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� DBRIEF43–2008
So are we a public body?weaver - 4 months onIn June this year the Divisional Court handed down judgment in the case of R (Weaver) –v- London & Quadrant Housing Trust. In what was seen as a startling development, the Court ruled that the allocation and management of housing stock (including the service of notices to terminate tenancies) by RSLs (now registered providers) were functions of a public nature and that in relation to those functions, RSLs were to be regarded as public authorities for the purposes of the Human Rights Act 1998 and Judicial Review. Devonshires were instructed by London & Quadrant.
So where are we four months on? It is of course early days for the full impact of the Weaver decision to “kick in” but here at Devonshires we have already seen one JR claim issued against a London housing association relying on Weaver to challenge an allocation decision under a Common Housing Register. Judicial review has also been threatened by a number of tenant lawyers in relation to decisions to bring possession proceedings.
Weaver is not going to go away. L&Q obtained permission to appeal from the trial judge, Lord Justice Richards, and an appeal has been issued in the Court of Appeal. The appeal is likely to take place in February or March next year. However, there is every possibility that the case will go as far as the House of Lords, given its importance.
In the meantime, HAs need to take steps to protect as far as possible against judicial review and human rights claims. In practice this means (1) reviewing allocations policies (2) ensuring that internal decisions regarding management of tenancies
dbriefthe
No43
Legal Insight from Devonshires
in thiS iSSueSo are we a public body? 1conflicts of interest - a new regime for board members of companies 3residents on board - a reminder! 4devonshires focuses on its growth strategy 5Government turns to pfi in crisis 5investigating acts in the care sector 6academies: opportunities for housing associations? 7the companies act 2006 - october 2008 changes 8the spectre of contractor insolvency 10Joint Ventures or bail outs? 12charitable incorporated organisations 13rent to homebuy - Vat implications 15partners complete extramile challenge 16
“Judicial review has also been threatened by a number of tenant lawyers in relation to decisions to bring possession proceedings.”
residents on board - a reminder! See page 4
2 DBRIEF43–2008
our SerViceSif you are not familiar with the range of legal services offered by devonshires the following list of services and partner contacts may be of interest:
banking Andrew Cowan
building contracts, Maintenance and Gas contracts Paul Buckland
charities Andrew Crawford
commercial litigation and fraud Philip Barden and Daniel Clifford
commercial property Susan Hall and Allan Hudson
corporate and commercial Jonathan Ebsworth, Gareth Hall and Andrew Crawford
constitutional advice Gareth Hall and Andrew Cowan
construction Philip Barden and Mark London (contentious) Paul Buckland and Andrew Thompson (non-contentious)
employment Amanda Harvey and Nicola Philp
eu procurement Duncan Brown and Paul Buckland
Group Structures and Governance Andrew Cowan and Gareth Hall
housing Management litigation and advice Nick Billingham
insolvency Philip Barden and Jonathan Ebsworth
it Gareth Hall
local authorities Julie Bradley
low cost home ownership, Shared ownership and homebuy Allan Hudson and Julie Bradley
Mergers Andrew Cowan
nhS trusts and care Duncan Brown
partnering Duncan Brown
projects Paul Buckland
property acquisition, development and Sale Allan Hudson and Julie Bradley
property litigation and planning Nick Billingham
Stock transfers Julie Bradley
ForfurtherinformationsimplyspeaktoyourusualcontactoranyoftheabovepartnersTel:02076287576Fax:020725673�8
email:[email protected]
So are we a public body? – cont.
– including decisions to take possession proceedings - are properly documented and (3) reviewing complaints procedures.
As far as allocations policies are concerned, HAs need to remember the fundamentals: policies must be fair, transparent and coherent; they must not be applied blindly and must allow for departure in exceptional circumstances; they must take into account all the applicant’s circumstances; any review must be impartial and by an individual distanced from the original decision; and policies must be reviewed regularly.
As to decisions to terminate tenancies, the focus here must be on tenants who have limited security of tenure. Decisions to terminate secure and assured tenancies on discretionary grounds (breach of tenancy, ASB etc) are less likely to be the subject of a judicial review challenge because any complaint about the decision to bring the proceedings can be dealt with by the trial judge (see R(Mills) –v- Airways HA (2005)). However, when it comes to terminating licences, assured shorthold tenancies, starter tenancies, demoted tenancies and other non-secure tenancies, the tenant has very little opportunity to defend a possession claim.
These are therefore the situations where a JR claim is now most likely. It is therefore imperative when deciding to bring possession proceedings against residents with limited security of tenure, that the decision made is robust and properly documented. In particular, starter tenancy policies should be reviewed to ensure that the procedures for termination of the probationary tenancy are properly documented and provide for an appeal process which is fair, transparent and independent.
Policies on taking joint tenants’ notices to quit in circumstances of domestic violence should also be reviewed given that the rights of the remaining joint tenant are severely restricted and may well give rise to a judicial review claim.
In all this, we do need to remember however that Ms Weaver’s substantive claim before the Divisional Court was dismissed. She had claimed that L&Q’s use of ground 8 (the mandatory arrears ground) was contrary to Housing Corporation guidance and that she had a legitimate expectation that the ground would not be used against her. In the event, L&Q’s use of ground 8 was vindicated with Lord Justice Richards dismissing Ms Weaver’s claim. Perhaps ironically therefore - given the ongoing controversy surrounding the use of ground 8 - the Weaver case appears to have bolstered rather than undermined the use of ground 8 by HAs as part of their income collection policies.
When it comes to complaints procedures, similar principles of proper record-keeping, fair and coherent procedures and ensuring independence of the decision-maker apply. At each stage of the complaints process, HAs need to bear in mind the possibility of a public law challenge and should not be afraid to overturn the decision made below if it is considered wrong or unreasonable.
