not claim the benefit of the indemnity.

Legal documents often use the Companies Act definitions of “subsidiary” and “holding company” (and sometimes “subsidiary undertaking” and “parent undertaking” which are similar) to capture a shifting population of group companies. In most cases, the intra-group relationships will be based on majority shareholdings, but where the holding company/subsidiary relationship depends on “membership” of the subsidiary, the case warns against allowing registration of shares held by way of security.

The decision gives an opportunity to a holding company to manipulate a corporate structure to its advantage because if it owns 50% or less of the shares in its subsidiary, it could avoid “holding company” status in relation to that subsidiary simply by vesting legal title to the shares in a nominee.  In that case, it is no longer a “member”.

Although section 736 CA 1985 has now been repealed, the substance of that section has been reproduced in section 1159 of the Companies Act 2006. The decision in Enviroco will therefore apply to the interpretation of that section.  Where the Companies Act definitions are used going forward, consideration should be given to extending the definitions so that transferring legal title to the shares by way of security to a bank or its nominee or to the holding company’s own nominee does not destroy the holding company/subsidiary relationship or any agreements, such as covenants, that might have been given.

Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399

Cheques – or passing cows?

“Cows”  – a hat tip to my old colleagues, Graham and Clive, who commented on the sad news about cheques on Linked In.  Clive:  ”I guess you can always use the side of a passing cow, in extremis…”.  And what explains Graham’s turning to AP Herbert (also author of “The Water Gipsies”)?  Well, hey, it’s Christmas: take a look at Wikipedia’s  ”case summary” of the Board of Inland Revenue v Haddock.

If you are, like me, fascinated by the practical implications of the possible abolition of cheques, you can express your concerns or make constructive suggestions to the Payments Council at cheques@paymentscouncil.org.uk.  They do promise to take account of comments.

Derivatives markets: House of Lords enquire

The House of Lords is conducting an inquiry into the European Commission’s “communications on ensuring efficient, safe and sound derivatives markets”. The Lords are inviting written evidence by 1 February 2010.  The EC communications outline proposals to reform the regulation and supervision of derivatives markets in the European Union.  The Committee hope to receive evidence on the economic benefits and risks associated with derivatives markets and the activities of central counterparties including how clearing might be regulated. The Committee will also be looking at trade repositories and who should be responsible for operating them. 

On a related topic, ISDA published a report this month on the impact of the legislation proposed in the US for over-the-counter derivatives on the Foreign Exchange Market.  ISDA aren’t convinced that this legislation is helpful: they think it would discourage customisation of foreign exchange transactions, increase the cost and difficulty of hedging foreign exchange positions and, as a result, lead to greater credit, settlement and market risk for companies and investors.

Cheques – end of an era?

The UK Payments Council decided in a meeting today, 16 December, to set a target end date of 31 October 2018 to close the central cheque clearing in Great Britain and Northern Ireland.  Because there is concern that viable alternatives to cheques have not yet been identified, a major review of the decison will be held in 2016.  Consultation on cheques has been conducted over the past 18 months.  Abolishing cheques would present a particular challenge for not only sole traders and small businesses but also those customers of banks who conduct business but whose sole purpose is not commerce:  e.g., schools, clubs and charities.  Much work has to go into finding alternatives that are practical and easy to use by payers to such entities.  There are more details on the UK Payments Council site.

From a legal point of view, I will miss cheques.  They have a long and, if you will excuse the pun, an honoured history.   Although not as long and romantic a history as bills of exchange, their close cousins – romantic? think of The Merchant of Venice.  A plastic card or a computer screen isn’t as beautiful as those early examples of cheques in copperplate handwriting of instructions to goldsmiths “To Pay”, embellished with flourishes and curlicues.  It will be interesting to see what alternatives other than that other rare breed, cash, are proposed by the UK Payments Council to enable me to pay my plumber (how many tradesman feel happy about giving out their bank account numbers?), the ladies who run our after-school club or the mother who out of the goodness of her heart organises a school trip for the whole class to the Christmas pantomime.

Bank Law Fossil

Asset Protection Scheme

RBS shareholders are voting in Edinburgh today on the Bank’s entry to the Asset Protection Scheme, although the meeting is likely to range across a broader range of subjects than just the APS.  The APS protects RBS against losses above a certain level if particular “credit events” (eg, failure to repay, insolvency or restructuring of the borrower) happen to the assets in the APS.  The documents that establish RBS’s participation in the scheme are set out here.  

If the shareholders give their approval, the terms of the APS will be ratified and “assets” the bank has already identified, loans (primary, secondary and securitised), overdrafts, lease agreements, mortgages, letters of credit, guarantees, bonds, securities and derivatives will pass into the APS.  If those assets result in a loss for the bank, RBS will have to pay the loss up to a total amount of £60bn.  If the losses are higher than £60bn, the Government will assume 90% of the loss, up to £282bn.  RBS have to pay an annual fee to the government while they are in the APS.  When RBS want to leave the APS, they will have to have the approval of the Financial Services Authority and pay an exit fee. 

