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The Corporate Insolvency and Governance Act

Boardroom Table

Overview

The Corporate Insolvency and Governance Act (CIG) received Royal Assent on 26 June 2020. The CIG is expected to improve the ability of companies to be efficiently restructured, reinvigorate UK rescue culture, and support the UK’s economic recovery.

It also includes temporary corporate governance changes to shareholder meetings, AGMs, and Companies House filing deadlines.

The following is a brief summary of the main provisions. These are specialist areas of the law and will require specialist advice.

Restructuring Plan

The CIG introduces a new flexible restructuring plan, similar to the existing scheme of arrangement. Under the plan, a company that has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on its business as a going concern has the ability to enter into a compromise or arrangement with its creditors/members in order to restructure its debts.

It will be inserted into the Companies Act 2006 with the aim of achieving a compromise with dissenting secured creditors by the addition of a “class cram down”. This particular feature draws inspiration from US Chapter 11 proceedings.

The aim is to make it easier to pass a restructuring plan by dividing creditors/members into classes based on the similarity of their rights and each class/member given the opportunity to vote on the plan. The new restructuring plan enables a court to sanction a plan that binds dissenting classes of creditors/members. A plan will be passed if it is approved by 75% in value of the creditors/members or class of creditors/members and importantly, unlike a scheme of arrangement, there is no requirement for a majority (over 50%) in number of each class to vote in favour.

Moratorium

The CIG introduces a new, stand-alone moratorium procedure designed to provide breathing space to companies in financial distress. The moratorium provides a payment holiday for certain types of pre- and post-moratorium debts without requiring leave of the court and will prevent creditors from taking enforcement action against a company. Companies will qualify if they are, or are likely to become, unable to pay their debts when they fall due. A company does not have to be solvent to be eligible.

A fundamental requirement of the process is that it must be likely to result in the rescue of the company as a going concern. It is a director-driven process, and the directors retain full management and control of the company throughout. The regime requires the appointment of a monitor, who must be a qualified insolvency practitioner, and whose role it is to oversee the company’s affairs with a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern.

Ipso Facto (Termination) Clauses

Contracts for the supply of goods or services contain clauses which allow a supplier to terminate or threaten to terminate or vary the supply when the counterparty to the contract enters into an insolvency or restructuring process. This is known as an ipso facto clause. The CIG contains a provision, to be inserted into the Insolvency Act 1986, to prohibit suppliers from relying on such clauses. Therefore, subject to certain exceptions, suppliers will be required to continue to supply goods or services to a company in a restructuring or insolvency process. The aim is to protect a company’s supply chain and enable the company to continue to trade.

Temporary suspension of winding up petitions, statutory demands and wrongful trading

The Government announced on 28 March 2020, plans to amend the wrongful trading provisions to remove the potential liability for directors in situations where a company’s financial position has worsened during the COVID-19 pandemic. This was an attempt to prevent directors from placing a company into administration prematurely as a result of concern for their exposure to personal liability for wrongful trading.

The relevant period is between 1 March 2020 and one month after the CIG is enacted.

Likewise, it was announced in April 2020 that statutory demands and winding up petitions would be temporarily banned where a debtor company cannot pay its debts as a result of the COVID-19 pandemic. The hope is that this process will enable companies in financial distress to enter into compromises/arrangements with their creditors without the need for formal insolvency processes to be commenced.

Under the CIG, all statutory demands will be void if served on a company during the period between 1 March 2020 and one month after the CIG comes into force.

Flexibility for Holding Shareholder’s Meetings and AGMs

The rules around shareholder meetings will be temporarily relaxed. This period of relaxation began on 26 March 2020 and ends on 30 September 2020, subject to a possible extension until April 2021.

During this period, overriding anything in the company’s constitution, the provisions allow for general meetings to be held on a virtual basis and for votes to be cast by electronic means, and that quorum requirements can be met without any members being together at the same place.

Companies required to hold their AGMs during the period from March to September 2020, can hold their meeting at any time before 30 September 2020 (again with a possible extension).

Temporary Extension of Companies House Filings

Temporary easements will be introduced regarding filing requirements. They include extensions to deadlines for:

  • confirmation statements;
  • accounts (Companies House has already made arrangements for companies to apply for a three-month extension to their accounts filing deadline if they are unable to meet the deadline owing to COVID-19);
  • registrations of charges (mortgage); and
  • event-driven filings, such as changes to company directors, people with significant control, or a change of registered office.

Where the existing filing period is 21 days or less, the extended filing period will not exceed 42 days. Where the existing filing period is between three and nine months, the extended filing period will not exceed 12 months.

This is a very brief overview of the CIG and more information can be found here.

The GDPR Two Years On

After a long build-up, a great deal of commentary, fear, and anticipation, the EU’s General Data Protection Regulation or “GDPR” came into effect on 25 May 2018. At the time, a great deal of attention was focused on the wider scope of the GDPR and, in particular, how “personal data” was defined. Individuals or “data subjects” had more and better rights bestowed upon them, and any organisation that breached those rights would face tough new penalties.

So, what actually happened? At the time, many businesses scrambled to become compliant with the new GDPR regime. Inboxes throughout Europe and beyond became clogged with messages about updated privacy policies. Internet users suddenly found their favourite websites blocked because American companies either didn’t know how to comply with the GDPR or didn’t want to. Far from being taken as a (mostly) sensible and practical evolution of existing data protection legislation, the GDPR became a source of fear for many. Scarcely an article about it could be found that didn’t talk of fines reaching into the tens of millions.

The GDPR itself requires the European Commission to review it every two years. Here in 2020, the outcome of that review is now due and should have been published in April, but at the time of writing, it is now expected in June. Now is also a good time for businesses and other organisations handling personal data to review the GDPR themselves.

  • After getting compliant in 2018, have you stayed compliant since?
  • There was considerable confusion around the GDPR two years ago; have things been clarified?
  • Has the GDPR been a success; is people’s personal data safer and have organisations taken more steps to truly protect privacy?
  • Has there been a wider impact; what happened to all those American websites that cut us off?
  • Has the GDPR been a force for change in other jurisdictions?

Moreover, as the oft-falsely attributed curse goes, may you live in interesting times. Both Brexit and the COVID-19 pandemic are significantly changing the business and legal landscape, not least where data protection is concerned.

In this post, we will take a look at the GDPR two years on, discussing those questions above (if not providing definitive answers!), and considering where we go from here. Whatever shape the UK’s domestic data protection legislation takes (initially as the “UK GDPR”), the EU GDPR and indeed the EU itself will remain central to many business’ compliance after the transition period ends. Meanwhile, the prevalence of home working and the increase in sensitive medical data changing hands within organisations as the world endeavours to press on through the coronavirus pandemic, also raise important issues that were unforeseen just two short years ago.

What did the GDPR ever do for us?

Data protection legislation is still, in the grand scheme of things, in its relative infancy. Privacy has been protected to some degree by law for much longer, but the first Data Protection Act in the UK only dates back to 1984. This was succeeded by the Data Protection Act 1998, and again by the Data Protection Act 2018 and the GDPR.

Technology, particularly the internet, has been a major catalyst for the development of data protection law. In the mid-1990s, the internet was still quite new, but the implications for privacy and the widespread use of personal data were clearly recognised from an early stage. The EU passed its Data Protection Directive in 1995, setting out minimum data privacy and security standards. Being a Directive, it was then up to EU Member States to implement it through their own domestic legislation and, thus, the Data Protection Act 1998 was born.

As the world settled into the 21st Century, the internet’s appetite for personal data stepped up the pace. In 2010, the European Commission adopted a communication entitled “A comprehensive approach on personal data protection in the European Union” and so began the work to update the 1995 Directive and, considering the growth of the internet, not before time. In 1995 less than 10% of UK households had internet access. By 2010, this number had risen to over 70%. In 2016, the General Data Protection Regulation was born, due to enter into effect in all EU Member States on 25 May 2018.

The definition of “personal data” expanded significantly to include not only the obvious forms of personal data such as names and contact details, but also less obvious – at first glance, anonymous – forms of data such as IP addresses. The amount of information to be provided to data subjects was increased, and rules surrounding consent where tightened up. Greater emphasis was placed on accountability and record-keeping, and higher standards for “lawful processing” applied.

The GDPR also brought with it a much greater territorial scope than had been seen before. Simply put, if an organisation processed the personal data of anyone residing within the EU, regardless of that organisation’s location, the GDPR applied.

More information was required to be given to individuals when collecting their personal data. This requirement was designed to promote transparency, ensuring that individuals were more informed about what their personal data was being used for, how, why, and what rights they had in relation to that. In practice, it also triggered a veritable blizzard of “we have updated our privacy policy” emails.

