In Brief – February 2014
Print newsletter10/02/2014

‘Debtors’ to get a fairer Green Deal
The Department of Energy and Climate Change (DECC) recently announced further revisions to the Consumer […]
The Department of Energy and Climate Change (DECC) recently announced further revisions to the Consumer Credit Act 1974 (the CCA), as applicable to Green Deal plans. The intention is that all domestic Green Deal Plans will be regulated by the CCA, whilst non-domestic property will only be affected in certain instances.
In May 2013 following calls from stakeholders, DECC launched its consultation proposing alterations to the CCA for the Green Deal – the government’s flagship initiative to improve buildings’ energy ratings by eliminating the upfront costs of efficiency measures. The basic premise of the Green Deal is that energy efficiency improvements should be self-funding via electricity and gas bill savings. Certain measures are therefore eligible for a pay-as-you-save financing mechanism, whereby accredited providers install features such as loft insulation for homes and businesses without initial costs.
Since consumers were first able to sign-up to Green Deal programmes in January 2013, the DECC has emphasised the importance of consumer protection. This is particularly reflected via the inter-relation between the Green Deal and the CCA. Green Deal plans are, essentially, a type of unsecured loan and interest is charged on the loan. Under the Energy Act 2011, the CCA was modified in relation to the Green Deal to:
- exempt from CCA regulation Green Deal plans for businesses where the credit provided was no more than £25,000
- exempt energy suppliers from needing an Office of Fair Trading (OFT) licence for the purposes of collecting plan instalments
- alter other relevant CCA requirements.
Albeit placing a number of plans beyond the scope, many Green Deal participants are subject to the onerous legislation. Plans in the residential market in particular are still regarded as regulated consumer credit agreements under the CCA. All relevant documentation has to comply with the CCA’s strict requirements.
Understanding when a party should be regarded as a ‘debtor’ for CCA purposes has become a matter of importance for providers and consumers alike, as essentially only where Green Deal debtors are ‘individuals’ do they receive the associated protections. Traditionally a person entering into a credit agreement will also be making repayments, so they are easy to identify as the ‘debtor’. However, with a Green Deal plan, different parties may be involved – with one person entering into the credit agreement (for instance, a tenant as ‘bill payer’ in a rented property) and another entering into the agreement to supply and fit energy-saving measures (an ‘improver’ landlord, for example).
Responding to its initial consultation, the DECC stated that Green Deal plans would be both restricted-use credit and deemed as debtor-creditor-supplier agreements for CCA purposes – regardless of whether the ‘improver’ and ‘debtor’ were one and the same. It had also proposed to amend the ‘debtor’ definition so:
- for any prospective credit agreement, the bill payer at the point of entry into the agreement would be the ‘debtor’, rather than the bill payer at the point of payments commencing
- for any current credit agreement, the person receiving the CCA’s protection as a ‘debtor’ would be both (1) anyone liable to pay the plan’s instalments as a result of their responsibility for the property’s energy bills and (2) anyone else with arrears under the plan due to such previous responsibilities.
However, these proposals left uncertainty as to precisely whether any one Green Deal plan would be regulated or not. A particular concern arose surrounding unregulated Green Deal plans being issued for domestic properties to corporate landlords, but then passed onto consumer tenants. As a result, further changes are to be made.
All domestic Green Deal plans are therefore now to be regulated, regardless of the identity of the ‘improver’ or ‘bill payer’ (unless exempt under any other CCA provision). Non-domestic plans are regulated only where the ‘improver’ is an individual, that is, the property’s occupier / owner who makes arrangements for the plan. The exemption relating to businesses (under section 16B(1A) of the CCA) will also only apply when the Green Deal consumer credit agreement is made for non-domestic property.
Following worries that ‘improvers’ would not receive rights and protections relevant to their roles under a Green Deal plan, the DECC has further decided that the ‘improver’ will now be the ‘debtor’ for certain sections of the legislation whilst they are still the owner / occupier of the property – alongside the current and previous (if in arrears) ‘bill payers’. As an aid for providers, the relevant sections of the statute are outlined in a new schedule to the CCA. Of greatest importance:
- the ‘improver’ must sign the plan at the outset, but the bill payer’s consent also has to be sought
- only the current ‘bill payer’ or ‘improver’ can repay early, but the ‘improver’ can withdraw consent to the plan within the first 14 days
the first ‘bill payer’ will be subject to an assessment of creditworthiness, can request a copy of the agreement, and must receive the pre-contractual explanations document - the current ‘bill payer’ should be sent statements, can request a copy of the executed credit agreement, and benefits from the CCA’s unfair relationship provisions
- the ‘improver’ should receive pre-contractual information, pre-contractual explanations, and copies of all agreement documentation. He will be subject to a credit assessment, but will also be protected via the unfair relationship provisions.
