In the February 2018 edition of Corporate Rescue and Insolvency, we discussed the recent decision in Re Agrokor DD and in the matter of the Cross-Border Insolvency Regulations 2006 [2017]. The case serves as a useful reminder of the provisions and utility of the Cross-Border Insolvency Regulations 2006. A copy of our article can be found here, and is reproduced with the publisher’s kind permission below.

Introduction

Re Agrokor DD and in the matter of the Cross-Border Insolvency Regulations 2006 [2017] EWHC 2791 (Ch) concerned an application by the ‘foreign representative’ of Agrokor DD (the ‘Company’), a Croatian company, for recognition in Great Britain under the Cross-Border Insolvency Regulations 2006 (the ‘CBIR’). The application was opposed by Sberbank (‘Sberbank’), a Russian bank and creditor. Sberbank claimed in excess of €1bn from the Company and had commenced arbitration proceedings against the Company in London in July 2017. Contested applications for recognition under the CBIR are uncommon. This case therefore serves as a useful reminder of some of the provisions of the CBIR and the issues the English court must consider in determining whether to grant recognition. The outcome of Brexit as regards Regulation (EU) 2015/848 on insolvency proceedings (recast) (the ‘Recast EIR’), Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (the ‘Recast JR’) and other EU legislation remains uncertain. However, it is possible, particularly as new insolvency and/or restructuring procedures continue to be introduced around the globe, that practitioners in the United Kingdom (and overseas) might need to become better acquainted with the provisions of the Model Law (as defined below), and other means of coordinating cross-border insolvencies and related disputes.

Background

The Company is the holding company of a group of companies (the ‘Group’) specialising in agriculture, food production and related activities in Croatia. Its annual revenue is around £6.5bn, and it was said to account for circa 15% of Croatia’s GDP (more, if one includes supply chains). Because of its size and systemic importance to the Croatian economy (and because a desired restructuring could not be effected pursuant to the existing Croatian Bankruptcy Law 2015), it became necessary to introduce specific legislation to resolve the Company’s financial difficulties. This new law, the Law on Extraordinary Administration Proceeding in Companies of Systemic Importance to the Republic of Croatia (the ‘Extraordinary Administration Law’), was passed by the Croatian government on 6 April 2017. The Company did not delay, and on 10 April 2017 the Croatian court made an order that the Company be made subject to an extraordinary administration. The commencement of an extraordinary administration has the consequence of, among other things, prohibiting the bringing or conducting of civil or enforcement proceedings against the debtor and its controlled and affiliated companies; in effect, a moratorium on claims. Therefore, both the Company and the Group became subject to an extraordinary administration.

Extraordinary administration

The court noted that the Extraordinary Administration Law was based, at least in part, on the Italian Legge Marzano, enacted in relation to the collapse of the Parmalat group. An extraordinary administration is overseen by an extraordinary administrator. Certain decisions require the approval of the court, the creditors’ committee, the relevant government Ministry or the government of the Republic of Croatia (as applicable). The Extraordinary Administration Law empowers the extraordinary administrator, with the approval of the creditors’ committee, to propose a satisfaction of creditor claims by way of settlement agreement. By the settlement agreement it is possible to, among other things, transfer some or all of the assets of the debtor to a third party, for the debtor to continue trading, for the debtor to merge with another entity, and to reduce or postpone the debtor’s payment obligations. Creditors are categorised by class, and each class must approve the settlement agreement by a simple majority. An extraordinary administration can be converted into a bankruptcy proceeding at any point in the process.

The cross-border insolvency regulations

The Recast EIR applies to Croatia. However, the Extraordinary Administration Law is not included in Annex A of the Recast EIR and, therefore, is not a ‘main proceeding’ to which automatic recognition is given. Accordingly, it was necessary to seek recognition via the CBIR instead. The CBIR were introduced in Great Britain (that is, England, Scotland and Wales) under the Insolvency Act 2000. This enacted (with some modifications) the model law (the ‘Model Law’) drafted by the 30th session of the United Nations Commission on International Trade Law, known as UNCITRAL relating to cross border insolvency. The Model Law was devised to resolve issues arising in crossborder insolvencies. Unlike other crossborder insolvency legislation (such as the Recast EIR), the Model Law (in unmodified form) does not require reciprocity from the requesting state in order for the enacting state to be obliged to recognise foreign insolvency procedures. Some states (but not Great Britain) have chosen to enact the Model Law to include a reciprocity requirement. Croatia has not adopted the Model Law. Under Art 2(i) of Sch 1 to the CBIR:

‘“foreign proceeding” means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision of a foreign court, for the purpose of reorganisation or liquidation’

Under Art 20.1 of Sch 1 to the CBIR, upon recognition:

‘commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities is stayed [and] execution against the debtor’s assets is stayed…’

Article 20.2(a) of Sch 1 to the CBIR provides that the automatic stay is the same in scope and effect as if the debtor had been made the subject of a winding-up order under the Insolvency Act 1986 (IA 1986). In Cosco Bulk Carrier Company Ltd v Armada Shipping SA [2011] EWHC 216 (Ch) Briggs J said:

‘The domestic regime for the imposition and management of a stay incorporated by paragraph 2 of article 20 is that prescribed by section 130(2) of the Insolvency Act 1986’.

Under Art 6 of Sch 1 to the CBIR:

‘Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of Great Britain or any part of it’

The arbitration in London was, pending the outcome of the application, stayed by consent. An automatic stay would apply under the CBIR, assuming the application was successful, thus explaining Sberbank’s objection to the application.

Opposition to the application

Sberbank, opposing the Company’s application, argued that the extraordinary administration procedure is not a ‘foreign main proceeding’ within Art 2(i) of Sch 1 to the CBIR because:

• the Extraordinary Administration Law is not a law relating to insolvency
• the Extraordinary Administration Law was not passed for the purposes of reorganisation or liquidation
• an extraordinary administration is not a collective proceeding
• an extraordinary administration is not subject to control or supervision of a foreign court
• the extraordinary administration concerns a group, and group proceedings are outside the scope of the CBIR
• even if the extraordinary administration is a foreign main proceeding, to grant recognition would be manifestly contrary to the public policy of Great Britain

The court addressed each of those arguments, with careful reference to the CBIR, the Model Law, documents of UNCITRAL and its working group relating to the preparation of the Model Law, the guide to the enactment of the Model Law (the ‘Guide’), and case-law from the United Kingdom and from other jurisdictions. The court also received expert evidence on matters of Croatian law. The court described its role as to decide whether the extraordinary administration fulfils the criteria for recognition under the CBIR, acknowledging that the characteristics of that proceeding are a matter of Croatian law. It is interesting to note that neither Serbia nor Montenegro was prepared to recognise the Company’s extraordinary administration, notwithstanding that those countries have adopted the Model Law.

Group proceedings out of scope

The Guide makes clear that what is generally being considered in the Model Law is the case of an individual debtor company that undergoes an insolvency or reorganisation process. The position of groups of companies is generally ignored. Whilst the extraordinary administration concerned the Group, recognition was sought only in respect of the Company (we assume being the only group company party to the arbitration proceedings in London). The court held that there is nothing in the CBIR to prevent a foreign proceeding being recognised, which in the foreign court involves a group of companies, but where the recognition being sought in Great Britain is only in relation to a single member of that group of companies.

Law relating to insolvency

The Guide says ‘liquidation and reorganisation might be conducted under a law that is not labelled as insolvency law (eg company law), but which nevertheless deals with or addresses insolvency or financial distress’. The law concerned does not have to be confined to the law of insolvency. The court, having analysed the Extraordinary Administration Law, observed that: ‘It is… clear that the extraordinary administration proceedings in Croatia is begun on grounds either of insolvency or impending insolvency, whether proved or deemed.’ It held that: _x0096__x0096_ the requirement that the law under which the proceeding is brought must be an insolvency law is satisfied if insolvency (presumed by operation of law or actual) is one of the grounds on which the proceeding could have been commenced, even if insolvency could not actually be demonstrated and there was another basis of commencing the proceeding; and _x0096__x0096_ it was immaterial, for the purpose of this application, that affiliate and subsidiary companies of the Company could not themselves have been made subject to an insolvency proceeding.

Subject to the control and supervision of the Court

The court was of the view that ‘supervision or control’ is not a demanding standard, and notwithstanding that the Extraordinary Administration Law confers significant powers and oversight upon the government of Croatia (among others), the test was satisfied in this case.

Control or supervision can be potential rather than actual, and indirect rather than direct.

Collective proceeding

Sberbank argued that ‘collective proceeding’ means that the insolvency proceeding must relate to the debtor and its own creditors, and not to creditors of other companies. An extraordinary administration encompasses all the assets and liabilities of the group companies subject to the proceeding, and such claims are administered on an omnibus basis. The extraordinary administrator is tasked with making a proposal between the companies subject to the proceeding and their various creditors. The court held that the proceeding was a collective proceeding, observing, rather tartly, that Sberbank’s objection seemed to be that the extraordinary administration was, if anything, too collective. A distinction was made with a proceeding that is a collection device for a particular creditor or select group of creditors (like a receivership, which is not a collective proceeding).