The GDPR was designed to raise both standards and hurdles when it came to the use of personal data. In particular, new rules over consent were introduced, including a stricter standard for consent. Consent and explicit consent would now require a clear affirmative action from the individual. Consent would now have to be freely given, specific, informed, and unambiguous. Data controllers were also now required to make it easy to withdraw consent at any time and, unless they had another legal basis on which to continue using the personal data in question, would have to cease using it upon such withdrawal.

Not only were the requirements for consent toughened up, but so were other lawful bases for personal data processing such as “legitimate interests”. Under the old Data Protection Act 1998 regime, the UK had taken a rather generous position on this particular basis, but the GDPR narrowed things down, placing a stricter emphasis on ensuring that such interests were not overridden by the rights and freedoms of data subjects.

Key new rights were bestowed upon individuals, not least the so-called “right to be forgotten”, which gave individuals the right to require organisations to delete all personal data relating to them. In practice, particularly with so much data being backed up in various forms and spread across multiple systems, the prospect of complying with this right was a source of considerable concern for many.

New requirements concerning accountability were introduced. Chief among these were the requirement to notify supervisory authorities (such as the ICO) of data breaches within 72 hours if the breach was likely to pose a risk to the rights and freedoms of individuals. Where there was a high risk that the rights and freedoms of individuals would be adversely affected, the individuals themselves were also to be notified. The GDPR also introduced new requirements relating to Data Protection Officers, making it mandatory for a wide range of organisations to appoint one. Also important under the heading of accountability was record keeping. Even in situations where a decision had been made to not do something, for example, because of a low risk to individuals’ rights, it would need to be documented.

How Did We React?

The majority of news items about the new GDPR were keen to emphasise one element above all others: the fines and penalties. In broad terms, the GDPR introduced two categories of fines, the highest of which could reach up to €20m or up to 4% of an organisation’s total worldwide turnover, whichever was higher. Cooler heads remarked that for many businesses that were already taking their Data Protection Act 1998 compliance seriously, there was little need to worry and that the change was easily manageable. Nevertheless, predictions of doom persisted.

Many were also confused about their obligations, leading in some cases to over-reactions and in others, to apathy. The over-emphasis in commentary on topics such as consent, for example, even led some to believe that it was now the only basis upon which they could use any personal data. Particularly for online operations in the US, so demanding and threatening was the GDPR that the preferred choice was simply to block all EU-based users from their websites.

Further concern stemmed from the fact that a great deal of guidance on data protection, including some of that available from official bodies, was outdated, referring only to the Data Protection Act 1998 / Data Protection Directive 1995 regime.

Where Are We Now?

What happened to all those huge fines that were going to put everyone out of business? There have certainly been fines, but, as the ICO was keen to point out in its blog post GDPR – sorting the fact from the fiction back in August 2017, “it’s scaremongering to suggest that we’ll be making early examples of organisations for minor infringements or that maximum fines will become the norm…Issuing fines has always been and will continue to be, a last resort…we intend to use those powers proportionately and judiciously.”

There have been some big fines, certainly, but looking at them more closely, they are still far from the top end. The French supervisory authority, CNIL, issued a €50m fine to Google. This, however, amounted to a mere 0.04% of Google’s global turnover – arguably more the cost of doing business than a deterrent. Last year, the ICO announced its intention to fine British Airways £183.39m in relation to a cyber incident which took place in 2018. Again, big money, but only equal to around 1.5% of BA’s global turnover. Moreover, at the time of writing, BA has not yet been issued the fine after a series of delays and there are now questions over whether the ICO may take the financial impact of the COVID-19 pandemic into account, the effect of which would presumably be to reduce the fine or perhaps defer it.

The fines may not have turned out to be as bad as feared, but does this mean that people’s personal data is better protected? Is the GDPR doing its job? Certainly, awareness is much higher, even outside of the UK and EU. Some of the biggest names in technology have adopted GDPR standards of data protection worldwide, rather than focusing only on Europe. Small businesses that might previously have overlooked data protection entirely are now keen to get their privacy policies in place, and it is clear that the GDPR itself prompted a surge of updates to business practices and documentation, both inwardly and outwardly.

Moreover, much more useful guidance has emerged over the past two years, including comprehensive guidance on compliance from bodies such as the ICO, and certain issues that caused confusion in the early days have been clarified.

Has it all been good news, however? It would be difficult to argue that this is the case. The GDPR continues to be a source of uncertainty and increased costs, particularly where technology is concerned and in areas such as analytics and ad tech. A 2019 survey conducted by German trade association, Bitkom, found that for many, the GDPR represents a barrier to innovation, particularly where new technologies are concerned. Nor is it necessarily ideal for individuals, many of whom have long since tired of emails informing them of privacy policy changes. Moreover, while many have heard of the GDPR, it is at the very least open to question how many of those people really understand what it means for them. Then, there is also the issue noted above – the geo-blocking of online content, particularly from the US – solely on GDPR compliance grounds. One must ask whether this is a benefit to individuals at all. It will be interesting to see if the Commission’s review considers such real-world impacts and, if so, what improvements may emerge.

What Did You Do Back in 2018?

Two years feels like a long time. Longer now, probably, given that the past two months have felt like an eternity as the world collectively hangs on the pause button. The advent of the GDPR caused no small amount of panic. Many scrambled to make their businesses compliant in time for the 25 May 2018 deadline that loomed like a threatening spectre.

Since then, however, the important question has become not so much “how did we do then?” as “how have we done since?”. Getting your business compliant in 2018 was but the first step of what a less jaded author might call your “GDPR journey”. Now that things have had time to settle down and guidance has become more widespread and fleshed-out, it is an ideal time to take a fresh look at data protection within your business. As a starting point, consider these questions:

  • Am I maintaining awareness of data protection within my business?
  • Have the changes I made in 2018 been successful? What could I do better?
  • Is my privacy information up-to-date and is it easily accessible?
  • Am I keeping proper records? Is there any way I can improve upon them?
  • Have I had any data breaches? Have they been handled properly?
  • Am I being proactive about data protection when considering new uses of personal data?

A Data Protection Audit is a useful exercise to carry out on a regular basis as it prompts you to ask and answer questions like these in more detail, considering all aspects of your business’s data protection compliance. If you haven’t carried one out before or perhaps haven’t carried one out since preparing for the GDPR, now is a good time to get started. It might also be the case that you have avoided an audit because you are afraid of what it might turn up. That is not an invalid concern but consider this – it is an internal exercise and the ICO would rather you identified your weaknesses and fixed them than ignored them. You aren’t going to get a €20m fine landing in your lap because your internal audit identified room for improvement or even outright failings. It is better to find out what is wrong and fix it, so cast aside the fear and get going!

Another side to ongoing compliance is the Data Protection Impact Assessment. A DPIA is a valuable (and indeed mandatory in some cases) tool which helps you to evaluate new projects from a data protection perspective, identifying and minimising the risks from a variety of angles. Again, a DPIA is not an exercise that should be carried out once and forgotten about. A system, product, or feature that began as a new project back in 2018 will quite possibly have changed in some way since then. Perhaps without even realising it, the way in which you collect, use, or store the personal data involved has changed. DPIAs should, therefore, be regularly reviewed and repeated if necessary.

The Picture in 2020

Brexit and Data Protection

Until recently, one of the biggest topics up for discussion in data protection circles was Brexit. We know that, at the end of the transition period, the EU GDPR will cease to apply in the UK and that it will be replaced with a “UK GDPR” – a direct copy in many respects, with necessary contextual changes to accommodate its status as a solely domestic instrument (references to EU laws, institutions, and powers, for example, will be removed or replaced with UK equivalents).

We also know that, whatever the outcome of Brexit, it will remain possible to transfer personal data to the EU and EEA and to “third countries” covered by an existing EU Commission adequacy decision without constraint, as is the case now. Not only that, but the UK will also recognise the current EU Standard Contractual Clauses as a valid mechanism for international transfers of personal data.

We do not, however, know what the UK’s status will be from the European perspective. Despite the similarities in our data protection legislation, the European Commission must still assess the UK’s post-Brexit data protection framework and grant an adequacy decision in order for personal data to flow as freely into the UK from the EU and EEA as it can in the other direction. It is far from certain that an adequacy decision will be made before the end of the transition period.

If an adequacy decision is not granted before the end of the transition period – and many commentators think it unlikely that one will be – other safeguards will be needed to cover personal data moving from the EU into the UK such as the aforementioned Standard Contractual Clauses or binding corporate rules (to name just two examples). Another key change to data protection compliance will be the need to appoint an EEA representative from the end of the transition period if your organisation offers goods or services to individuals in the EEA or monitors their behaviour.