The DECC has laid the draft amendments before Parliament, aiming to make the alterations as soon as practicable. However, it still intends to consult and make further consequential amendments over the coming months. Additional developments are also expected to reflect the transfer of consumer credit regulation from the OFT to the Financial Conduct Authority on 1 April 2014. Despite this, it is hoped this recent fine-tuning of the CCA amendments will enable providers to proceed with greater confidence when issuing Green Deal plans.

Best endeavours, all reasonable endeavours and reasonable endeavours
Best endeavours A “best endeavours” obligation is the most onerous of the three levels of […]
Best endeavours
A “best endeavours” obligation is the most onerous of the three levels of “endeavours” obligation. In the words of one old case: the term “best endeavours” “means what the words say; they do not mean second-best endeavours” [1]. A party should take steps which a prudent, determined and reasonable obligee (i.e. the beneficiary of the obligation), acting in its own interests and desiring to achieve that result, would take [2]. A party that has assumed a “best endeavours” obligation – the obligor – must exhaust all of a number of reasonable courses which could be taken in a given situation to achieve a particular aim.
This is not an absolute obligation, nor is it “the next best thing to an absolute obligation or a guarantee” [3]. A “best endeavours” obligation may require the obligor to incur expenditure [4]. However, depending on the nature and terms of the contract in question, the obligor may have some regard for its own commercial interests. This obligation does not therefore include actions which would lead to its financial ruin, undermine its commercial standing or goodwill [5], or have no likelihood of being successful. For instance, the obligor may be required to take the risk of success or failure in proceeding to litigate, but only where there is a reasonable prospect of commercial success.
All reasonable endeavours
The line between a “best endeavours” obligation and an “all reasonable endeavours” obligation can be a blurred one and it is too sweeping a statement to suggest that an “all reasonable endeavours” obligation is a half-way house between “best” and “reasonable” endeavours. Whilst an “all reasonable endeavours” obligation does not necessarily equate to a “best endeavours” obligation, in the context of the number of courses of action a party must take, there is some alignment between the two phrases. For instance, it appears that an “all reasonable endeavours” clause “requires you to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted” [6] – which looks very much like a “best endeavours” obligation. However, there may be a distinction between the two concepts in terms of the commercial sacrifice an obligor has to bear.
In Yewbelle v London Green Developments it was held that the phrase “all reasonable endeavours” does not impose an obligation to outlay significant sums to resolve a commercial issue. However, a more recent case affirmed that the phrase suggested that the obligor should subordinate its own financial interests to obtain the desired result, with the judge explaining that this obligation does “not always require the obligor to sacrifice its commercial interests” [7]. Implicitly therefore (from the use of the words “not always”) there will be cases where an “all reasonable endeavours” obligation will require the obligor to sacrifice its commercial interests.
The only clear lesson from the case law on “all reasonable endeavours” is that the nature and extent of the obligation imposed in any given case is highly fact sensitive. How to tackle this uncertainty is considered below.
Reasonable endeavours
An obligation to use “reasonable endeavours” means that a party should adopt and pursue one reasonable course of action in order to achieve the desired result, bearing in mind its own commercial interests and the likelihood of success, and which need not be exhaustive of every course available to it. This is a notably lesser obligation than an “all reasonable endeavours” obligation.
This obligation does not require the taking of an action insofar as it disadvantages the party under the obligation. However, this is subject to the exception that if the contract specifies that certain steps have to be taken in performance of the obligation these steps must be taken even if they involve the sacrificing of a party’s commercial interests.
The use of “reasonable endeavours” is defined by reference to an objective standard of what an ordinary competent person might do in the same circumstances and implies a reasonable balance to be struck between a party’s obligation to others and its own financial interests [8]. Relevant considerations may well include:
- the party’s relations with third parties
- the party’s reputation
- the party’s financial interests and the cost of the course of action
- the chances of achieving the desired result.
There might be a number of reasonable courses which could be taken in a given situation to achieve a particular aim. An obligation to use “reasonable endeavours” to achieve the aim probably only requires a party to take one reasonable course, not all of them.