For the purposes of reorganisation /winding up

Sberbank argued that because a company could exit extraordinary administration without certainty that it would be made subject to a reorganisation or a winding up, such proceeding could not be recognised under the CBIR. The court agreed that as regards the possible outcomes this was right, but held that nonetheless the Extraordinary Administration Law was a law for the purposes of reorganisation and winding-up. Even though a reorganisation or winding up outcome was not certain, it was a credible possibility at the outset of such proceeding.

Manifestly contrary to public policy

The discussion revolved around whether, because an extraordinary administration might result in a distribution to creditors otherwise than in accordance with the pari-passu principle, recognition of an extraordinary administration would, therefore, be manifestly contrary to the public policy of Great Britain. Reference was made to the decisions in Re HIH Casualty and General Insurance Ltd and other companies; McMahon and others v McGrath and another [2008] UKHL 21, Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 1490 and British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390. The court rejected Sberbank’s argument, saying that the fact that the priorities of the Croatian law in reorganising or winding up are different from those which apply or would apply under English law, is simply not enough. There was no violation of public policy, let alone a manifest violation.

Next steps and comment

In our view, this is a sensible decision and one that ought to help in facilitating an orderly reorganisation of a group of companies that are of immense importance to the Croatian economy. Sberbank’s arguments felt somewhat speculative, but one now wonders whether it will take any further action. It might decide to appeal the judgment (it is interesting to note that in his conclusion Paul Mathews J confessed that ‘[cross-border insolvency] is not a field into which I regularly venture’), or request permission to modify the stay as regards the arbitration proceedings already on foot. In Ronelp Marine Ltd and other companies v STX Offshore & Shipbuilding Co Ltd [2016] All ER (D) 77 (Oct), relying on Art 20.6 of Sch 1 to the CBIR, the automatic stay was modified to permit the continuance of proceedings in the Commercial Court. Under that Article:

‘the court may… modify… such stay and suspension or any part of it, either altogether or for a limited time, on such terms and conditions as the court thinks fit…’

In Ronelp, Norris J said: In cases where the foreign main proceeding is in the nature of a restructuring rather than a liquidation it has become the practice of the English Courts as a matter of discretion to grant the whole of the relief available under paragraph 43 of Schedule B1 [to IA 1986] and to modify the automatic stay to align it with those provisions.’

As mentioned at the outset, unless some means of maintaining in force the Recast EIR, the Recast JR, and other applicable EU legislation can be achieved, or treaties having equivalent effect are put in place, restructuring and insolvency professionals may have to become more imaginative in securing cross-border recognition of insolvency proceedings (and related judgments). The Model Law may become a more popular means of them doing so, rather than having to rely on the uncertain patchwork of private international law. Readers should note however that the Model Law has thus far been adopted by only 43 states worldwide, and by only Greece, Poland, Romania, Slovenia and the United Kingdom (including Gibraltar) in the EU, meaning recognition across the EU would be asymmetrical. Also, unlike the Recast EIR, recognition under the Model Law is not automatic. The Model Law’s applicability will therefore be limited.

In the recent case of Gelber and another v Sunderland Foundation and others [2018] EWHC 2344 (Ch), [2018] All ER (D) 31 (Sep), the court was asked to consider whether the trustees of the Marlborough 1981 Settlement (Settlement) could be granted additional powers under section 57 of the Trustees Act 1925 (TA 1925) as the result would benefit both the trust and the beneficiaries. All of the parties supported the application.

Background

The Settlement was created by the 11th Duke of Marlborough and has offshore resident trustees. The income from the Settlement assets is paid to the current Duke of Marlborough. The Settlement assets included land around Woodstock in Oxfordshire which had been granted planning permission, although a condition was imposed whereby 70% of the development value had to be paid to the Blenheim Palace Heritage Foundation (BPHF), a charity whose primary objective is restoring and preserving Blenheim Palace and its park. Blenheim Palace is a World Heritage site and is also the home of the current Duke of Marlborough under the terms of a Parliamentary Settlement. There is therefore a close alignment of interests between the Settlement and the Parliamentary Settlement.

Whilst the Settlement would increase in value by developing the land, notwithstanding the substantial payment to BPHF, and in turn some of the beneficiaries of the Settlement would also benefit as BPHF maintain their home, the trustees of the Settlement did not have the power under the Settlement to make the payment.