Home is where the Work Is – Data Protection and COVID-19

Just a few short months ago, we might have thought it impossible that any subject could knock Brexit of the top spot of things we were tired of hearing and worrying about, but along came the coronavirus, making Brexit look like proverbial small potatoes.

From a data protection perspective, the pandemic has resulted in a rapid increase in medical data changing hands within businesses of all shapes and sizes. Medical information is, of course, “special category” (formerly “sensitive”) personal data and thus requires greater levels of care and security. Not only that, but such data is also moving around in an inherently less secure environment in many cases. Instead of being confined to secure and tightly-controlled networks and equipment that is constantly kept up to date with the latest security patches and new software, business personal data is now finding itself residing on home computer systems and home networks – some lacking in the latest security software (or indeed any at all), left vulnerable by older equipment and weak passwords. Other security threats are also seeking to exploit the decline in secure IT environments with activities such as phishing reportedly (and dramatically) on the rise.

Not only does the increase in home working pose potential security threats, but it may also make it harder for some organisations to comply with requests from individuals to exercise their rights. With personal data less centralised, for example, it may be harder to locate it in response to a subject access request.

Maintaining awareness and providing regular training is essential in overcoming such new challenges. Having an up to date Data Protection Policy can help to underpin your staff’s knowledge and serve as a reminder of things that, again, might have been fresh back in 2018 but may have given way to complacency or simple forgetfulness by now. Where possible, other practical steps such as the use of VPNs and the issuing of centrally administered computers and other devices can be taken to help reduce the risks associated with individual staff working with personal data on their own devices.

Such challenging circumstances will undoubtedly make assessing the GDPR’s success a harder exercise, both for regulators and for organisations. It remains vitally important to protect personal data and to use it lawfully, fairly, and transparently. At this point, no virus-specific changes are planned for data protection law and it is doubtful that they will be. What is important to note, however, is that authorities such as the ICO are not oblivious to the difficulties. The ICO recently issued a statement reassuring us all that while the law itself remains unchanged, “We understand that resources…might be diverted away from usual compliance or information governance…We won’t penalise organisations that we know need to prioritise other areas or adapt their usual approach during this extraordinary period.” In short, keep calm and carry on!

Where To?

It is clear that while data protection regulation has evolved to keep up with modern technology and contemporary uses of personal data, there remain many problems. Perhaps the greatest of these is that the law appears to be too heavy handed. The law and technology have been at odds in many areas for a long time, and this shows no signs of abating.

Business, technology, and the law itself need to evolve to accommodate one another. Whether or not they will is a different matter. It does seem evident, however, that this is understood on all sides. Enforcement powers and penalties exist to punish those who break the rules knowingly or carelessly and put the rights and freedoms of individuals at risk. Does this mean that small businesses will be fined for innovating? Arguably not.

It will be particularly interesting to see how the UK’s data protection laws evolve after Brexit. While keeping closely in tune with EU legislation, it is arguable that a desire to make the UK an attractive economy for innovation and investment in technology may lead to new developments in the data protection framework. The UK GDPR will be the same as the EU GDPR for all intents and purposes – particularly from the SME perspective – but what comes next will make for interesting viewing.

SME Tips for Weathering the Coronavirus Storm

Freelancer Working at Home

Introduction

The outbreak of COVID-19 and the ensuing pandemic is unprecedented in recent times and its economic impact is similarly unheard of. The Office for Budget Responsibility recently warned that the pandemic could lead to the UK economy shrinking by 35% by June 2020.

For many businesses of all shapes and sizes, in a variety of sectors, the pandemic has, at the very least, necessitated changes and, in more serious circumstances, poses a threat to their survival.

There is, however, plenty of cause for optimism. The government has introduced a range of measures to help support struggling businesses and there are a number of things that businesses of all size, SMEs in particular, can do to weather the storm of the pandemic. Above all else, it is important to stay calm and organised. A clear head and an efficient approach to business will make everything else that much easier.

Dealing with your Staff

We have covered flexible and home working in a number of other articles here at Simply-Docs (check out our Working from Home with Children blog post and our recent newsletter on Home Working). We also offer a range of documents specifically designed to facilitate such arrangements. Flexible working is a boon to employers and employees alike, particularly in such challenging times. It may not be suitable in all sectors, but if the nature of your business permits it, it is most definitely worth considering if you are not already doing so.

Implementing the right policies is an important element of flexible and home working. Without the structure of a normal working day, productivity and adherence to procedures can quickly deteriorate. Nevertheless, it is also important to understand that many staff, particularly parents or those with other dependents, will be facing considerably more responsibilities at home at present. Cultivating an understanding of such pressures and offering as much flexibility as you can will be appreciated by your staff and ideally enable them to be more productive.

Technology can be a great help. Investing in the right software and hardware can make it much easier for your business to operate as close to normal as possible, enabling your staff to easily keep in touch with each other, to hold meetings, to deal with customers, business partners, and the like. It can also be easier to implement security controls on company-owned technology such as laptops and smartphones, meaning that your business is less likely to fall victim to hacking, malware, or the perils of a data breach and the potentially crippling fines that can follow.

If you find that your resources are stretched, consider weighing up the costs of training existing staff for new or expanded roles instead of recruiting new people or taking on contractors. This opens up new opportunities and the possibility of a very welcome pay increase for your existing employees while avoiding the higher expense and complications of taking on new people.

Not all businesses are suited to home working, whether partially or fully. If your staff still need to come into work, keeping the workplace clean and safe is of paramount importance. The normal health and safety rules continue to apply, but when it comes to keeping things clean and hygienic, now is the time to go above and beyond. Equipment and surfaces should be cleaned more often than normal, with “high-touch” objects and areas receiving particular attention. Where supplies permit, provide cleaning materials for your staff to use, such as alcohol wipes for keyboards, mice, telephones, and other objects that are regularly handled. Ensure a plentiful supply of soap and hand sanitiser and ensure that your staff are reminded to use them frequently. Most important of all – if any of your staff are ill, however minor it may be, and whether or not they think it may be the coronavirus, ensure they stay at home and self-isolate in line with government and NHS guidelines.

If revenue declines to the point at which your options are limited financially, there are a range of options open. What is very important is that you communicate with your staff. Do not keep them in the dark. Consult with them and, where appropriate, involve them in planning. If possible, take advantage of the Coronavirus Job Retention Scheme and place your employees on furlough leave. Simply-Docs has a range of templates and guidance designed to assist with this. Further choices include reduced pay, reduced hours, and, if all else fails, redundancy. When considering any such plans, it is vitally important to take professional advice.

Reduce Your Outgoings

If possible, look to re-negotiate contracts. Many of those businesses you are contracting with will be in similarly difficult positions and it may well be preferable to agree to reduced payments, orders, and so forth rather than to risk losing them completely. We offer a range of templates designed to assist in amending contracts in our Business document folder.

When it comes to property, particularly if you are not using your premises (or not using it to its normal capacity), consider negotiating with your landlord and look into the possibility of options such as discounted rent, rent deferment, rent-free periods, and/or a reduction on service charges. Find out more about managing property during the pandemic in our April 2020 property newsletter.

Whatever accommodations are agreed, and however renegotiations proceed, do not let the sense of urgency tempt you into informal agreements. Whenever possible, ensure that everything is documented and legally formalised.

Looking for New Financing Solutions

As revenue falls, debt becomes harder to pay. It is important to remember, however, that those to whom you owe money should hopefully want to receive it than risk missing out. Communication is, once again, key. Discuss your situation with banks and other lenders and look to renegotiate agreements or even take out new finance to help bridge the gap until normal trading begins to resume. The government’s Coronavirus Business Interruption Loan Scheme is of particular relevance under this heading.

If you are a company, be particularly careful about giving personal guarantees. Always remember that a company is a legal entity of its own. Shareholders are protected and have limited liability. By giving a personal guarantee, the so-called “corporate veil” is pierced and the guarantor’s personal assets (including, potentially, their home) will be at risk. Once again, the importance of taking professional advice cannot be overstated.

VAT

Paying VAT can be a tremendous source of pressure and, if your revenue is on the decline, it will be even more so. Look to set up a quarterly payment plan for VAT and talk to HMRC about other assistance or concessions that may be available.

The government has also announced a VAT payment deferral scheme under which payments due between 20 March 2020 and 30 June 2020 will not need to be made until 31 March 2021. Returns must, however, be filed on time. Also ensure that any direct debits are cancelled.

Take Care of Your Duties to the Company

If your business is a company, it is important to remember that directors must still comply with their statutory duties as set out in the Companies Act 2006:

  • Act within their powers
  • Promote the success of the company
  • Exercise independent judgement
  • Exercise reasonable care, skill, and diligence
  • Avoid conflicts of interest
  • Not accept benefits from third parties
  • Declare any interest in a proposed transaction or arrangement

The second of these is particularly important, and directors must act in a way that they consider (in good faith) to be most likely to benefit the company’s shareholders as a whole.