Conclusion
Given the uncertainty as to what an endeavours clause may actually require in any given case, a sensible course will often be to define precisely the extent and nature of the obligation, such as:
- the extent to which the obligor should incur any expenditure (if at all)
- the extent to which the obligor should keep the obligee informed as to its progress
- the extent to which the obligee may be entitled to insist upon a particular course of action, or assume responsibility for pursuing the desired objective itself
- the end date by which the desired objective is to be achieved
listing specific steps that the obligor is or is not expected to carry out.
This will, of course, achieve the unwanted result of adding to the length of the contract. Nonetheless, given the uncertainty as to the meaning of the different “endeavours” obligations, this is a cross usually worth bearing.
It will also be best practice for the obligor to keep a record of the steps it has taken to comply with the obligation.
_____________________
[1] Sheffield District Railway Co v Great Central Railway Co [1911] 27 TLR 451
[2] IBM United Kingdom Limited v Rockware Glass Limited [1980] FSR 335
[3] Midland Land Reclamation Limited v Warren Energy [1997] EWHC 375 (TCC)
[4] Jet2.com v Blackpool Airport Ltd [2012] EWCA Civ 417
[5] Rackham v Peek Foods Limited (1990) BCLC 895
[6] Yewbelle v London Green Developments [2007] All ER (D) 379 (May)
[7] CPC Group v Qatari Diar Real Estate Inv Co [2010] All ER (D) 222 (Jun)
[8] Rhodia International Holdings v Huntsman International [2007] 2 All ER (Comm) 577

Breach of contract – when not paying the price is a penalty
Penalty clauses The courts are frequently asked to determine whether a clause providing for payment […]
Penalty clauses
The courts are frequently asked to determine whether a clause providing for payment of a fixed sum on breach of contract is a penalty (and unenforceable under English law, even if the parties are of equal bargaining power) or a genuine pre-estimate of loss (liquidated damages), in which case the clause will be enforceable. Forfeiture clauses – that is, clauses which entitle the innocent party to withhold monies which it otherwise would be required to pay over, as opposed to demanding compensation in respect of a breach – can also constitute penalty clauses and the question of whether a forfeiture clause was a penalty was at issue before the Court of Appeal recently in El Makdessi v Cavendish Square Holdings BV. [1]
Facts of the case
The clause in issue was contained in a share purchase agreement. The clause provided that, on the seller’s breach of a restrictive covenant, the purchaser would be released from its obligation to pay certain deferred consideration and would be entitled to compel the seller to transfer the remainder of his shares in the target company at a price based on net asset value (which was less advantageous than the price that would be payable if there were no breach).
The purchaser sought to enforce these provisions when it appeared that the seller had breached the restrictive covenant. The seller, whilst settling the claim, argued that the clause was unenforceable as a penalty. That argument was rejected by the High Court, which noted that:
- the share purchase agreement had been negotiated heavily over a period of time between sophisticated commercial parties, represented by experienced solicitors
- the purchaser was paying a premium over net asset value of the shares, in part as an incentive for the seller to comply with the restrictive covenants
- the restrictive covenants were integral to the agreement as the value of the target business relied to a great extent on the strength of the seller’s personal connections.
In the circumstances, the High Court considered that the forfeiture of the deferred consideration and the variation to the transfer terms were commercially justified and therefore reasonable. Accordingly, the contract was not a penalty and was enforceable.
Court of Appeal decision
The Court of Appeal, however, came to a different view.
The Court noted that the approach of the courts towards an alleged penalty clause was to assess whether the predominant function of the clause was to deter or whether there was a commercial justification for the clause. This required an assessment of whether the figure in the clause was a reasonable estimate of the likely recoverable loss of the innocent party. In the context of a breach of a restrictive covenant, that loss would be whatever loss was suffered as a result of the breach of the covenant. If the sum exceeded the maximum possible loss, that would be an indicator of a penalty; if it fell within a range of possibilities, it might be reasonable, although that was less likely if the range was very wide. If the provision allowed recovery of more than could be recovered by the innocent party by way of damages, that would indicate that the loss was not an estimate of recoverable loss.
Applying that approach to the clause in question, the Court found that the clause lacked any commercial justification and that its predominant purpose was to act as a deterrent. The loss that the seller stood to suffer from the breach of contract was completely disproportionate to the loss attributable to the breach.
Points to consider
Where a contract provides that, in the event of breach, a sum will be paid that is out of all proportion to the loss attributable to the breach, this is likely to be a penalty as its function is to deter a breach. The same principle applies to provisions requiring a right to be forfeited or assets to be transferred at an undervalue, as in the instant case.