And on the plus side? In the long term the hope is of course that Weaver is overturned. In the meantime some comfort can be had from the fact that Kay –v- Lambeth (2007) remains good law in the light of the House of Lords decision in Birmingham –v- Doherty earlier this year which means that Human Rights Act claims in possession proceedings will be extremely rare. By the same token, continuing pressure on public funding means that only those judicial review cases with a significant chance of success should get as far as the Courts.
Weaver four months on? There is certainly work to be done by HAs internally, but if principles of good management, effective policies and procedure are applied, HAs should have little to be afraid of in the post-Weaver world.
3 DBRIEF43–2008
“Now board members are required to prevent such conflicts from arising in the first place unless either the board has, or the members of the company have, given prior authorisation in accordance with the new legislation.”
conflictS of intereSt – a new reGiMe for board MeMberS of coMpanieSBoard members will be familiar with the process of declaring their interests where they are – or have an interest in a third party that is – contracting with their company. That applies whether it is a trading company, an RSL or a charity. They may be less likely to realise the potential for conflict in other situations: for example, as a director of another company or from their personal interests.
From 1 October 2008, a new statutory provision, section 175 of the Companies Act 2006 placed an absolute duty on each board member (of companies limited by shares or by guarantee) to avoid situations which could possibly conflict with the company’s interests. The section 175 duty would, for example, cover situations where a director or a person connected with him or her:
represents a parent shareholder; or
is a board member of a competitor, supplier, customer or advisor of the company.
Currently, when a material conflict of interest arises, the member of the board concerned will take steps to mitigate the conflict by, for example, absenting themselves from board discussions, seeking the consent of the members and, in extreme cases, standing down from the board.
Now board members are required to prevent such conflicts from arising in the first place unless either the board has, or the members of the company have, given prior authorisation in accordance with the new legislation. There is no statutory definition of a conflict of interest. That said, it is safe to say that it includes anything or any connection that might cause a board member to put his or her own, or a third party’s interests, before those of the company. The ways of dealing with the new duty are summarised below.
prior authorisation of conflicts
The Companies Act 2006 allows board members of companies to authorise conflicts and potential conflicts where appropriate. This can be done, for example, by:
board approval - The new statutory duty will not be breached if the relevant conflict has been authorised by the directors.
However, for a company incorporated before 1 October 2008, as indicated above, the directors can only authorise conflict solutions if a resolution of the company’s members has been passed, permitting them to do so. Generally, there is no obligation for companies to empower their directors to authorise conflict situations. Those that do not will have less flexibility in dealing with conflict situations, as they will need to rely on shareholder approvals which may involve more time and process than may be desired.approval by the Members of the company - In addition to the need to pass a shareholder resolution to enable the directors to authorise conflicts as mentioned above, the current law enabling members of a company to authorise conflict situations remains. This can be obtained by unanimous shareholder consent or by special resolution.
ratification - A breach may subsequently be ratified by the company’s members.
If a company is contemplating amending its articles it may, for example, also want to make it clear that a board member will not be in breach of duty in respect of a conflict:
if they receive confidential information from a third party (such as the parent) and do not disclose this to the company or use it for the company’s benefit; or
through sanctioning conflicts that may arise as a result of a board member’s involvement with other companies, or I&Ps, in the same group.
practical Steps
Practical steps board members and members of their SMT’s may want to consider include:
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4 DBRIEF43–2008
“As the Tenant Services Authority comes into being it’s worth stating that this approach isn’t going away.”
reSidentS on board – a reMinder!From 1 April 2008, the Housing Corporation’s Circular 05/07 came into force. The circular sets out the regulatory requirements in relation to the involvement of residents in an RSL’s business and in particular in relation to service delivery.
legal ramifications
From a legal perspective, most importantly this requires that all housing associations owning more than 250 units of social housing should have at least one resident on its board or on a committee with a service delivery remit. This is stated to be an absolute regulatory requirement for RSLs with over 1,000 units.
The Circular says that the “election” of residents should be “seen as the default option”.
legal action required
This means that those associations with requirements for election by shareholders will need to revisit their rules if residents are being “given” a place on the board in order that residents can be elected or appointed by residents in a way which is agreed by the board.
For those RSLs who are also charities, consideration should be given to their conflicts of interest rules in order to ensure that residents are not conflicted out from sitting on these boards or committees. Where instead of the board membership, a new focus is being placed on resident led committees (say in relation to services and service delivery) then specific terms of reference will be required in order to demonstrate compliance.
other related requirements
The Circular makes it clear that where associations have not brought in or are unable to bring in a resident board or committee membership framework yet, there should be a timetabled action plan in order to achieve this. In addition, the Circular also requires that an RSL’s approach and plans for involving residents must be included in its Corporate Plan. This is in addition to the Charity Commission requirement for a Public Benefit statement in a charity’s annual audited accounts.
The Circular doesn’t distinguish between shared ownership, market rent, or supported housing residents (and in the latter case, their carers). However, it is a requirement that an RSL produces and publishes a clear “resident involvement statement” (and are able to demonstrate how residents have been involved and their degree of influence). This then needs to be followed by “impact assessments” which evidence how services have improved. No time period is specified for these updates. Our assumption is that the statement needs to address each of these user groups.
commentary
Without wishing to comment on the rationale behind the Circular, there are two items being dealt with here – resident involvement in services; and residents within governance structures. Many RSLs have already revisited their resident engagement framework and governance structures. However, many are still “works in progress”. For this latter category, urgent action is now required. As the Tenant Services Authority comes into being it’s worth stating that this approach isn’t going away. The TSA”s “constitution” includes a requirement as “Objective 3” “to ensure that the tenants of social housing have the opportunity to be involved in its management”.
identifying their existing actual or potential conflict situations; and
circulating an ordinary resolution to the company’s members seeking to empower the board members to authorise conflict situations (and, ideally, circulate a special resolution to amend the company’s articles to include specific conflict provisions).
for an article on the remaining changes under the companies act 2006 please see pages 8-10.