A separate but connected issue was that the Settlement did not permit the appointment of a sole trustee, unless that was a trust corporation. In relation to the sole trustee, the definition of a trust corporation does not include an offshore (non-EU) company but it was preferable to administer the trust using the single offshore corporate vehicle.

The outcome

The court exercised its jurisdiction under section 57 TA 1925 which enables the variation of trustees’ powers in certain circumstances. The court can provide the trustees with a power, either generally or for a specific instance, in circumstances beyond those of salvage or emergency (as had not been the case prior to 1925), where the wider power or transaction would be in the best interests of the trust as a whole, rather than particular beneficiaries. The test is based on expediency.

The court held that permitting the development of the land, and in turn the payment to BPHF, would benefit the Settlement as a whole. The Settlement’s net assets would increase (the net sum the Settlement would receive would still be between 20 and 25 times the current agricultural value), the beneficiaries of the Settlement would benefit from the funds being spent by BPHF on Blenheim Palace and it would also satisfy a moral obligation as the trustees of the Settlement have an obligation to maintain and conserve Blenheim Palace. It was also held expedient to have a sole corporate trustee (a foundation) as the Settlement had always been managed outside the UK and the change would bring benefits for the Settlement and the beneficiaries.

The case demonstrates that the court will consider exercising its powers under section 57 TA 1925 where it is appropriate given the particular circumstances. It also confirms, for the first time in England, that the jurisdiction can extend to the powers to appoint or replace trustees.

At a time when building materials can be difficult to source, professional indemnity insurance is becoming harder to procure at higher levels and the risk premiums sought by design and build contractors, many developers are turning to construction management as an alternative procurement strategy for their projects.

Construction management as a procurement route which sees the developer engage various trade packages for the works directly, as well as appointing design consultants and a construction manager who uses their expertise to programme, co-ordinate and tender the contracts. The construction manager is effectively engaged as a professional consultant – they have no contractual link to the trade contracts or design team – but their skill is critical to the success of this method of procurement.

Construction management isn’t for everyone – and it is not appropriate for every project. It is most successful when implemented on large-scale project where flexibility and early start on site are key – and where up front cost certainty is not the principal driver.

The advantages are generally seen as:

• High levels of flexibility during the construction process;
• Early start on site possible and savings on construction duration due to overlapping of design and construction process;
• Cost savings by the tendering of each works package;
• Further cost savings as no overall risk premium payable to a main contractor;
• Value engineering during construction phase is easy to implement;
• Allows developer to proactively manage its own project.

However, it is not all sunshine and roses. Critics of the procurement method will warn that the disadvantages of construction management include:

• A lack of cost certainty;
• An increase in administrative and legal time/cost upfront;
• Incorrect programming may lead to trade packages delaying one another.

In terms of the contractual aspect of this procurement method, the Joint Contracts Tribunal (JCT) updated their construction management suite of contracts in 2016 and these are the most commonly used contracts. These are drafted for large construction management schemes – but developers could also use other forms of contract to work for this procurement method (suitably amended) – including or incorporating JCT Minor Works, NEC forms of contract or indeed (for projects with an engineering or plant element) iChemE or FIDIC contracts.

Whilst it is not for everyone, the increasing prevalence of construction management procurement in the market suggests that in these changing times developers are starting to look for alternatives to the traditional or design and build approach to construction. We have recently advised on a number of projects which are using construction management and once the whole construction team and the investors in the project understand the risk profile of this procurement model, the project progresses in the usual way.

Earlier this year, the government announced a plan to introduce a new Residential Property Developer Tax to raise revenue in order to address building safety defects and in particular the removal of unsafe cladding in the aftermath of Grenfell. The government also plans to introduce a levy on planning permission for high-rise buildings.

The tax is expected to be introduced in April 2022, is intended to be time-limited and will apply to the larger residential property developers. The tax rate has not yet been set but will apply to profits in excess of £25m per annum.

The consultation on what that policy might look like recently came to an end and we continue to await an announcement on the further details of how this tax will operate.

With only a number of months until the tax is implemented, it will be interesting to see if larger developers will factor the increased tax burden into the purchase price of a development site and whether it will have any impact on build-out rates. Watch this space…

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek legal advice.

Annual holiday entitlement has been a much talked about topic over the past year or so (think holiday and furlough interaction, the extension of the right to carry-over, as well as the ever-changing international travel bans/quarantining etc). In addition, the pandemic has brought a sharper focus to mental health in the workplace and employee well-being.