The Court’s emphasis upon whether the clause is commercially justified is noteworthy. This appears now to be the position the courts are taking, as opposed to simply applying the “genuine pre-estimate of loss” test to determining whether a clause is a penalty. The Court stated that a finding of a genuine pre-estimate of loss was not necessarily determinative of the issue.
One of the reasons why the Court found that that the clause was a penalty was that any loss that the purchaser would recover for breach would be ‘reflective loss’. ‘Reflective loss’ refers to the diminution in the value of a shareholder’s shares, together with other losses suffered by the shareholder, as a direct result of the loss suffered by the company. Public policy prevents a shareholder recovering for reflective loss. In this case, the purchaser’s loss would be of the value of its shareholding which would be reflective of a loss to the company itself (and the company could recover those losses either for breach of duty or, following the wording of the share purchase agreement, by bringing a contractual claim itself).
This type of provision will not be uncommon in share purchase agreements, where rights are granted to the target company (for example, by giving the target itself enforceable third party rights) as well as to the purchaser. This could, in some circumstances, lead to the target’s claim excluding the purchaser’s. Where this is the case, a disparity could arise between the loss a purchaser could recover (nil) and the amount a seller is required to pay (or have forfeited), increasing the chances of the clause being found to be unreasonable and therefore unenforceable as a penalty.
The Court suggested that this situation could have been avoided by making payment of the deferred consideration conditional upon the seller’s compliance with the restrictive covenants. Accordingly, it will be sensible if payment of deferred consideration is to be dependent upon the seller’s compliance with its restrictive covenants to structure any deferred consideration as a conditional payment, rather than providing that the purchaser’s payment obligation will fall away in the event of a breach of covenant.
Finally, another drafting consideration to bear in mind, is that the Court took a dim view of the ‘one size fits all’ nature of the clause. In practice, the range of loss that could be suffered could be very wide yet the effect of the clause was the same regardless of whether the breach was trifling or short-lived, on the other hand, or of substantial gravity, on the other. Drafting a more nuanced clause will not be easy but it is more likely to be enforceable.
___________________
[1] [2013] EWCA Civ 1539

Government promotes Industrial and Provident Societies
Since the current UK Government was formed in 2010, it has been keen to promote […]
Since the current UK Government was formed in 2010, it has been keen to promote Industrial and Provident Societies (IPSs) and mutuals as part of the diversity of the UK economy. In July 2013 it published a consultation on reforming the law governing IPSs and in December it published its responses, which included introducing the Co-operative and Community Benefit Societies Bill into Parliament.
Background to IPSs
IPSs were introduced as a legal form by the Industrial and Provident Societies Act 1965. This created two types of co-operatively owned societies: co-operative societies (businesses owned and run by and for their own members) and community benefit societies (businesses operating for the benefit of their community, e.g. housing associations). The IPS structure, currently regulated by the Financial Conduct Authority (FCA), remains popular in the UK, with more than 7,600 IPSs currently active and a membership of over 15 million. They cover a wide range of businesses and industries, from public service mutuals to wind farms, football clubs to credit unions. The Government wants to keep the unique features of the traditional IPS form so that the sector stays focused on serving its members and can contribute further to the success of the UK economy.
Reforms
The consultation proposed bringing into force a number of provisions in the Co-operative and Community Benefit Societies and Credit Unions Act 2010 (the CBSA), which until now have not been implemented. These are:
- Section 1 – provides the option to register as ‘Co-operative Societies’ or ‘Community Benefit Societies’ instead of Industrial and Provident Societies – a change requested by the sector as more appropriate and up-to-date
- Section 3 – making the Company Directors Disqualification Act 1986 applicable to IPSs
- Section 4 – provides the power to apply certain legal provisions relating to companies (see below for what changes the Treasury intends to make under this section)
- Section 5 – provides the power to establish a framework for credit unions similar to those applicable to building societies. The Government does not intend to use this power at present but will keep it under review.
Sections 4 and 5 came into force on 1 December 2013 and the other sections will be coming into force shortly.