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5 DBRIEF43–2008
“Over the last few rounds, we have seen an increasing amount of extra care schemes being awarded funding and also schemes involving wider regeneration initiatives.”
deVonShireS focuSeS on itS Growth StrateGy
The Partners of Devonshires have elected Andrew Cowan to the new post of chief executive of the partnership and Julie Bradley as head of property.
Andrew’s role will focus on growth and client relationships. Julie will be looking at ensuring our property team of 19 solicitors and 19 paralegals works effectively and efficiently for each of our clients (both in the Commercial and Social Housing Sectors).
Allan Hudson as Senior Partner, will continue to have a key role in the strategic development and growth of the practice.
GoVernMent turnS to pfi in criSiSAs predicted in the last edition of DBrief, PFI has been re-confirmed as a key policy initiative to increase social housing investment.
In July, Communities and Local Government (“CLG”) announced the 6th Bidding Round for PFI credits. This is the process whereby Local Authorities apply for a slice of the £1.8 billion revenue funding that has been made available for housing PFI projects.
Authorities do this by working up an Expression of Interest for submission to CLG by the end of October. The CLG will then consider these expressions against pre-published policy criteria and then it will announce the successful applicants early in 2009.
In putting together their Expressions of Interest, Local Authorities will need to work up the basics of a particular housing related scheme, covering such matters as indicative costings and programme, proposed number of units, method of delivery etc. This make up of the scheme will influence the level of funding that is both requested by the Local Authority and also awarded by CLG to successful Authorities.
To date, each round of PFI Credits has tended to have a slightly different emphasis. Over the last few rounds, we have seen an increasing amount of extra care schemes being awarded funding and also schemes involving wider regeneration initiatives.
This time around, CLG has stated that it intends to give priority to:
“projects that deliver a range of outputs contributing to regeneration and the creation of sustainable communities. In particular, we would encourage proposals that demonstrate more than one of the following:
a re-positioning of estates and their neighbourhoods in terms of quality and diversity of housing, reputation and demand
a comprehensive approach to a broad policy agenda which includes tackling worklessness, community empowerment and enhanced design and quality
a recognition that service led solutions must complement bricks and mortar ones
a ‘thematic’ approach to stock needs (e.g. addressing problems with sheltered housing)
an increase in affordable rented housing, particularly where this addresses the needs of specific client groups, especially those socially excluded”.
Also, and perhaps significantly, there is a greater emphasis upon delivering larger schemes with CLG stating that it “hasinmindprojectswithacapitalvalueof£�00millionormore.”
The response from Local Authorities appears to be very positive and we are aware of a number of Local Authorities who are intending to make applications. These include both Local Authorities who have undertaken PFI projects before and also those who are considering applying for the first time.
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6 DBRIEF43–2008
“The golden rule, as with any investigation, is that the more comprehensive the information gathered, the more easily the accident investigation team will arrive at the cause(s) of the accident.”
In summary, the announcement of Round 6 must be seen as very welcome by those involved in the housing sector. With funding currently in short supply, the commitment of nearly £2 billion by the Government is not to be sniffed at. It is now incumbent upon the Local Authorities concerned and the housing community to work together to maximise the impact that this funding can have on our communities.
If you have any queries or comments about this article or about PFI please contact Paul Buckland. Paul is a Partner in Devonshires’ Projects Group and has advised Local Authorities, Sponsors and RSLs on a large number of Housing PFI projects.
inVeStiGatinG actS in the care SectorAlthough Health & Safety law obliges Care Sector Operators (CSOs) to prepare and regularly review risk assessments, it perhaps surprisingly contains no specific legal obligation requiring the investigation of accidents or the production of accident reports. Notwithstanding this, an enforcement authority will nearly always expect to see an Accident Investigation Report (AIR) following its decision to investigate the causes of an accident.
The preparation of a fully considered and properly reasoned AIR is an essential part of managing risk. In the care sector, where the consequences of an injury to a resident may be significant and long term, the ability to prepare a report to a high standard is essential. A well prepared report can often be the difference between a decision by an enforcement authority to investigate and prosecute or to take no action.
So, by way of a recap, what are the 4 basic steps required in preparing an AIR.
Step 1 – deciding whether or not to prepare an air
If a resident has been seriously injured or has died as a result of the accident then an AIR will be necessary. For all other accidents, consideration will have to be given to the severity of the accident. If having notified the accident in accordance with RIDDOR obligations you are still uncertain as to whether or not an AIR is required or is necessary then you should either consult your health and safety advisors or your solicitors.
Step 2 – Gathering the evidence
Gathering evidence from the physical accident scene and from those who witnessed the accident or dealt with the injured person should be the first priority. This will include photographic or other electronic records of the scene, records of equipment that may have had a bearing on the accident, and obtaining detailed statements from witnesses.
The golden rule, as with any investigation, is that the more comprehensive the information gathered, the more easily the accident investigation team will arrive at the cause(s) of the accident.
In addition to the physical evidence, the CSO will have to take into account any relevant documentation, such as risk assessments, health/ability assessments, whether the circumstances surrounding the accident have occurred previously or been the subject of any audit or advice, training records and written procedures.
The investigating authority has powers under the Health & Safety at Work Act to obtain disclosure of all health and safety documents. Any report must deal with previous risk assessments that are relevant to the accident and must deal with why it is that no risk assessment has been prepared when one ought to have been.
Step 3 - analysing the causes of the accident
The first question to address in analysing the cause of any accident is “what happened?” Once that question has been answered then one must ask “how did it happen?” This analysis will involve an examination of the known risks, the adequacy of training and procedures. There are no hard and fast rules and each CSO should have as part of its health and safety policy a detailed set of framework questions to consider when preparing an AIR.