It is also, however, important to keep in mind solvency and wrongful trading. If your company’s solvency is in doubt, a director’s first duty is to creditors, not shareholders. That being said, companies in trouble have been given more breathing room with the recent announcement of changes with respect to wrongful trading.

Under normal circumstances, directors may incur personal liability if they allow a company to continue trading beyond the point at which they should have decided it wasn’t reasonably possible to save it. New measures, however, allow directors to continue trading even if there are reasonable grounds to think that the company may become insolvent, without incurring personal liability. This applies to actions taken after 1 March 2020. There will also be a temporary moratorium to prevent creditors seeking to wind up companies seeking rescue or restructuring, but at the time of writing, this is yet to be introduced.

Ensure that the normal procedures for running your business are adhered to, at least as much as the situation permits. If a decision needs to be made that requires shareholder or board approval, conduct things online using tools such as Zoom or Microsoft Teams (the same applies to meeting with your staff). Ensure that your articles of association permit this, however, and keep to the established processes. Do not succumb to the temptation to let things slide into informality. In particular, if you hold a virtual shareholders’ meeting, ensure that you adhere to the Companies Act 2006 and all required formalities.

Fail to Plan; Plan to Fail

Planning is always important in business, but all the more so now as there is less margin for error. A good starting point is to prepare a cashflow forecast to cover the next two to three months. This should be followed by planning and forecasting for the next couple of years as, even once lockdown restrictions begin to lift, it is likely to take the economy quite some time to stabilise and rebuild.

Organisation is vital. Ensure that your books and management accounts are up-to-date and review everything regularly. All meetings, at whatever level and however formal, should be documented, in accordance with legal requirements where applicable.

Concerns, whether they are of the gravest or most easily dismissed, should all be taken seriously and considered at the appropriate levels within your business, leaving nothing to chance. Changing circumstances could easily turn paranoia into reality on the one hand, and render a significant worry unwarranted on the other. Bury nothing!

Diversify and Grow

Yes – grow! As counterintuitive as it may first appear, such seismic changes to the economic landscape also present opportunities for those businesses ready and willing to adapt. One opportunity is to expand online, particularly if your business has remained predominantly (or entirely) brick-and-mortar in the past. This will not, of course, work for all, but in some cases a move online could not only keep your business afloat during the COVID-19 pandemic, but also benefit it immensely afterward.

It may also be a good time to explore diversification. Perhaps there are new avenues that you have been keen to explore or some that are a natural next step that could be easily accommodated within your existing business model and by your existing staff.

Now is not the time for complacency. Businesses that have built up goodwill and nurtured customer relationships over many years may not, until now, have considered advertising and marketing particularly important. If finances permit, however, now may be an ideal time to consider casting a wider net. Online advertising, particularly on social media, can be an extremely productive investment if done correctly. Similarly, for those businesses already established online, consider your current SEO strategy. Is your website performing at its best? Could you make some changes to it that might move you up a peg or two in the search engine rankings? The internet is key to doing business under normal circumstances and even more so with the vast majority of the population quarantined in their homes.

You CAN Make It!

We keep being assured that there is light at the end of the tunnel. Meanwhile, numerous commentators caution us that we can’t see that light yet. It is certain that the toll that COVID-19 will take on the world will be huge, both in terms of the human cost and economically. Nevertheless, it is vital to persevere, and not surrender to the assumption that your business will fail just because it is facing difficulties.

To wrap up, some key points:

  • Stay up-to-date with the news (but don’t overdo it) and look out for announcements from the government that relate to your business affairs.
  • Document everything, whether required to by statute or not.
  • Avoid informal agreements at all costs.
  • When negotiating or re-negotiating contracts, be sure to cover the important points. Be specific about numbers, dates, review periods, termination, and other key provisions such as force majeure.
  • Communicate with your board, your shareholders, your staff, your suppliers, your customers, your bank, HMRC, and anyone else with whom your business deals. A problem is much harder to solve if those affected by it don’t know about it!
  • Be realistic and act accordingly. Don’t hide from your problems. Be proactive, be honest, be transparent, and be positive!

Being positive may sound awfully trite; but it is vitally important to remain as positive as you can. Looking after yourself as well as your business should be a key priority. Exhaustion and stress will not help keep your business going and could well end up costing you dearly if a lack of focus, physical, or mental illness stop you from performing at your best. Take time for exercise and for rest. Look after your mental health during these difficult times and ask yourself whether doing something really will make a difference. Will sweating over work until 11pm actually result in anything, or would your mind and work fare better with a fresh start in the morning if you took the evening to relax with your family or catch up with a friend over the phone or online?

Plan for the worst, hope for the best, and take steps now to keep your business going. In the words of President Barack Obama in his 2009 inaugural address: “With hope and virtue, let us brave once more the icy currents, and endure what storms may come.”

Working from Home with Children

Home Working with Children

Introduction

Working from home is the new normal for thousands of people in many sectors and industries. The laptop on the dining table is the new workstation on the desk; Zoom is the new conference room; and the kids are the new colleagues.

For some, this will be a delightful change, and indeed there are many who thrive on the flexibility and comfort of working from home, enjoying the company of their families as they continue about their labours. For others, however, adapting is hard. Striking a balance between childcare, education, and remaining productive for your employer can be a seemingly insurmountable challenge.

If there is one word that stands out as a solution from all sides, it is flexibility. By embracing flexibility during these challenging times, employers, employees, and their families will all benefit and striking that elusive balance will be that much easier. In this post, we look at some top tips for achieving the holy grail that is the work-life balance.

Setting Realistic Goals

Being realistic is right up there with being flexible. Particularly if you have young children, expecting a full working day that is as productive as a day in the office is likely to be unrealistic. It is, therefore, important to accept that your working day will be disrupted and that long periods of concentration may not be possible.

With this in mind, it is important to prioritise and to plan. Planning applies not only to your work, but to everyone’s. A normal working routine provides structure which can rapidly dissipate without the fixed timetables of school and work attendance. Creating a schedule for the family can be very helpful in recreating that structure.

  • Ensure that everyone gets up at the same times they did before the lockdown began.
  • Get showered and dressed for the day. It will put you in a more productive frame of mind than staying in your pyjamas.
  • Have meals at normal times, together as a family, and free of screens if possible!
  • Devise a timetable that incorporates everyone’s work – grownups and children alike.
  • Plan work carefully. Prioritise and keep track of what you’re doing.
  • Try to maintain boundaries between working and non-working hours.

Everyone is different. Some people thrive in circumstances that stymie others and vice versa. Maintaining self-discipline is important but try to avoid letting that slide into unhelpful comparisons and self-criticism. A colleague may have children too, but perhaps those children are older than yours or perhaps their family’s lifestyle has made them more self-sufficient. Chastising yourself for seemingly not performing as well as that colleague is rarely productive and remember – as the saying goes – the grass is always greener on the other side of the fence!

Work with Your Children

This heading encompasses multiple meanings. Creating a positive environment with as little friction as possible will help everyone to get more done. Importantly, you will need to adapt to the age of your children.

For those with very young pre-schoolers, nap times and early bedtimes may help when planning work time. Instead of trying to work when the kids decide that it’s playtime, consider shifting your working hours to coincide with naps or after bedtime, if the nature of your business or your employer allows it.

When it comes to primary school-age children, find ways to accommodate their desire for attention and set aside time in your schedule to fully engage. Attempts at multitasking rarely succeed in reality. Your productive endeavours and your children will benefit as a result.

Teenagers crave a sense of agency. They are transitioning from childhood to adulthood in more ways than one. So, when it comes to creating a positive home working environment, work with your teens. Negotiate rather than dictate and, depending on the nature of your work and the schoolwork that they have been assigned, perhaps even look for ways to involve them in your own work. This can help you at a practical level and provides many benefits for your offspring too by giving them useful work experience as well as a sense of responsibility.

Whatever age your children are, remember flexibility. While you may be used to – and even enjoy – a relatively rigid routine and work regimen, your children quite likely don’t share your enthusiasm and while it remains important to do your job, ask yourself this question: “Do I work better when I’m in a good mood, or while fuming after a row with the kids?” We hope we know the answer!

Look After Your Health

This is another ingredient to successful home working that applies to your whole family. When you aren’t leaving the house as part of your normal routine, it can be easy to slide into not getting any exercise. Government guidelines on leaving the house during the pandemic allow for outdoor exercise once a day, alone or with people you live with. This includes activities such as walking, running, or cycling. There are also many exercises you can do indoors, with or without exercise equipment.