The consultation also asked for views from the co-operative sector on six proposed primary changes to IPS legislation. It has decided to proceed with four of them. The six were:
- a raising of the limit on withdrawable share capital in an IPS – this was set at £20,000 in 1994 and if increased by RPI would only be £31,000. The Government will now raise the limit to £100,000
- introducing insolvency rescue procedures for IPSs – arrangements under the Companies Act 2006, company voluntary arrangements and administration procedures under the Insolvency Act 1986 for the benefit of IPSs
- the introduction of insolvency procedures for Credit Unions along a similar model to that applied currently to building societies – the Government has decided to wait and see if this is needed over and above the measures set out in 2. above, so it is not proceeding with this at present
- IPS officers will be liable to investigation by the FCA in respect of improper or unlawful behaviour in IPSs. This is intended to create a level of equality between the regulation of IPSs and companies, with the rationale that this will increase consumer confidence in the IPS sector
- providing greater transparency in the IPS sector by providing for the inspection of the register of IPS members in a similar manner to that currently employed by the Companies Act 2006 – following concerns expressed by key stakeholders, the Government is not implementing this
- optional electronic registration for new IPSs. This will be cheaper and faster than the current system to encourage the take up of the IPS structure, and brings the registration system in line with that for companies.
Co-operative and Community Benefit Societies Bill
A further strand to the reforms is the Co-operative and Community Benefit Societies Bill (the Bill), which received its second reading in the House of Lords on 13 January 2014. This is a consolidation bill, aiming to bring together in one Act all the legislation relating to IPSs, in a similar way to how the Charities Act 2011 consolidated charity law. The Bill does not make any substantive changes to the existing law but it does seek to clarify ambiguities and inconsistencies in the overlapping Acts that it will replace.
One interesting point regarding charitable IPSs was made by Lord Hodgson (who was in charge of the Charities Act review) regarding the test for registration as a community benefit society. Clause 2 of the Bill states that a society can only be registered as a community benefit society if it is shown to the FCA’s satisfaction that its business is being, or is intended to be, conducted for the benefit of the community. Lord Hodgson was concerned that this might be a lower test than the public benefit test that an organisation must pass in order to be registered as a charity and that there is “a danger that the unscrupulous will game the system to take advantage of whichever regime is the laxer”. Charitable IPSs are exempt from registration with the Charity Commission and it seems that this exemption will continue (there was talk at one point of abolishing it but there is no mention of this in any of the reform documents).
We will continue to monitor developments.

How to deal with settlement approaches in the early stages of a dispute
A quick recap on the PGF case: silence can be costly We recently highlighted the […]
A quick recap on the PGF case: silence can be costly
We recently highlighted the Court of Appeal decision in PGF II SA v OMFS Company 1 Ltd [1] (PGF) in which a costs sanction was imposed on a defendant because of its failure to respond to the claimant’s request to mediate. Ignoring the other party’s request amounted to an unreasonable refusal to mediate for which the defendant was penalised. For our quick refresher on the decision in the PGF case.
The courts’ strong support of ADR procedures like mediation is in keeping with Lord Justice Jackson’s costs reforms which are forcing many parties and their lawyers to rethink how they approach the early stages of litigation.
ADR (of which mediation is just one method) has been around for a couple of decades. Yet, in the PGF case, Lord Justice Briggs felt compelled to refer in his judgment to Lord Justice Jackson’s, “clear endorsement of ADR as a process which is still insufficiently understood and still under-used”. [2]
It is true that those involved in disputes may not fully appreciate the workings of ADR procedures. However, there can be few commercial dispute resolution lawyers left without a thorough understanding of ADR – and the consequences for their clients – if they do not give a full explanation of the various processes available to litigants to assist in the early resolution of a dispute.
Why are the courts so supportive of Alternative Dispute Resolution?
So why are the courts so supportive of ADR?
There were sound public policy reasons for the Court of Appeal’s decision in the PGF case. In particular, the court considered that:
- ignoring an offer to try ADR or not providing reasons for refusing such an offer can ‘stymie’ negotiations
- where parties do not explain their reasons for ignoring or refusing an offer to engage in ADR at the time of the refusal, it will often be harder, more expensive and more time consuming to establish the true reasons and their reasonableness later.
In addition, the court recognises the benefits of ADR. A mediation, for example, costs less than proceeding to trial and can:
- help to save, preserve or resurrect a business relationship
uncover practical solutions the parties might not have considered previously - help the parties gain insights into their own and their opponent’s position which can help facilitate settlement, even if the mediation is unsuccessful on the day.