7 DBRIEF43–2008
“As a demonstration of the Government’s commitment to Academies, it has recently been announced that the national framework to procure the building of Academies is to be doubled in size.”
acadeMieS: opportunitieS for houSinG aSSociationS?It takes many things to create a successful and sustainable community but more often than not at the heart of such communities is a school. A good community school not only provides somewhere for local children to be educated but is also at the centre of community activities. The Government’s Academies programme provides organisations with an opportunity to provide improved facilities for community schools and also to have a say in the ethos and culture of the school.
what are academies?
Academies are all-ability, state-funded schools established and managed by sponsors. They aim to bring a distinctive approach to school leadership and management drawing on the skills of their sponsors by giving the sponsors the chance to shape the philosophy of the school and influence how the school is run. Academies are set up with the backing of the local authority in which the school is situated but are not funded by the local authority. Their funding comes from central Government at a level comparable to other schools in the area.
The Academies programme was introduced by the Government in March 2000 with the first projects being announced in September of the same year. There are currently over 100 projects at the expression of interest stage or beyond. The Government has spoken of wishing to see at least 400 Academies being completed as part of the programme.
Once the Academy has been established, the school or schools forming the Academy will either be rebuilt, refurbished, operated from the existing facilities or a combination of all of these. The schools involved can be primary or secondary schools or a mixture of the two.
As a demonstration of the Government’s commitment to Academies, it has recently been announced that the national framework to procure the building of Academies is to be doubled in size. The framework will be re-procured early next year up to a value of £4 billion.
who are the Sponsors?
Each Academy has at least one sponsoring organisation although it is not uncommon for an Academy to have more than one sponsor. The sponsoring organisations are
Not all accidents will arise from a single identifiable cause. The vast majority arise through a combination, some of which may represent a failure by the CSO to take a proper account of risks or to learn from previous mistakes. The cause of an accident will almost certainly be multi-layered with one cause having perhaps more of a direct affect than another. Each of the causes should be identified.
Step 4 – preparing the report
There are no strict rules as to how an AIR should be set out, but a typical framework will include a description of the accident event, the control measures in place at the time of the accident (such as risk assessments, published procedures etc), a consideration of the causes of the accident and then recommendations for remedial action.
Provided the enforcement authority is satisfied that the accident has been properly investigated and that the organisation has learnt from any mistakes that may have come to light (and its procedures changed accordingly) then it will have gone a long way to
persuading the enforcement authority that it is not in the public interest to prosecute or to investigate further.
Before any CSO is required to prepare an AIR, it is essential that its health and safety policy address the method by which the AIR team should be constituted and provide a framework for preparing an AIR. Any advice in relation to the preparation of this can be sort from the CSO’s health and safety consultant or solicitors.
8 DBRIEF43–2008
“The Academies programme offers the opportunity to take this to another level by removing educational deprivation and providing communities with a facility not only for the young people of the community but for all the community.”
the coMpanieS act 2006 - october 2008 chanGeSRunning to over 1,300 sections, and easily the longest Act of Parliament in English legal history, the implementation of the Act was by necessity chopped up into manageable chunks, as to bring it all into force in one go would have caused upheaval that would have made the opening of Terminal 5 look positively smooth.
The good news, though, is that having survived seven “key dates” on which parts of the Act have come into force, and that’s not even including the most recent, we’re down to the final two key dates. The even better news is that they’re a year apart, which means that once one has digested the changes which came into force on 1 October 2008, the next is not until 1 October 2009, at which stage one would be rejoicing in the knowledge that that would be it. At least until the next time the powers-that-be decide on wholesale sweeping reforms to the company law regime, that is.
All the sections of the new Act lie somewhere upon a spectrum. At one end there are entire chunks which have been ported over in their entirety from the old Act, and which
drawn from a wide range of backgrounds including high performing schools and colleges, universities, individual philanthropists, businesses, the voluntary sector, the third sector and religious communities. Some but by no means all of the sponsors have a record of involvement in educational enterprises but the Government requires that all sponsors are able to demonstrate a record of success. The Government believes that by involving successful organisations in the running of schools the culture of low aspiration will be banished and sponsors will bring to their Academies a desire to achieve.
To date, two Housing Associations have sponsored Academies. The first to financially close was New Charter Housing Association in early 2007. In September of this year the New Charter Academy welcomed its first pupils. In 2010, the Academy will open a newly built campus.
In March of this year, the Gentoo Group became the second Housing Association to close an Academy project when they became sponsors of an Academy in the Sunderland area. The Academy is co-sponsored by Sunderland City Council.
what do the Sponsors do and what do they Get?
The sponsors effectively control the schools within the existing statutory framework that govern publicly funded schools. The sponsors have the right to appoint the majority of the members of the governing body. This allows the sponsors to steer the direction and vision of the school and to establish their own management style at the Academy.
A financial contribution is required in order to become a sponsor. Each sponsor is expected to establish an endowment fund. This will typically be worth £2 million which will be payable over five years with at least £500,000 invested in the first year. The endowment fund is spent by the Academy to improve educational standards in the local community.
what are the opportunities?
Housing Associations work at the heart of communities to build, strengthen or regenerate local areas. The Academies programme offers the opportunity to take this to another level by removing educational deprivation and providing communities with a facility not only for the young people of the community but for all the community.
By taking the opportunity to direct the culture and ethos of the local school Housing Associations would have the chance not only to raise housing aspirations in a community but also to raise the educational and vocational aspirations. As New Charter Group’s Chief Executive, Ian Munro said “It is clear to me that our massive investment in homes and environment will not, on its own, provide great opportunities for all our communities. We need to give young people the chance to achieve more than they thought possible. The [New Charter] Academy can provide this”.
� DBRIEF43–2008
therefore don’t change the landscape at all. At the other end, however, are those where the extensive consultation carried out before the Act was written was actually heeded, and things have changed, maybe not hugely, but generally for the better. The following lie more to that end than the other.