Maintaining (or even improving) your physical health is important; mental health is, if anything, even more important. This is particularly so under such stressful conditions. Poor mental health can rob you of focus and motivation, ultimately reducing both the quality and quantity of your work. This in turn increases stress and damages your mental wellbeing yet further. Poor mental health can also have a knock-on effect within a family, particularly with everyone stuck at home, unable to take a break. Vicious cycles can develop rapidly. It is, therefore, important to be mindful and to deal proactively and positively with worries, stress, and other mental health issues rather than burying them.

Taking some of the other steps outlined in this piece can help with mental health. By being organised, your mind is free to think more clearly and calmly about things – work and otherwise. By managing your expectations, you are more likely to feel satisfied with your work rather than frustrated and worried by it. By fostering a positive relationship with your children and balancing their wants and needs with your work, you will be cultivating a happier and healthier home.

It is important to stay in the know. Indeed, your job may require you to follow current events in detail. An overload of news and information about the pandemic, however, can be harmful. If you can, limit your consumption of news. Consider picking two or three times per day when you read the latest news or watch a bulletin on TV or online and keep it at that. Also, take great care with your sources; keep to those that you know are trustworthy and reliable. Overconsumption of news will not make you any better-informed, but it may lead to excessive worry, stress, and ultimately more serious health issues. Similar rules should be applied to social media. You may even wish to curate your content more carefully using lists or groups. Twitter, for example, allows you to mute words, phrases, and hashtags.

Communication also plays a key role in maintaining mental health, both within the home and without. Talk to your family and encourage them to talk to you. Human contact is severely limited for many at present, and those with family at home should make the most of it. If you are worried about the virus, about your job, or about anything else, talk to your family and encourage them to do the same. Communicating with your friends is similarly important. You may not be able to socialise in person, but with methods ranging from a simple text message, to a video chat, to a session of Fortnite, there are myriad options available to keep your social life alive and well, and if you need to vent a little about your family with whom you’ve been cooped up for weeks, a phone call with a friend will help relieve pressure tremendously!

Communication is Key

We have looked at the benefits of communicating with your friends and family, and the same applies to your workplace at all levels. Having a chat around the water cooler with colleagues is on hold, but the same workplace relationships can and should be maintained through the other means available, for example, by email or via a workplace online chat tool such as Microsoft Teams.

Communication is also essential in keeping work organised. Even if your own work is largely independent from that of your colleagues, it is important to keep in touch and maintain at least the same knowledge of each other’s work that you would have under normal circumstances. Particularly now, you may have colleagues who need a hand maintaining their own work-life balance, or you may need a hand from them in maintaining yours.

Many workplaces are keeping regular meetings going using online tools such as Teams and Zoom. For those whose work requires communication with customers, other organisations, or similar, the use of company-provided phone systems or internet-based equivalents can be particularly useful. In any case, steps should be taken, wherever possible, to avoid “uninvited guests”. The appearance of children in the background of TV news interviews often goes viral online, but in the day-to-day business context, it is likely to become tiresome and unwelcome rather quickly. Finding a quiet place to work, preferably in a room with a lockable door, is ideal. If this is not possible, noise-cancelling headphones or a headset with a noise-cancelling microphone can at the very least help to filter out some unwanted background racket.

Communication is also important on a practical level within your family. You know how important your work is, and your partner or spouse likely understands it too. Your children, on the other hand, may not. Take the time to explain the responsibilities and pressures of your job and why that means you can’t spend all your time with them, even though you’re at home.

Much of the above also requires regular communication between employers and employees. Some people are fortunate enough to be in a position to arrange their work and their working hours however they would like but, in many businesses, this is not the default option or even possible under normal circumstances. These are not, however, normal circumstances and it is important to remember that many other people within your business are quite likely dealing with the same balancing act as you. Management are likely to prefer that staff work flexibly and productively rather than struggle to work strict nine to five hours while being unable to stay focused at their desk for more than five minutes at a time before having to help with maths homework or clean up a home art lesson gone wrong.

How Employers can Help

Once again, flexibility is key. Flexibility within employment comes in many forms and need not relate only to working hours. Depending upon the nature of the business, flexible hours may not be desirable or even possible. What, then, are the options for employers and their home working staff?

Flexible Working

If the nature of the business permits it, this is likely to be everyone’s favourite option. It maintains the availability of more staff, albeit at varying times, and is better in this regard than the various leave options considered below. Staff could, for example, split their workdays with their partner or spouse, with half a day spent on the children and the other half spent on the job. This could also be combined with working earlier or later in the day, resulting in a normal number of hours worked, with compressed hours, or with weekend working on days when one partner or spouse has more time to spend looking after the children.

For those who work part time, hours could perhaps be spread more thinly. The same number of hours are worked, but over a greater number of days, resulting in more time to spend looking after the kids. For those who do not normally work part time, it may be worth exploring the possibility of moving from full to part-time during the lockdown.

Taking Annual, Parental, or Compassionate Leave

Flexible working is desirable but may not be an ideal fit in all industries. Using annual leave may help to relieve some pressure or at least may buy some time to set up longer-term childcare arrangements. Similarly, leave entitlement could be used in combination with that of a partner or spouse, alternating time off in order to stretch it out somewhat. Given the length of time the lockdown restrictions may last, however, this is unlikely to be a long-term solution.

Parental leave is a second possibility, with every parent of a child (or adopted child) entitled to up to 18 weeks per child up to the age of 18. Unlike annual leave, however, parental leave is unpaid. Moreover, employees are subject to eligibility requirements and need to have been employed by their employer for more than a year.

Time off for dependants is a third option. This is also known as “compassionate leave”. If you have someone who “depends on you”, you are entitled to take compassionate leave for a reasonable period to deal with an emergency involving them. Compassionate leave is usually unpaid, although some employers opt to pay staff taking it. Again, however, taking compassionate leave – or any of the above kinds of leave – for the duration of the lockdown is unlikely to be a viable option for many. Wherever it can be accommodated, therefore, flexible working should be the preferred goal for those with children (or other dependants) to look after.

It All Comes Down to Flexibility

Working from home can be a pleasure or a toil; working at home with children, all the more so (in either direction). For employers and employees alike, in many cases it is a less than desirable combination and will inevitably impact productivity. At the start of this post, we said that flexibility was the watchword, and so it is. Employers will ultimately benefit from being flexible with their employees, enabling their employees to be flexible in turn.

Flexibility is only effective, however, when supported by some sort of structure. Planning and organisation are vital ingredients, as is the maintenance of good health, and effective communication.

Managing expectations is also something that all must do. Employers must manage their expectations of their employees and employees must manage their expectations of themselves. “Business as usual” is, for many, a concept that is unquestionably on hold for the time being, but by accepting and adapting to the unprecedented situation in which we all find ourselves, doing “the best you can” may just bring about better results than you might hope for.

Coronavirus, Commercial Contracts, and Force Majeure

As cases of the novel coronavirus, or COVID-19, continue to increase, having now reached pandemic status, as defined by the World Health Organization, many businesses are feeling the impact. This is perhaps most keenly felt where employees are concerned, either with staff taking sick leave, or with the need to increase home-working. As the impact worsens, however, it is likely to start impacting more supply chains and other areas in which contracts play a key role.

The basic principle that applies to commercial contracts that are subject to English law is that the parties remain bound to perform their obligations under them although it might have become more difficult or expensive to do so. However, many commercial contracts include provisions which expressly provide a right to terminate or some other right or remedy in particular circumstances described by the contract. The most common provisions of this type found in commercial contracts governed by English law are force majeure clauses, which excuse performance in the circumstances stated in the clause.

An important question that businesses should be considering now is whether COVID-19 amounts to a force majeure event under the terms of any force majeure clause that is included in any current contract that they have with another party, and if so, how does it apply to the circumstances?

What is Force Majeure?

The term “force majeure” originates in French, meaning “superior force”. A force majeure clause in a contract is designed to relieve the parties from their contractual obligations when events beyond their control (or reasonable control) prevent or hinder their performance of those obligations.

Rather than bringing the contract to an end, the party affected by the force majeure event will often be excused from performance by a force majeure clause in the contract for the resulting delay or non-performance, and the time within which performance is required will be extended. It is also quite common for force majeure clauses to allow one or both parties to terminate the contract – but do not state that the contract automatically ends – if the force majeure event and its effects on performance continue for a certain period of time.

Contracts under English law must include specific provisions covering force majeure if the parties want to be able to rely on such exemptions from a contractual obligation. English law does not apply any doctrine of force majeure or imply any force majeure term or effect in any contract; whether a force majeure consequence arises in relation to a contract will depend on the precise circumstances and wording of the force majeure clause, if any.