If you have a dispute – be proactive and review ADR options from the outset
If you are involved in a dispute whether as a claimant or defendant, you should endeavour from the outset to resolve it. In particular:
- review all ADR options to ascertain which is the most appropriate for the resolution of the dispute. Consider what might be the most cost-effective process for resolving the dispute
- seek full explanation from your lawyers on the different ADR options and their potential costs
- engage with the other party. Such engagement could lead to full or partial settlement and thereby reduce both the costs and the need for court and judicial time
- discuss the issues. Discuss your proposals for ADR. If the other party doesn’t agree, remember that there are lots of options: mediation; expert determination; early neutral evaluation – or just plain negotiation
- continue to review ADR options if the dispute continues – don’t curtail further discussions.
Action to take if you receive a request to try mediation or other ADR methods
So what should you do if your opponent asks you to try ADR?
If you receive such a request, take action – do not ignore it. In particular:
- consider all ADR options as well as the particular option proposed
- engage with the other party and respond substantively to the ADR request (and preferably within a reasonable time scale)
- if you do not believe it is the right time to engage in ADR – or that the particular procedure suggested is not appropriate, fully explain your reasons and make an alternative suggestion. (Have a look at the section below on what constitutes an unreasonable refusal).
Even if you believe it is too early to try ADR, you must still engage with the other party. If you:
- don’t have enough information about the claim – ask for it
- need sight of some documents – ask for them
- need an expert view before you can settle, discuss expert evidence with the other party and discuss when might be the right time to try ADR in the future
- think the cost of ADR is not justified – explain why.
If you do not give reasons at the time, you might later find yourself having to explain to the court why you refused to try ADR. That could well involve you in a forensic investigation to prove your thinking and actions at the time of the refusal which is likely to be difficult. And remember that, as a result of the PGF decision, if you gave no response at all, your position will be deemed to have been unreasonable.
What constitutes an unreasonable refusal to mediate?
When is it reasonable to refuse to engage in ADR?
In deciding whether a refusal is unreasonable, the court will take into consideration a number of factors including: the type of dispute; the merits of the arguments in the case; whether the parties have tried to settle the dispute: whether the costs of ADR would be so great as to be disproportionate to the amount in dispute, and whether or not there was a good chance of the ADR process resulting in settlement. These principles were set out in the case of Halsey v Milton Keynes General NHS Trust [3].
In the PGF case, the Court of Appeal extended the Halsey principles slightly by confirming that ignoring an offer to use ADR would effectively amount to an unreasonable refusal to engage in ADR.
Handling ADR: tips for in-house lawyers
Finally, some tips for in-house lawyers. ADR is no longer one of a litigator’s tools: it is a litigation essential. The court hinted in the PGF case that lawyers, who do not fully advise their clients on ADR, risked negligence should their client be penalised in costs for unreasonable refusal to engage in ADR processes.
All litigators should read and use the Jackson ADR Handbook [4] not least because:
- Jackson LJ was its catalyst – and fully supported the Handbook’s authors
- the foreword to the handbook has a recommendation by Lord Dyson MR who refers to it as “properly authoritative” on ADR
- in the PGF case, the Court of Appeal agreed with the claimant’s reliance on the handbook [5] in the absence of any other authority to support their argument that the defendant’s failure to respond to the mediation request amounted to unreasonable behaviour.
Conclusion
The use of ADR is one of the key ways in which the courts are trying to reduce the costs of litigation. Those litigating or intending to litigate should explore all options for settlement in the early stages of their dispute and respond promptly and constructively to any settlement approaches made by the other party.
[1] PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288
[2] Paragraph 26 of PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288
[3] Halsey v Milton Keynes General NHS Trust
[4] See: http://ukcatalogue.oup.com/product/9780199676460.do
[5] Paragraph 11.56 of the ADR Handbook

Insolvent borrowers: is there a trust?
An issue that commonly comes before the courts in insolvency situations is whether a lender, […]
An issue that commonly comes before the courts in insolvency situations is whether a lender, that has advanced money to the now insolvent borrower, has retained a ‘security interest’ in the monies advanced, so that the monies are held in a trust for the benefit of the lender (termed a Quistclose trust). This would mean, therefore, that the monies held in the trust are not available for distribution in the insolvency proceedings as part of the insolvent borrower’s estate. This in turn involves a consideration of the detailed provisions of the loan agreement. A recent case has emphasised the importance of getting the drafting right.
In Gabriel v Little [1] the lender had advanced money to a property developer. The relevant provision of the facility letter in issue defined the term “Loan” as “The sum of £200,000 which will be made available as a contribution to the costs of development of the Property, such sum to be advanced on the Drawdown Date”. The stipulated purpose of the Loan was “To assist with the costs of development of the Property”.