We are issuing a Handbook covering these latest changes. Copies are available on request.
underage directors
With effect from 1 October 2008 a minimum age requirement of 16 years old comes into force. No person who is under that age may be a director of a company, and any director of any company who is under 16 on that date will have their directorship terminated automatically without the need for any notification to the Registrar of Companies (although the company will need to update its statutory books). If this leaves the company without an eligible director (given the tightening of the corporate director regime at the same time) then the company will be in default and will need to appoint a director quick sharp.
corporate directors
Whilst it has historically been possible for a company to be a director of another company (and a separate company to be the company secretary), with effect from 1 October 2008 it will be a requirement that every company must have at least one director who is a “natural person”, i.e. an individual, not a company. There is a grace period for any company which only had corporate directors on the day of royal assent of the new Act (8 November 2006), which will have until October 2010 to put in place a “natural person” as a director.
directors’ conflicts of interests
Please see Andrew Crawford’s separate article on this topic on pages 3-4.
financial assistance
The prohibition against a private company providing financial assistance (of pretty much any nature) in the acquisition of its own shares has long been the bane of English corporate lawyers, who have looked with envy at their counterparts in jurisdictions with no such prohibition, such as Jersey, the Isle of Man and the British Virgin Islands – although, in truth, the envy of those in the BVI is more to do with the sunshine, sand and diving than the freedom to give financial assistance.
The whitewash procedure by which a private company could authorise the financial assistance was complicated, time-consuming and expensive, but all-too-often necessary even in relatively inauspicious circumstances, such as where the target of an acquisition was giving a cross-guarantee upon the entry into the group security arrangements of its purchaser.
With effect from 1 October 2008, however, the prohibition, and in consequence the whitewash procedure and three Companies House forms (the 155(6)(a), (b) and the 157, in case you were wondering) are consigned to the waste-paper bin of history, and the memory, usually accompanied by a shudder, of aging corporate lawyers.
Share capital reduction
Coming in a close second to financial assistance in the “things that corporate lawyers are glad to see the back of” stakes is the share capital reduction procedure. Historically any company wishing to reduce its share capital would firstly have to get the approval of its members through a special resolution, and thereafter would need to get the approval of the court.
This has been considerably simplified, as the latter part is now no longer necessary. Instead, the directors can simply make a solvency statement (to the effect that following the reduction the company is solvent and will remain solvent and continue to be able to meet its debts as they fall due for the forthcoming twelve months), set out a memorandum of capital (and after 1 October 2009 a statement of capital) showing the alterations to the company’s share capital effected by the reduction.
annual returns
For any annual return made up to a date on or after 1 October 2008, where the
“Coming in a close second to financial assistance in the “things that corporate lawyers are glad to see the back of” stakes is the share capital reduction procedure.”
�0 DBRIEF43–2008
the Spectre of contractor inSolVencyThese are difficult times for contractors. Various analysts are forecasting that a significant number will become insolvent within the next six months. This will have a dramatic effect on the industry. In this article Saajda Deen, a solicitor who specialises in insolvency within the construction sector, reminds clients of the various forms insolvency can take and how these effect standard form construction contracts.
The signs are usually there at an early stage, inflated applications for payment, delay and lack of trades on site. When a contractor becomes insolvent it invariably costs the Employer a significant sum of money to complete the Works. Although some of this expense will be avoided through having NHBC insolvency cover (or a similar product) a
company concerned is either a private company or a non-traded public company, it will only be necessary to provide the name of a shareholder, and not their address. Traded public companies will only be required to provide names and addresses where the shareholder concerned holds 5% or more of any class of share.
Two points arise, firstly, any historic annual returns which contain shareholder addresses will still be available as a matter of public record. Secondly, any annual return up to a date after 1 October 2008 which contains address details when it shouldn’t will not be accepted and Companies House will reject it as non-compliant.
objecting to a company name
When a new company name is registered, it is open to challenge in one of three ways. Firstly, the Registrar of Companies will double check that it doesn’t contain any prohibited, sensitive or restricted words, such as Charity, Chemist, Sheffield, Unit Trust, Council, Benevolent. There is a long list of such words and phrases, all of which will raise flags at Companies House.
Secondly, they will check that it isn’t “the same as” a corporate name already registered (whether for a company or an LLP), and when doing so ignores things like punctuation, capitalisation, and spacing so “Hands Limited” will be deemed to be “the same as”, “H and S Limited” and “H&S Limited”.
If a company passes those checks, then it will be registered – its name, however, is still open for challenge:
within one year of its registration if someone objects to the Secretary of State that the new company name is “too like” their existing company name;
within five years of its registration if the Secretary of State has reason to think that the company has provided misleading information for the purposes of registration; or
at any time if the name gives such a misleading indication of the nature of the company’s activities that it is likely to cause harm to the public.
To these checks has been added one further line of objection akin to the “cybersquatting” issues which faced domain names in the early part of this decade - any person can complain about a company name where the company has been registered with the intention of extracting money from the person making the complaint, or to prevent that person from registering a name in which they have goodwill.
Objections about these so-called “opportunistic registrations” are made to the new, independent, Company Names Tribunal, and won’t be dealt with by Companies House. If the Tribunal upholds the complaint, it can make an order that the company name must be changed, and if the company fails to comply then the Tribunal can pick a name for them. The company does have a right of appeal to the High Court, and the rules will be retrospective in nature, which means that they will apply to opportunistic registrations where the date of incorporation of the company was prior to 1 October 2008.
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“If the Tribunal upholds the complaint, it can make an order that the company name must be changed, and if the company fails to comply then the Tribunal can pick a name for them.”
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parent company guarantee, or a performance bond, these are unlikely to cover all the costs. What they will not do is compensate for the additional management time spent by the Employer in completing the Works or the disruption to its programme.
In this article I will examine the two main routes to insolvency and how these impact upon the three standard form construction contracts most used in the sector – The JCT Design and Build Contract, the NEC Standard form contract and the PPC2000. I will then examine some of the ways in which the effect of insolvency can be ameliorated.