Since the courts will generally prefer to enforce the performance of a contract, the party seeking to rely on a force majeure clause will usually not be able to do so unless it shows that the clause applies. Unless the contract expressly says otherwise, it will have to show that performance is legally or physically impossible, not just that it is commercially impractical or uneconomic to perform.

Is the Coronavirus a Force Majeure Event?

Whether or not the impact of COVID-19 amounts to a force majeure event will ultimately come down to the wording of the relevant clauses in the contract. Some force majeure clauses are more specific than others. If a list of possible events is included in the clause, the question will be whether or not the virus falls within one of those events. Until recently, for example, a general reference to “pandemics” would not have been helpful; however, as the World Health Organisation has now classified COVID-19 as a pandemic, such a reference in a force majeure clause would be more likely to be useful. Alternatively, the clause might include other, more general events such as “act of god”, and/or a catch-all provision such as, “any other event which is beyond the reasonable control of the effected party whether of a similar or dissimilar nature to any of the foregoing events”, but such provisions are not a guarantee of success. In any event, it will be for the party claiming that a force majeure clause covers COVID-19 and the particular circumstances relating to the contract to demonstrate that the clause does cover it.

Also of key importance will be the parties’ knowledge at the time the contract was formed. Some force majeure clauses refer to “unforeseeable events”. In such cases, the parties’ prior knowledge of outbreaks of COVID-19 in the relevant areas will be an important consideration. If the parties knew of the outbreak of the virus when the contract was formed and did not make an express reference to it in the force majeure clause, the courts may not subsequently allow a party to the contract to rely on it as a force majeure event under any non-COVID-19 wording in the clause.

Even where it is possible to rely on a force majeure clause with respect to COVID-19, such clauses should be handled with care and do not necessarily represent an “easy way out”. There may, for example, be an obligation to mitigate the impact of the force majeure event (express or implied); the scope of the clause may be limited; and there may be time limits.

Depending upon the wording of a force majeure clause, then, it may indeed be the case that the coronavirus amounts to a force majeure event. Nevertheless, force majeure clauses are not designed to be, and are not, easy get-out clauses. They cannot be used to avoid liability for contractual breaches that would have occurred in any case or which were not caused by force majeure, and many will include limitations to ensure that contracts cannot be prematurely terminated simply because performance has become tricky.

Frustration

Where there is no force majeure or other helpful clause in a contract, or where there is such a clause but it does not cover COVID-19 and the particular circumstances, the English law doctrine of “frustration” might apply in certain very exceptional circumstances. Under this doctrine, if an unforeseen event renders a contract impossible to perform or transforms the obligations under it into something radically different, the contract is, in law, deemed to terminate. This occurs automatically, not by virtue of any termination by either party. Frustration only occurs if, on a strict view of a situation, there is such impossibility or transformation of obligations: if the performance of contractual obligations simply becomes more difficult or expensive, that is very unlikely to be sufficient for the doctrine of frustration to apply. If frustration does apply, it may be difficult to ascertain what financial adjustments between the parties are required to be made under contract law.

Complexity of Issues Requires Proper Legal Advice

Interpreting the scope and effect of any force majeure clause or reaching a view as to whether frustration applies in any situation may be a complicated, difficult, and uncertain legal matter. Similarly, reaching a view as to the financial effect on the parties of the application of a force majeure clause or frustration will also be a complex, difficult, and uncertain issue.

As well as considering suspension or the ending of a contract, it will be necessary to consider whether there is a liability to refund payments already made under the contract or to pay for value received or money expended before the suspension or termination. Therefore, in all cases you should seek appropriate professional independent legal advice as to where you stand in relation to COVID-19 and its effects on the performance of any commercial contract.

Budget 2020 – Extraordinary Measures and the Coronavirus

Downing Street & Whitehall

In the Budget address on 11 March, Rishi Sunak, Chancellor of the Exchequer, announced £7 billion of extraordinary measures to support the economy through the coronavirus (COVID-19) crisis.

What Measures Have Been Announced?

The following key measures were announced:

  • The cost of statutory sick pay (SSP) for coronavirus-related absence of up to 14 days will be refunded by the government. This applies to businesses with fewer than 250 employees.
  • SSP will be available “to all those advised to self-isolate even if they haven’t yet presented with symptoms”. This will apply from day one of sickness.
  • Employees will be able to obtain a sick note (fit note) from the NHS non-emergency service (111), which they can use as evidence for absence from work. This initiative is intended to take pressure off local GPs.

Will There be Support for Self-Employed and Gig Economy Workers?

The self-employed and those working in the gig economy are not eligible for SSP and so the government has made it quicker and easier to access benefits.

Additional financial support is being made available under a new temporary Coronavirus Business Interruption Loan Scheme with banks offering loans of up to £1.2m to support SMEs.

A special HMRC helpline has also been set up to assist businesses and self-employed individuals in financial difficulties with and outstanding tax liabilities. Those concerned about their ability to pay tax due to the coronavirus can contact HMRC’s helpline on 0800 0159 559.

Law Commission Report on the Electronic Execution of Documents

Electronic Signature

Following our blog back in September 2018 on the Law Commission Consultation (available here), the Law Commission has now issued its report on the electronic execution of documents.

The report confirms that current laws permit electronic signatures, but that the law is not very accessible to non-lawyers and businesses. The aim of the report is to clarify concerns as to whether electronic signatures are admissible and to ensure that the law governing this area is sufficiently certain. The Law Commission has set out an option for reform – that the Government may wish to consider codifying the law on electronic signatures in order to improve the accessibility of the law.

It is important to note that this report excludes two categories: 1) documents that are to be registered at the Land Registry; and 2) wills. The issue of whether electronic signatures can be used in these two instances is being considered separately.

The report affects England and Wales only.

Key Conclusions

1. The Law Commission report confirms that an electronic signature can be used to execute a document (including a deed) provided that the person signing the document intends to authenticate the document and that they comply with any execution formalities. The Commission’s view is based upon legislation and court decisions which relate to both non-electronic and electronic signatures.

2. An electronic signature is admissible in legal proceedings.

3. In terms of executing deeds in the presence of a witness, the physical presence of that witness is still required even where both the person executing and the person witnessing are both doing so electronically.

The Law Commission concluded that parties could not be confident that the current law allows for “remote” witnessing (where the witness is not physically present when the signatory signs the deed).  The Law Commission considered two potential options to address this issue:

a. Witnessing by video link and witnessing through a signature platform; or
b. The use of digital signatures or other form of technology to replace witnessing.

Next Steps

The report recommends that:

1. An industry working group be set up to produce guidance for the use of electronic signatures in different commercial transactions;

2. The industry working group consider practical issues concerning the electronic execution of documents, provide solutions to the practical and technical obstacles for video witnessing of electronic signatures on deeds, and provide for legislative reform to overcome these obstacles if required; and

3. There should be a future review of the law of deeds and consideration as to whether the current requirements for executing a document as a deed are still relevant today.

New Laws on Non-Disclosure Agreements – What Will They Mean for You?

NDAs in Employment

Non-Disclosure Agreements or ‘NDAs’ have become something of a touchy subject in recent years owing to their increasingly frequent appearances in high-profile cover-ups and abuse scandals. In particular, NDAs are said to be widely used to cover up allegations of unlawful discrimination and sexual harassment in the workplace and have featured in a number of major news stories, not least those involving figures such as Sir Philip Green and Harvey Weinstein.

Settlement agreements also feature significantly in this area and are used to resolve workplace disputes without recourse to an Employment Tribunal. Settlement agreements can cover matters other than harassment and discrimination and may even be used in cases where an employee leaves without any trouble. They can also be used to impose obligations of confidentiality on both parties to a dispute, meaning that neither party can discuss the circumstances leading up to the agreement. Despite their obvious use as a legitimate tool for dispute resolution and for the protection of employers and employees alike, however, such agreements also fall prey to misuse.

In light of such issues, last month, Business Minister, Kelly Tohurst, announced plans for new legislation designed to stop NDAs from being misused in this way. The proposed reforms would:

  • Require employers to clearly explain the limitations of confidentiality clauses in plain English, within settlement agreements and written statements from employees. This should ensure that individuals properly understand what they are signing and what their rights are.
  • Build on existing legislation so that individuals signing NDAs get independent legal advice on the limitations of confidentiality clauses. This would include making it clear that information can still be disclosed to the police, legal professionals, and other regulated health and care professionals (e.g. doctors and social workers), irrespective of the NDA.
  • Introduce new enforcement measures to deal with confidentiality clauses that do not comply with the law, such as voiding those not following the new legislative requirements.

Critics of the proposals have said that they do not go far enough. Employees entering into NDAs would not be permitted to disclose matters covered by the NDA to their friends and relatives, and detail relating to permitted disclosure to regulations such as the Financial Conduct Authority also appears to be lacking.