The particular claim in this case was for dishonest assistance in breach of trust by the borrower but to succeed on this claim, the claimant needed to show that there was indeed a trust.
The Court upheld the High Court finding that neither the terms of the facility letter nor any of the surrounding circumstances implied the establishment of a Quistclose trust. The “mere fact” that the facility letter stated that the purpose of the loan was “to assist with the costs of development of the property” did not impose an obligation of trust on the borrower as to the application of the loan monies nor did the fact that the borrower was a special purpose vehicle established specifically to develop the property.
The case demonstrates that, while using words such as “sole” or “exclusive” in the purpose clause of a facility agreement will not be determinative of whether or not a Quistclose trust is established, the lender will find it easier to show the existence of such a trust, where the words are used. Without them the task of proving the existence of a trust will be very difficult.
[1] [2012] EWHC 1193 (Ch)

Is the future of waste collection yet more recycling bins?
Remembering to separate out recyclable materials when putting the bins out is something that can […]
Remembering to separate out recyclable materials when putting the bins out is something that can be a bit of a chore, but people seem to be getting used to. The national UK household recycling rate has risen from 11 per cent. in 2000 to 43 per cent, working towards our EU target of 50 per cent. The rate of increase has slowed though, but the pressure from Europe to meet the targets has not.
Last year we reported on some controversial changes to the Waste (England and Wales) Regulations 2011 (see our In Brief article from March 2013). These were made to bring them more in line with the European Waste Framework Directive that all EU countries must comply with. The Directive obliges EU Member States to promote high quality recycling and, to this end, set up waste collections where “technically, environmentally and economically practicable” and appropriate to meet relevant recycling quality standards. It goes on to require that by 2015 there should be separate collections for paper, metal, plastic and glass.
So does this mean that as from next January each household will need four separate recycling bins? Well, not necessarily. The requirement for separate collections only applies where separate collection is necessary to ensure that waste can be recycled to a high quality and is “technically, environmentally and economically practicable” (which is commonly shortened to “TEEP” by the waste industry). This will depend on how and what types of waste are collected. For instance, if a recycling bin contains only plastic and metal, it should be easy to collect them together (“commingled”) and separate them out at the recycling plant. If however glass and paper can be put in the same bin, it is much more difficult to separate out the glass shards from the paper at the recycling facility.
Before 1 January 2015 when the separate collection requirements come into force, councils will have to consider whether they have to collect paper, metal, plastic and glass separately or whether such separate collections will not be technically, environmentally and economically practicable. For instance, it may not be TEEP to require each tenant of a block of flats to have four separate bins as there may not be space for this.
Impact on councils
When considering whether to have separate or commingled collections, councils need to take steps to ensure their decision cannot be legally challenged. It is worth consulting with the market first to find out what is technically practicable and what the market sees as the most economic method of collection. Decisions should be made based on a sound evidence base with appropriate expert advice and written records kept.
Impact on existing waste collection contracts
Part of the consideration will be to look at the collection methods that the council currently uses and whether it would be necessary and TEEP to change them. If the council has recently signed a 15-year collection contract for commingled collections, changing to separate collections could mean a big hike in the contract price or even require a re-procurement if it is a sufficiently material change to what was originally tendered for. This could mean it is not “economically practicable” to implement separate collections. On the other hand, if a contract is shortly coming up for renewal, or has sufficient flexibility built into it to allow such a change with minimal cost, it may be TEEP to move to separate collections.
Impact on procuring new waste collection contracts
At the moment there is no formal guidance from Defra on what is and is not TEEP. It is unlikely that Defra will issue such guidance in the near future. We suggest that councils engage with the market as to what is TEEP and build in as much flexibility to the procurement as possible, both to allow for bidders to suggest a range of solutions and to “future proof” the contract against a need to change the method of collection.
How we can help
With a wealth of experience in both waste contracts and procurement, Walker Morris can help both councils and waste contractors to find the best legal solution to the separate collections and TEEP issue.

Shadow directors and their duties
A shadow director is defined in section 251(1) of the Companies Act 2006 as a […]
A shadow director is defined in section 251(1) of the Companies Act 2006 as a person in accordance with whose directions or instructions the directors of the company are accustomed to act. There are limited exceptions for those who act purely in a professional capacity when providing advice – such as lawyers. A de facto director on the other hand is a person who performs the functions of a director but who has not been formally appointed as a director.