The two major routes to insolvency are administration and liquidation.
administration
An Administrator may be appointed by either the directors of a company or by a charge holder under the express provisions of a charge. There are two alternative grounds for appointing an Administrator. The first ground is to try and save the company and trade out of its present difficulty. The second and most common ground is that administration will likely achieve a better result for the creditors than would be obtained in a liquidation.
It is uncommon for an administrator to continue trading for any length of time in the hope the company will survive. While it may happen with football clubs, it is extremely rare within the construction industry. As readers will no doubt know only too well, in order for a contractor to complete the Works it must pay its sub-contractors and employees. This requires a healthy cash flow. Without it, Works more often than not grind to a halt.
The reality is that an Administrator will probably not be able to trade the company to safety. Given this they will look to sell the business of the company and its assets as a going concern. If this cannot be achieved then the administrator will look to release any property for the benefit of any secured creditors. Invariably administration means that the company will cease trading and its assets will be disposed of. Even in the unlikely event that the administrator decides to continue trading, he is able to disclaim all onerous contracts and in effect walk away from them. This includes a construction contract.
liquidation
Liquidation (or winding up) is the end of the line for a company. It is where the business of the company comes to a shuddering halt. Liquidation can come about in two different ways. Firstly a liquidator may be appointed by one of the directors when they know the game is up, or alternatively it may be by order of the court, usually upon the application of a creditor. In both scenarios the company ceases to trade, the liquidator moves in and the creditors line up to see if there is any money available to them.
Secured creditors get first priority and unsecured second, although the costs and expenses of the liquidation are paid before there is any dividend paid to unsecured creditors. Employers under a construction contract will inevitably fall into the second category and receive the scraps, if anything, once the assets have been realised.
insolvency and Standard form construction contracts
The majority of standard form construction contracts deal with administration and liquidation in similar ways. The JCT98 D&B contract does not provide for automatic termination on administration, but it does for liquidation. Termination in the event of administration is at the election of the Employer; reflecting the possibility that a company might be able to trade out of administration. The JCT2005 D&B contract takes a more robust approach and provides for automatic termination in both administration and liquidation. It assumes, rightly so, that the prospects of a contractor trading out of administration are virtually nil.
The NEC Engineering and Construction Short Contract, in common with nearly all standard form NEC contracts, simply allows an Employer to terminate in the event of administration and liquidation. The PPC2000, like the JCT2005, provides for immediate and automatic termination in the event of both.
protection?
There is no getting away from the fact that insolvency will cost money and time, no matter what you have done to protect yourself. However, putting in place a rigorous
“Even in the unlikely event that the administrator decides to continue trading, he is able to disclaim all onerous contracts and in effect walk away from them.”
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protection mechanism will at least enable you to off set the majority of the cost. The first thing to do is ensure you consider the financial viability of the proposed contractor. Although it is not conclusive, an examination of the last filed accounts and trading history of the company can be a useful pointer. Secondly, any contract should be buttoned down with a good defects liability policy that includes insolvency cover. There should also be recourse to a third party in the event of insolvency, either a parent company or a bondsman.
In these difficult times, protection should be at the forefront of an employers’ mind. Although it will not prevent all the pain, it will certainly help.
Devonshires’ Construction team offer comprehensive advice on all elements of insolvency protection, bonds and guarantees. Please contact Andrew Thompson on 020 7065 1829 for further details. If you find yourself dealing with an insolvent contractor, or one you suspect may soon be insolvent and require guidance then please call either Saajda Deen or Mark London of the Construction team on 020 7880 4271.
Joint VentureS or bail outS?We are seeing a number of deals in the social housing marketplace being driven by private property developers keen to offset risk and get cash on to their balance sheets as quickly as possible. Sales have dried up for residential house builders and it’s therefore imperative that they are able to liquidate their assets (primarily in the form of land or finished developments) as quickly as possible. As a result a number of deals have been executed by larger RSLs to purchase significant quantities of finished housing stock or land on various terms. Not too surprisingly valuations have been at less than market price as it was six months ago.
The other trend is for developers that no longer have the ability to obtain bank funding for the whole of their larger sites to seek to jointly develop these with registered social landlords through joint venture vehicles or structures. A recent transaction needed to be done by a set deadline in order to ensure the initial cash payment went on to the developer’s balance sheet prior to its financial year end. Its accounts are going to look a lot healthier as a result.
If an RSL is to consider such a joint venture it must consider a number of different factors to ensure it is getting value for money and is able to control the situation if the developer gets into further financial difficulties or goes bust. The following is a non-exhaustive check list for RSLs to consider in this eventuality:
Valuation – it is imperative that a full valuation is carried out by experienced and reputable valuers to ensure the initial price being paid is correct. This will either be paid for direct to reflect the RSLs future ownership of the site/development or will be funded through a joint venture vehicle. Either way the price being paid would need to be set at day one based upon the valuation of the land/buildings.
Location/future demand – obviously sales have dried up but when are they likely to come back? What are the demographics for the area and the social housing and open market need for housing? A difficult question to answer at this time perhaps.
Funding – the developer is looking for initial cash and possibly instalments payable over time in respect of the interest in land it is giving up. What is the scheme going to look like in terms of the mix between social rented, shared ownership or open market? This will determine the development funding necessary and careful thought will need to be given to where this comes from.
Planning – what are the existing permissions and if there aren’t any (and best practice in any event), you must obtain a planning consultant’s report from an experienced and reputable planner used to dealing with the relevant local authorities.
Insolvency of the developer – it is often the case that if a particular structure is required by the RSL then the developer will require these to be mutual. We see no issue with this, as what’s good for the goose is good for the gander! However, you need to be explicit on exactly what will happen in the event of an insolvency event
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“The other trend is for developers that no longer have the ability to obtain bank funding for the whole of their larger sites to seek to jointly develop these with registered social landlords through joint venture vehicles or structures.”