Implications for Employers

For many businesses, this should not make a significant amount of difference. When announcing the proposals in July 2019, Ms Tolhurst stated that:

“The vast majority of businesses comply with the law and use NDAs legitimately – from protecting commercially sensitive information to preventing information being shared with competitors.”

“We will not tolerate the use of NDAs to silence and intimidate victims from speaking out. The new legislation will stamp out misuse, tackle unacceptable workplace cultures, protect individuals, and create a level playing field for businesses that comply with the law.”

At present NDAs and confidentiality clauses are barred from preventing individuals from reporting wrongdoing in the public interest (also known as ‘whistleblowing’). Such disclosures could include a criminal offence, danger to health and safety, or failing to comply with legal obligations. NDAs and confidentiality clauses are also unable to prevent individuals from taking matters to an employment tribunal.

In the realm of employment, written confidentiality clauses are a common (and, indeed, perfectly normal and acceptable) feature in employment contracts. Not only that, but some employees actively prefer NDAs in the form of settlement agreements as, when used properly, they can alleviate the stresses of an acrimonious departure, legal action, and tribunals. Moreover, the courts have established that all employment contracts contain an implicit expectation of confidentiality with respect to information which has a necessary quality of confidence. This cannot, however, be used to cover up immoral or grossly unfair conduct.

The proposed reforms will not, therefore, have a negative impact on those businesses using NDAs and confidentiality clauses properly, and they will continue to have an important and valid role to play. It is nevertheless good practice to ensure that your documentation complies ahead of time, making sure that the boundaries of such provisions are clearly defined and clearly explained, and making sure that you do not attempt to prevent individuals from making disclosures that should be permissible.

What About Commercially Sensitive Information?

Not all NDAs are created equal. Indeed, many have very little to do with terms of employment. With so much talk in the media of new laws to clamp down on NDAs, however, it is easy to become concerned that all NDAs are being targeted.

It is important to understand that the proposed reforms are specifically targeted at those NDAs and confidentiality provisions that seek to supress evidence of wrongdoing in the workplace. NDAs which are rightfully used to protect commercially valuable information, for example, when sharing confidential information with another business for limited purposes in a joint project, should not be affected.

As is often the case in such matters, if you are using NDAs as the law and good practice dictate, there is no reason to believe that business will not simply continue as usual.

When Will the Reforms Take Effect?

At present, there is no parliamentary timetable for the new law, but we will update you as and when more precise information becomes available. In the meantime, your comments are, as ever, welcome.

Do you use NDAs in your business? Do you include confidentiality provisions in employment contracts? How do you limit the scope of such provisions to balance the fair and lawful treatment of your employees with the protection of your commercially sensitive information?

Important Changes to IR35 Coming in 2020

HMRC Sign

Are you a freelancer who works through a Personal Services Company (“PSC”), or do you engage freelancers who do so? If so, you need to be aware that the tax position will be changing in April 2020.

Proposed Changes to Off-Payroll Working Rules (IR35)

The Government issued a Policy Paper and Consultation Document on 5 March 2019 (“Off-Payroll Working Rules From April 2020”). If you would like to read the paper in full, you can find it by clicking here. The consultation runs until 28 May 2019, but it is clear that the Government does not intend to make any significant changes to its proposals as a result of feedback it receives to this consultation.

A Finance Bill will be published in the summer and, once it is passed into law, it will implement changes to how the IR35 regime works. Although details of the proposed changes will not be known until the Bill is published, the points covered in the Government’s March 2019 consultation indicate the nature of the changes that will come into effect in April 2020. In this post, we consider some of the proposed April 2020 changes set out in the consultation.

Background to the Changes

Working via a PSC (or some other form of intermediary) is often referred to as “off-payroll working”, and the tax rules that apply to it are usually referred to collectively as “IR35”. IR35 does not alter or dictate the employment law position either as to workers’ rights or as to whether someone is employed as opposed to self-employed. Nor does IR35 alter the general tax law establishing the amount of tax liability.

As it currently operates, and as it will operate from April 2020, IR35 is only, in effect, a means to aid collection of the full and correct amount of tax and National Insurance (“NI”) to be paid in respect of certain payments where a freelancer works through a PSC. To find out more about IR35, check out our guidance notes IR35 as background to the latest changes to IR35 being proposed by HMG. You can find our guidance notes here and our information pages here.

Operation of IR35 from 2000, and Recent Developments

The operation of IR35 depends on identifying where a freelancer working for a client through a PSC is, in substance not form, an employee of that client. When IR35 was originally introduced, the rules required the PSC itself to identify whether use of the PSC to receive gross payments from a client in any instance was “disguised employment” by the client and to arrange payment of tax and NI under PAYE if that was the case.

Freelancers (and sometimes family members) are usually the only directors and/or shareholders of a PSC. Perhaps unsurprisingly, the Government found that PSCs could not be relied upon to implement the IR35 rules. PSCs commonly paid dividends to the freelancer (as a shareholder of the PSC) rather than a full (or any) salary to the freelancer. As a result, PSCs did not pay the tax or NI that would have been paid had they paid a salary derived from the gross payments made by clients.

Consequently, under a change in the law in 2017, the Government began to implement anti-avoidance measures. Since April 2017, where the client is a public sector entity, the burden of assessing the tax status of freelancers shifted on to the public body concerned, so that it, not the PSC, is responsible for identifying such “disguised employment” situations. Where the public sector body does so in any case, it must operate PAYE and make net payments to the PSC. Many, including IPSE (the Association of Independent Professionals and the Self Employed), think that these changes have had damaging effects on the public sector, and that any extension of these changes to the private sector will be also be damaging for all concerned.

The April 2020 Changes to IR35

Since late 2017, the Government has indicated its intention to extend similar changes to the private sector, although the April 2020 changes will differ in some respects from the measures that currently apply to the public sector. From April 2020, the private sector client will be responsible for determining whether the freelancer is a “disguised employee” and therefore to be treated as if an employee. If the entity in the labour supply chain which pays the fees to the PSC is not also the client of the PSC, then the fee payer will be responsible for operating PAYE. If the client determines that IR35 does not apply, then the client or the fee payer will pay the PSC gross.

However, these new rules will not apply to all private sector clients. The legislation will provide that clients which are “small” entities will not be involved in having to determine freelancers’ status and, whether or not the client is also the fee payer, the fee payer will not need to operate PAYE. For this purpose, “small” means that if the client is corporate, the rules will not apply to it if it falls within at least two of the following:

  • Its annual turnover does not exceed £10.2 million;
  • Its balance sheet total does not exceed £5.1 million;
  • The number of its employees does not exceed an average of 50 in the year.

If the client is non-corporate and it is “small”, the rules will similarly not apply to it. The criteria for “small” have not yet been made clear, but they will fairly closely follow the criteria for corporate entities.

This means that where a client in the private sector is “small”, the responsibility for determining the freelancer’s status will remain with the PSC as at present.

Before deciding whether IR35 rules apply, are they even relevant to you?

These 2017 and 2020 changes to how IR35 operates only impact on any case where IR35 is relevant, i.e. where a PSC is involved. If a freelancer does not work through a PSC but through some other type of entity (e.g. an agency or managed service company), then other rules will or might apply, so it is important to understand what amounts to a PSC for the purposes of IR35.

So, if you engage a freelancer working for you directly as opposed to working through a PSC, you will not be affected by IR35. However, as a consequence of normal tax law (not IR35 rules) applicable in these cases, you will still need to decide whether they are an employee rather than a sole trader or contractor. If they are an employee, you will have to operate PAYE.

Determination of a Freelancer’s Status

Although clients will need to apply the normal employment status tests (based on case law – see our helpful tips, here) to decide whether someone is a “disguised employee”, it can be difficult to do so, and that difficulty is aggravated by the fact that HMRC’s view of status in a case cannot necessarily be regarded as correct. Where HMRC has contested the status of contractors in tax tribunals, it has lost a large percentage of them.  HMRC provide a tool, the Check Employment Status Tool (“CEST”), which clients may (but do not have to) use to assess employment status. CEST’s reputation has unfortunately become somewhat sullied due to many public sector clients finding that it is biased towards finding that an individual is an employee. This has not inspired confidence amongst freelancers or their clients. HMRC has said that it will enhance CEST to make it more suited to the private sector.

New Information Requirements

Currently, where the client is in the public sector, it must tell the entity it contracts with of its determination of the freelancer’s status. From April 2020, the Government intends to introduce new IR35 rules that will require private sector and public sector clients to inform both the entity they contract with and the freelancer or PSC of their determination and, if requested, the client’s reasons for it.