Identifying a shadow and/or de facto director
A number of cases have been concerned with the identification of a shadow and/or de facto director. The High Court decision in Smithton Limited v Naggar [1] is the latest.
In this case, the claimant company (Hobart) claimed for loss suffered when two companies, Insureprofit and Mariona, defaulted on obligations under contracts entered into with Hobart. Insureprofit and Mariona were insolvent and the claim was brought against a Mr Naggar personally. Naggar was the director of a company called Dawnay Day, itself the majority shareholder of Hobart. Dawnay Day’s business model was to “incubate” new businesses and then spin them off in joint ventures should they prove successful. Directors were appointed to the new companies by Dawnay Day to protect its interests. Naggar directly and/or indirectly owned both Insureprofit and Mariona. The first part of the claim against Naggar was that he was a de facto or shadow director of Hobart and had breached his statutory duties to Hobart.
On the question of whether Naggar was a de facto or shadow director, the court’s approach was to identify what “hat” he was wearing in his dealings with Hobart. The description of Naggar’s role was of less importance. The facts did not support a finding that Naggar was a de facto or shadow director. His involvement in Hobart’s business did not extend beyond what one would expect of a major shareholder and client. There was no evidence that a majority of the board were accustomed to act in accordance with Naggar’s instructions.
Recent cases have highlighted the fact-specific nature of assessing whether someone is a shadow or de facto director and also that the two concepts, whilst distinct, often overlap. This case is in line with those authorities, although the focus on identifying the “hat” worn by the putative director is noteworthy. This will be relevant to lenders as well as majority shareholders. In the words of the judge: “This ‘hat identification’ issue does not only arise in relation to human directors of corporate directors. In Ultraframe (UK) Ltd v Fielding Lewison J considered the position of a lender alleged to be a shadow director of the debtor company. He held that where the alleged shadow director is also a creditor of the company, he is entitled to protect his own interests as creditor without necessarily becoming a shadow director”.
The duties of a shadow director
Because of its finding that Naggar was not a shadow director, the High Court did not need to venture into an analysis of the duties of a shadow director. There are some express requirements in the Companies Act 2006: shadow directors are liable, in largely the same way that a run of the mill director is, for issues such as wrongful trading, director disqualification, and they are expressly obliged by statute to declare their interests in an existing transaction. However, the extent to which shadow directors owe fiduciary duties has not always been clear: in Ultraframe UK Ltd v Fielding [2] the High Court stated that “the indirect influence exerted by a paradigm shadow director who does not directly deal with or claim the right to deal directly with the company’s assets will not usually… be enough to impose fiduciary duties upon him”.
In Vivendi SA v Richards [3] Centenary Holdings III Limited (the Company) had been sold by the Vivendi group to a company that was ultimately owned by one Mr Richards. Richards had not been formally appointed as a director of the Company although he had entered into a consultancy agreement with it. The Company went into liquidation and the liquidators assigned claims to Vivendi.
Vivendi argued that by procuring payments by the Company totalling £10 million over a two-year period, the Company’s sole director had breached the statutory duty of good faith owed by a director to his or her company. Vivendi further argued that Richards was a shadow director and, as such, also owed a duty of good faith, which he had breached. Vivendi also argued that Richards had acted dishonestly.
The court found that Richards was indeed a shadow director, the formally appointed director being no more than his “legman”.
The court then went on to tackle the extent to which a shadow director owes a duty of good faith to the company and concluded that a shadow director will typically owe this duty at least in relation to the directions or instructions he or she gives to the formally appointed directors. This includes the duty of good faith, as a shadow director could reasonably be expected to act in the company’s best interests rather than his or her own interests, when giving such instructions.
The court went on to find that Richards had breached the duty of good faith. Whilst the duty is ordinarily owed to shareholders, the interests of creditors must be taken into consideration when a company is in financial difficulties, as was the case here. The payments were not in the interests of the company or its creditors. Further, Richards had knowingly acted contrary to the interest of the Company’s creditors in making the payments and, accordingly, the court made a finding of dishonesty.
Cases on shadow and de facto directors come before the courts on a fairly consistent basis and in each case context is all-important. The emphasis on ‘hat identification’ is a good way of working out whether a shareholder or creditor is acting as a shadow director. If they are, then the lesson from the second case considered in this article, is that they owe a duty to act in good faith in what they consider to be the best interests of the company.
[1] [2013] EWHC 1961 (Ch)
[2] [2005] EWHC 1638 (Ch)
[3] [2013] EWHC 3006