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or a breach of banking covenants arising. In essence, you will need to ensure that you are not only able to control the future development of the land but also the vehicle itself. This may mean buying out the developer from the particular vehicle but in these uncertain times that may not be what is required at the time. An option to leave the developer in place and take over the vehicle to complete the development may be the best route. Alternatively, taking the developer’s staff in to the joint venture vehicle might also get the job done. In essence, the innocent party will need to be in control, but care has to be taken to ensure that an insolvency practitioner will not be able to disclaim the agreement for being onerous on the developer and you should seek expert advice to ensure this is the case.
Construction and Development – who will be carrying this out and is it a condition of the RSL being involved that the developer takes on this contract? There has to be an ability to avoid this if the developer is not performing under the Development/Construction Contract and we would again suggest that the developer is not able to control the joint venture vehicle when making these decisions, e.g. relating to the building contract or appointment of architect. These decisions must be left in the hands of the RSL.
Joint Venture Vehicle – we are generally advising RSLs to use limited liability partnerships when entering into joint ventures and for the RSL group member to be a limited company. This enables profits to be taxed in the hands of the members with the ability of the company to gift aid the profit directly to one of the charities within the group. A development company structure is therefore very useful where the scheme is a mixed scheme and cannot be classified as charitable in whole or in part.
Conflicts of Interest – new Companies Act 2006 provisions came in on 1st October 2008 to bolster the existing directors duties enshrined in the legislation. When operating a development company structure, directors must be aware of these new rules where they have other interests to represent within the group. Please see Devonshires Companies Act 2006 Handbook for further details.
It appears therefore that where development and sales have slowed because of the market and RSLs are having difficulties in maintaining their targets, fresh stock and fresh opportunities in the forms of outright purchase or joint ventures are coming to light to assist. Planning the structure of joint ventures, in particular, is imperative and early advice should be taken as to which direction it is best to take. Taxation advice is critical as is the ability to work with the parties to put together the most efficient structure that works for each party. But RSLs should not be bowled over or flattered by the approaches being made by private developers or house builders. “Cash is king” and therefore RSLs should be able to drive a hard bargain.
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charitable incorporated orGaniSationSCharitable Incorporated Organisations are a new kind of corporate body, designed specifically for charities’ use and introduced by the Charities Act 2006. Might they provide any opportunities for RSLs?
So what, exactly, is new?
At the moment, companies (usually limited by guarantee) which are also registered charities suffer the burden of dual regulation. They have to take into account the requirements of company law and charity law, register with the Registrar of Companies at Companies House and with the Charity Commission and provide accounts and submit returns to both bodies.
With the creation of the CIO as a new form of legal personality for charities incorporated in England or Wales, the Charities Act 2006 (the Act) does away with the inconvenience of dual regulation. The Charity Commission will be the sole registrar and regulator of CIOs.
“Taxation advice is critical as is the ability to work with the parties to put together the most efficient structure that works for each party.”
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what practical difference does the different regime for cios make?
Those who, having decided to set up a charity, choose to form a CIO will:
be able to take advantage of the usual benefits of corporate structures, such as limited liability;
only have to register with the Charity Commission. The act of registration with the Charity Commission both incorporates the CIO and registers it as a charity at the same time;
have to prepare one annual return and one annual report in accordance with the Charities Act 1993. CIOs will not have to prepare a directors’ report in accordance with the Companies Act 2006, as charitable companies do; and
have to send their accounts to the Charity Commission only. The requirements for preparing accounts will also be less onerous for CIOs, as they will be subject only to the accounting regime set out in the Charities Act 1993.
Moreover, the Charity Commission does not intend to charge CIOs for registration or for filing information, unlike the Registrar of Companies. The Charity Commission also plans to introduce model forms of constitution; the general intention is to make the process of registering an incorporated charity quicker, cheaper and simpler.
will it be possible for charities which are not set up as cios at the moment to convert to cio status?
The provisions of the Act on CIOs come into force in October 2009. Secondary legislation detailing how CIOs should be established and operate will be made by the Minister for the Third Sector. The Charity Commission will also issue detailed guidance on setting up CIOs and converting to CIO status.
It is clear from the Act that companies limited by guarantee (who may find the simpler regulatory regime attractive) and unincorporated bodies (who may wish to take advantage of the benefits of limited liability) should be able to become CIOs. Unincorporated charities will have to do this by first registering a new CIO with the Commission and then transferring the whole of their assets to the new CIO by a relatively simple statutory procedure. Charitable companies may convert through a process of re-registration as a CIO, having submitted a special resolution approving the conversion, a new constitution and any other documents that the Charity Commission may specify.
Charitable organisations with a defined benefit pension scheme (such as a final salary pension scheme) should be aware that conversion to CIO status is likely to be treated by the Pensions Regulator as a notifiable event. As a result the Pension Regulator may, in order to safeguard a pension scheme, require particular financial arrangements to be put in place or for contributions to be made to scheme trustees. Depending on the particular circumstances of the case, significant pension liabilities might be triggered.
and what about rSls?
The Charities Act 2006 states that “registered societies within the meaning of the Industrial and Provident Societies Act 1965” will be able to convert to CIO status. However, the Act then goes on to expressly prohibit exempt charities from converting to CIOs. As charitable registered social landlords (RSLs) which are constituted as industrial and provident societies are generally exempt charities, it seems that RSLs will not be able to convert to CIO status, at least not directly. It may be possible for an RSL to convert to CIO status by first becoming a company limited by guarantee and then converting to CIO. But it will be interesting to see how any CIOs which are also RSLs will be regulated by the Housing Corporation (or rather, the Tenant Services Authority as its successor body) and the Charity Commission.
Subsidiary cios
RSLs planning to carry out charitable projects as part of their diverse activities, for instance, social enterprise projects, may want to consider setting up CIO structures when deciding what form their subsidiary vehicles should take, given their relative advantages.
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“The Charity Commission also plans to introduce model forms of constitution; the general intention is to make the process of registering an incorporated charity quicker, cheaper and simpler.”