I have been reading HM Treasury’s paper  “details of the Asset Protection Scheme and launch of the Asset Protection Scheme”.  It’s interesting.  The majority of the assets that have gone into the APS were originated between 2006 and 2008, and not surprisingly, the largest proportion of assets are property related.  £32.1 bn worth of the total 57.2 bn assets of RBS’s Real Estate Finance book has gone into the APS.  The APS avoids the lengthy and costly process of splitting the bank into good bank and bad bank and effecting a legal transfer of assets  On this, see the National Audit Office’s report on Northern Rock .

Second reading of Financial Services Bill

The Financial Services Bill was presented for its second reading in Parliament on Monday, 30 November.  Hansard reports that the Chancellor, Alistair Darling was questioned on the absence of consumer protection provisions in the Bill, particularly as regards pre-payment of goods.  Mr Darling replied that he was conscious more consumer legislation is needed but that he aimed to keep this Bill short (so that it can make it through Parliament before the election).  The main purpose of the Bill, he said, is to strengthen financial regulation.  It is to manage system-wide risks and “tighten” the powers available to the FSA on the remuneration of banks.  The discussion went on for some hours.  “Living wills” were touched on lightly, with a criticism from an MP that there was not enough detail about them in the Bill.  This was brushed aside by the Minister that such detail would be dealt with in the Public Bill Committee (which starts on a day yet to be announced but has to conclude by 14 January 2010).  The Bill got through the second reading on Monday night with a majority of 276 to 152.

Supreme Court allows banks’ appeal in test case

So, the lesson is, don’t pay any attention to those words on the street (viz, yesterday’s post).  Of course, no lawyer will now admit their surprise but the banks have been successful in the OFT’s test case.  The Supreme Court unanimously upheld the appeal by the banks against the decision of the two inferior courts that Regulation  6 (2) (b) of of the Unfair Contract Terms in Consumer Contracts Regulations 1999 does in fact stop the OFT from investigating for fairness terms relating to charges for unauthorised overdrafts in the banks’ contracts with customers.  See the 3 page press release by the Court here.  46 page judgment here.

Bank charges Judgment expected

Judgment in the bank charges case will be handed down tomorrow, Wednesday 25 November.   It’s a dangerous game, predicting the outcome of cases that you haven’t been involved in and whose judgments are kept under securely fastened wraps, but I will play it anyway: the word on the street is that the Supreme Court is likely to find that the OFT do have the right to challenge the fairness of banks’ terms that impose a charge for unauthorised overdrafts.  Then the hard work will start: assessment of the fairness of each bank’s terms in specific cases.  The BBA have issued a “Test Case Fact Sheet” for customers.  Six month’s have passed since the House of Lords allowed the appeal (last post) and in that short time, the House of Lords legal function has passed to the Supreme Court. 

The Supreme Court.

New – Money Attachment Order

A new form of debt recovery called a money attachment order will come into force in Scotland on 23 November 2009.   This  guest article, by our Scottish correspondent, looks at how the Orders will work in practice.

When a court awards a decree (judgment) for the payment of a debt, Sheriff Officers (Bailiffs) can use a money attachment order to enter the business premises of the debtor and seize cash and cheques payable to the debtor in satisfaction of the debt. 

If Sheriff Officers are successful in seizing any cheques under a money attachment order, they will then need to pay those cheques into their own  bank account to collect the proceeds. The cheques will be payable to the debtor and are likely to be crossed “account payee” or “account payee only” so how will banks in Scotland be protected against a claim from the true owner of the cheques?

Luckily the snappily named Bankruptcy and Diligence etc (Scotland) Act 2007 provides the collecting bank with protection, provided they get a copy of the payment order issued to the Sheriff Officers by the court which must contain details of the actual cheques being presented for collection.

So while bank tellers will need to be alert, Sheriff Officers who wish to pursue this form of debt recovery will first be required to serve a charge for payment on the debtor, wait 14 days and if payment has not been made, descend on the debtor armed with a money attachment order.  By that time the Sheriff Officers are likely to find themselves in the same position as Old Mother Hubbard!

Living Wills

… or as the Bank of England prefers them to be known, “recovery and resolution plans”.  The FT has an article on these, reporting that Andrew Bailey, head of banking services at the Bank of England (whose signature is printed on bank notes) has listed the elements that would be required in , ooh - dare me! … ”living wills”:

• Recovery
  Board responsibility for detailed plans for recovery in a crisis (“a lender’s internal blueprint”)
  proposals for an orderly death (actually, you can’t blame the BoE for objecting to the morbid metaphors this subject engenders)
  lenders to hold more capital
  contingency funding plans
  use of contingent capital instruments
  sale of assets and/or business lines
• Resolution
  a detailed balance sheet
  a clear mapping of relationships with affiliates
  wind-down plans for all parts of the business
  a contact plan for stake-holders