HMRC also intends the rules to require all intermediary recipients of the determination (i.e. those in the chain other than the client and the freelancer or PSC) to pass it and, if requested, the reasons for it, to the person with whom they contract.

Status Determination Disputes and Anti-Avoidance Measures

The proposed new rules for the private sector are likely to include mechanisms for challenging decisions as to whether or not a freelancer is within IR35, and a means for resolving such disputes. Where a party is initially liable to determine status and does not do so, or does so without reasonable care, or if it does not fulfil any other IR35 obligation, it will be made liable for tax and NI even if it is not the fee payer. Where a party is liable for tax and NI but in the event it cannot be collected from that party, the rules are likely to have the effect of moving liability to the next entity in the labour supply chain.

Impact of Changes on Your Business and Action Needed Now

The changes might have an effect on you if you are a freelance business or your business engages freelancers. The effects might include an increase in the burden of administration work, the cost of that extra work, practical difficulties in operating within the changed rules, and the commercial and financial impact on your business.

With less than a year to go before new rules come into effect, it is very important that you start now to take steps to prepare for the new IR35 rules if you do engage any freelancers through intermediaries. There are numerous steps that should be considered. It is recommended that you begin by identifying those freelancers working for you through intermediaries and the labour supply chain in each case, and then implementing processes to determine freelancers’ status. Further steps are likely to be advisable, and we recommend that you seek advice or guidance on these from suitable advisers or sources.

As always, if you would like to share your thoughts as to whether and how you think these proposed changes will impact you or others with whom you deal, we would be glad to hear from you in the comments, below.

Brexit Notes: What Will a No-Deal Brexit Mean for Your Commercial Contracts?

No-Deal Brexit

As at the time of writing, the UK is due to leave the European Union on 29 March 2019 (as a result of having served a formal notice under Article 50 of the Treaty on European Union to terminate its membership of the EU), but whether this will be delayed or will take place in a ‘no-deal’ scenario it is still not clear. For the purposes of this post, we assume there will be an exit in a no-deal scenario, but this is a fluid situation that could change rapidly.

General Impact on Contracts of No-Deal

This note looks at the potential impact of a ‘no-deal’ exit on your existing and future commercial sales, purchases, or other contracts. (Note that it does not cover any contracts that you have with consumer customers.) Since contract terms will differ from contract to contract, and the subject matter and circumstances of each contract will also differ, it is impossible to provide any specific guidance or advice. We can, however, highlight some areas that you might need to focus on and so this note concentrates on a few issues that you should be considering.

Consider the Effect of No-Deal on Each of Your Contracts

In relation to an existing or a future contract, you will need to form a view as to whether Brexit might have an adverse impact, and whether that impact might be on you or on the other party to the contract. Whilst Brexit itself will have limited impact on contract law (except in relation to agency and other specialist types of contract), Brexit might have an effect in relation to the parties’ obligations set out in a contract.

Brexit might give rise to greater expense being incurred in order to perform the contract; for example, costs might rise due to new or increased (import or export) tariffs or customs checks applying to trading between the UK and the EU, due to currency exchange rates fluctuating, or due to there being restrictions on the free movement of people. In each case, this could affect the overall costs of buying or selling goods, products, or materials.

Brexit might make it more difficult or even impossible to perform the contract, or it might be that performing it will be commercially unattractive or that it will produce a different outcome from that required or expected by one or both parties. If a party is unable to perform a contract due to Brexit, it could find itself in breach of contract, and, as a result, liable for that breach.

Taking Steps to Mitigate Any Problems

We suggest that you consider firstly those contracts which will still be in existence when Brexit occurs (either on 29 March or any later date on which it is to occur), and secondly, contracts yet to be entered into either before or after it occurs.

Existing Contracts

Taking existing contracts first, if you conclude that a particular contract will be more onerous or expensive due to effects of Brexit, you might decide that you cannot afford to continue with it as it stands, or that, if possible, you would like to mitigate the adverse effects of Brexit on that contract.

What are your options, if any? If the contract has a termination clause allowing you to terminate in stated circumstances which include Brexit, you could use the clause to end the contract, but this will only be an option if the stated circumstances clearly cover Brexit.

You might instead consider renegotiating the contract if the other party is willing to do so.

If they are not, then you would do well to examine the contract to see if it is possible for you to unilaterally take some other step.

If you are seeking to be excused from performance of the contract and your contract includes a ‘material adverse changes’ clause (“MAC”), you might be able to demonstrate that a no-deal Brexit or its effects is an event or amounts to circumstances falling within the terms of the MAC clause, but all will depend on the precise wording of the MAC clause. If in effect you are looking to the MAC clause for relief from financial hardship due to Brexit, you would need to consider whether the MAC clause provides that relief. It might not allow relief where the relevant event (i.e. Brexit) was an anticipated one.

Many contracts contain ‘force majeure’ clauses which excuse performance where it is prevented or delayed by a cause beyond the reasonable control of the party relying on the clause, but it is more likely that you could make use of a MAC clause than a force majeure clause for several reasons.

Unlike a MAC clause, the scope of wording of a typical force majeure clause is confined to a case where it is not possible to perform obligations under the contract, not merely where it is more expensive or onerous to do so. In order to make use of a force majeure clause, a party would first have to show that when properly interpreted it clearly covered a no-deal Brexit, and that it covered Brexit as an event having a permanent, not temporary effect. Furthermore, a typically drafted force majeure clause would only allow reliance on it if a no-deal Brexit were not reasonably foreseen and the affected party could not reasonably have taken steps to avoid the adverse effect of it. It would seem very difficult to argue that Brexit could not be foreseen unless perhaps the relevant contract was entered into many years before it became apparent that it might occur. However, if the effect of Brexit were to make it impossible to perform the contract (a relatively rare case), it might be possible to make use of a force majeure clause. Where the clause does apply, you need to consider what relief it applies, for example, it might suspend the requirement to perform the particular obligation for a period or indefinitely, or it might give a right to terminate the contract.

Where the contract is incapable of being performed, it is possible, but very unlikely, that the doctrine of ‘frustration’ under the law of contract would apply. Where it does apply, the doctrine would have the effect of rendering the contract void. However, it is a very narrow doctrine and for it to apply, it would require the very purpose of the contract to have been removed by the occurrence of Brexit (i.e. the obligations would have to have been transformed by Brexit into something radically different or performance of the contract would have to be commercially sterile) or it would be physically impossible or illegal to fulfil the contract. Further, the relevant event (Brexit) must have been unforeseen by the parties as a possibility at the time of entering into the contract, and not covered by a term of the contract catering for the impact of Brexit. Although context will be important, then, only in quite rare cases will there be ‘frustration’.

Where there is no ‘frustration’ and there is no term written in the contract which helps in the circumstances, is it possible to argue that as a matter of law, a term is to be implied in the contract whose effect is to provide relief against some adverse impact of Brexit on the contract? This is very unlikely given the strict approach that the courts take when interpreting commercial contracts.

Future Contracts

Turning to contracts yet to be signed, if you conclude that carrying out the obligations under a proposed contract would or might be negatively impacted by Brexit, you might first consider the above points about existing contracts. If you reach the conclusion that you need to provide for some relief from certain effects of Brexit, then you would be well advised to include provisions in the contract catering for your needs. For example, you might insert a clause specifically referring to Brexit allowing for rapid termination of the contract upon its occurrence, or dealing with certain stated consequential effects of it. It might provide that no liability will arise from termination, or it might provide for financial adjustments to be made on termination. Alternatively, you might decide to include a MAC clause which states that it comes into play upon Brexit. If relevant, the MAC clause could provide a mechanism to adjust prices where tariff, customs, or exchange rate changes arise from Brexit. You might decide to include a force majeure clause which very specifically deals with Brexit.

It is worth emphasising, however, that the task of identifying what a Brexit clause should cover and then drafting it in a way that is effective to meet the particular requirements identified is not likely to be an easy one.

A possible option might be to enter into only a very short-term contract, but it might only mitigate and not necessarily avoid a problem arising on occurrence of Brexit.

It is also worth bearing in mind that one party (or even both parties) might not accept that Brexit should have any legal effect on the contract or give rise to any relief in relation to obligations under the contract. If that is the case, then, even if nothing in the contract states or suggests that Brexit might have an impact on the contract in any way, it would be prudent to include suitable wording in the contract whose effect is to make clear that Brexit will not have any effect on the contract.

Food for Thought

This is a complex subject, and we can only offer suggestions as to what you might need to address. A Brexit clause in a contract will not solve all Brexit-related problems. Your particular circumstances and the nature, subject matter, and terms of contracts will dictate what you should consider and what you might do, and as always, you should take professional legal advice in relation to existing and future contracts.

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