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rent to hoMebuy – Vat iMplicationS Due to the current slow down in the residential property market many RSLs are taking the decision to defer selling dwellings constructed for shared ownership sale and to let them out. The new Housing Corporation initiative - Rent to HomeBuy - is a case in point, where homes are offered to prospective applicants on an intermediate rent basis for a limited defined period up to a maximum of three years (which may be extended in limited circumstances) following which there is an expectation that the property will be purchased on shared ownership terms.
The decision by an RSL to defer sale can have VAT implications for the RSL. Frequently there will be no adverse VAT consequences. If the RSL acquired the land on which the dwellings are to be constructed from a vendor who had not exercised the option to tax, the supply of the land to the RSL would have been an exempt supply and no VAT would have been paid by the RSL. Also, if the vendor had opted to tax the land, the RSL might well have purchased through a developer using the “golden brick” route so that the supply of the land to the RSL through the developer would have been a zero-rated supply.
However, in circumstances where the land has been opted for VAT by the vendor and a golden brick route is not used, there may be VAT implications. Here, if the RSL acquires the land with the intention of developing it for sale on shared ownership terms the RSL will have paid VAT on the land price and will have recovered that VAT as input tax. This VAT is recoverable because the RSL intends to make only zero-rated supplies in respect of the land i.e. the grant of the shared ownership leases.
However, if after acquiring the land and reclaiming the VAT as input tax, the RSL changes its plans by forming a new intention to let the dwellings it constructs on short leases prior to making the zero-rated supply of the shared ownership leases then it may have to reduce the amount of the input tax it had originally recovered. This is because it intends to make both exempt supplies (the short leases) and taxable supplies (the shared ownership leases) in relation to the dwellings. The clawback is as a result of a case which arose in the early 90s where a business claimed input tax on its costs of building a house that it planned to sell. However, it was unable to sell as originally intended and so granted a short term lease until the house could be sold. The High Court found that a claw-back adjustment was needed to apportion the input tax to take account of the business’s taxable and exempt intentions for the property at the time when it was first used.
So how is the claw-back adjustment calculated? The RSL must calculate the claw-back adjustment by comparing the amount of input tax it originally deducted with the amount of input tax it would have deducted had it held its changed intention all along. The claw-back adjustment is the difference between the two input tax amounts. The RSL calculates the amount of input tax he would have deducted by applying his partial exemption method at the time when the cost were incurred.
Details of the partial exemption apportionment calculation methods available is beyond the scope of this article. Invariably RSLs are treated as partially exempt because they make both taxable and exempt supplies and will be used to applying a partial exemption apportionment. Broadly, the standard method of apportionment laid down in law is to apportion input tax according to the value of taxable and exempt supplies made by the RSL during the tax year. If the RSL has adopted this standard method of apportionment then it will need to apply this to the input tax incurred on the purchase of the land.
However, it is always open to any business to agree with HMRC a special method of apportionment if the standard method of apportionment would yield an unfair result. If the RSL considers that the application of the standard method of apportionment of input tax incurred on a purchase of land makes its existing partial exemption method become unfair because of the short term lets then it can apply to HMRC who may allow an alternative method to be agreed and backdated.
“Invariably RSLs are treated as partially exempt because they make both taxable and exempt supplies and will be used to applying a partial exemption apportionment.”
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dbrief Legal insightThe DBrief is a quarterly newsletter from Devonshires Solicitors on legal developments.Edited by: Gareth Hall, PartnerHead Office: Salisbury House, London Wall, London EC2M 5QYFurther copies: Marketing Department on tel: 020 7628 7576 email: [email protected] or via our website at www.devonshires.comPrinted by: Gemini Press, Shoreham-by-Sea tel 01273 464884DBrief articles are for guidance only. Professional advice should always be obtained. No responsibility can be accepted by the publishers for losses occasioned as a result of action taken due to its contents.DBrief is printed on environmentally friendly paper. © Devonshires November 2008
diary dateSThe following seminars are being held over the coming months:
Rent Possession Seminar20 November 2008Chartered Accountants’ Hall, London
Health and Safety Seminar4 December 2008Lion Court Conference Centre, London
Housing and Regeneration Act 2008 Seminar with speakers from HCA and TSA9 December 2008Lion Court Conference Centre, London
The University of Oxford are running a series of Housing Seminars, which Devonshires are sponsoring. The sessions are going to cover a range of subjects of topical interest including The Future of Social Housing, Homelessness and Household Formation. All will be presented by leading housing experts.
There will be 6 seminars taking place in Oxford on Tuesday afternoons, from 18 November 2008 – 19 May 2009
FurtherinformationcanbeobtainedfromourMarketingDepartmenton02076287576emailinfo@devonshires.co.ukorfromtheeventssectionofourwebsiteatwww.devonshires.com.
partnerS coMplete extraMile challenGeDevonshires’ partners Gareth Hall, Philip Barden, Nick Billingham and Jonathan Ebsworth completed the 500 mile Extramile Challenge cycling from Lens in northern France to the Puy de Dome in the Massif Central in relays over 3 days.
The event, organised by charity Extramile Challenges, ran from the north of France past Fontainebleau into the Loire Valley and Bourges, and on to the Massif Central to finish at the foot of Puy de Dôme near Vichy. The challenge took 3 days from 26 to 28 September.
So far Devonshires’ partners have raised over £6,000. Two-thirds will be donated to Kids Company and the rest to charities nominated by Extramile Challenges.
If you know any of our cyclists who have conquered the Massif Challenge and wish to make a donation please send a cheque (with your postcode on the reverse so we can claim back the tax) payable to Extramile Challenges to Samantha Harrison at Devonshires, Salisbury House, London Wall, London EC2M 5QY. Even £10 could make a huge difference to someone’s life.
For further information on the challenge, including route maps visit:
http://www.extra-mile.org.uk/
a link to our travelogue “wrong way round” is also available on our website in the news section.