With the above in mind, plus the general shift to more agile working arrangements, is now the time to ditch the traditional “20 days plus bank holidays” approach to holidays, and move towards a more flexible “unlimited holidays” style offering?

What is “unlimited” holiday?

Unlimited holiday has traditionally been popular in the US (where statutory holiday entitlement is much less generous than in the UK), as well as in technology/start-up companies. It’s a policy where employees are given no set number of holiday days per year, meaning employees can – at least theoretically – take as much or as little holiday as they like.

Several global companies have successfully implemented this policy for a long time. Ranked by Forbes as one of the best employers globally, Netflix was one of the first to offer unlimited holiday to its staff – the focus being on the quantity and quality of the work output, rather than the number of hours or days worked. LinkedIn and Virgin have reportedly adopted such policies, too.

Take-up of such a policy in the UK seems to be relatively low, though job site Indeed.co.uk reported that since 2017, the number of job posts on its site mentioning unlimited holiday have increased by 148%. But, despite this dramatic rise, unlimited holiday policies remain rare, with only 1% of jobs on the site offering it.

Holiday entitlement in the UK

Regulations on working time, particularly regarding holiday, are in place to safeguard employee health and safety.

Employers must meet their statutory minimum obligations with regards to holiday. Under the Working Time Regulations 1998, workers are entitled to 5.6 weeks’ holiday each year and payment in lieu of accrued but untaken holiday on termination. Employers can offer more generous holiday entitlements, and many do.

Employers also have a responsibility to try and ensure that workers take their statutory minimum entitlement. This requires businesses to show that they enable their workers, through the provision of sufficient information, to take their annual leave.

Unlimited Leave policy – Is it really “unlimited” and how does it work in practice?

It will depend on the terms of any policy and the approach adopted by each company.

Whilst the idea of truly unlimited holiday sounds great, as a concept it’s not really workable in practice, given that the business still needs to operate throughout the year, which involves sufficient numbers of people being present and working at any one time. As such, this necessitates there being some form of process/procedure to help manage the entitlement.

If you’re considering introducing unlimited holiday, getting the policy right is key.

You’ll need to make sure your policies are operationally sound. You should consider practical issues like:

• Setting out procedures for requesting leave.
• The rights of your business to reject leave requests.
• How you’ll deal with competing requests.
• Consider how you’ll deal with “carry over”.
• Setting a maximum number of days which can be taken in a block at any one time.
• Introducing minimum performance targets as a pre-requisite to being entitled to extra leave – e.g. making it a condition that an employee needs to be hitting their targets/KPIs to be eligible. It’s likely that this type of policy will be better suited to roles where output is easily measurable.
• How you’ll manage under-performance if this is linked to an employee taking too much holiday.

You’ll also need to be mindful of complying with your legal obligations. Relevant considerations will be:

• Ensuring your workers are getting to enjoy their statutory minimum holiday. As outlined above, you should be able to show that you enable your employees to take annual leave – for example, by transparently giving them the opportunity to take leave, encouraging them to take leave, and informing them in good time that, if they don’t take their leave by the end of the leave year, they will lose it. Arguably, this becomes harder when holiday is “unlimited”, as workers will be given increased flexibility to take leave as and when it suits them. In practice, not keeping track of how many days holiday a worker has taken risks falling foul of your obligations if workers then fail to take the statutory minimum. Although you might think that giving unlimited holiday would encourage staff to take more than the statutory minimum, the reality can be quite different (discussed in further detail below).
• Ensuring your contracts are compliant. You may wish to consider including a minimum amount of holiday in your employment contracts (e.g. the statutory minimum annual leave entitlement) and then add some wording to deal with any additional discretionary leave under your “unlimited holiday” policy. Simply referring to holiday entitlement as “unlimited” in your contracts risks falling foul of employment legislation.
• Ensuring that workers are paid properly for the leave they take. The rules on holiday pay calculations are complex but, essentially, workers should be paid the same during statutory holiday as they would if they were working, so as not to deter them from taking leave.
• Considering the interaction with carry-over and periods of maternity leave, sick leave etc. and how this might impact your business and staff.
• Discrimination risk – if it’s going to be up to line managers to make “judgment calls” on holiday requests, there may be a discrimination risk depending on how decisions are made. Providing training and ensuring you have a clear policy and criteria in place is likely to mitigate this risk.

In light of the above, if you are looking to introduce unlimited holiday, a sensible approach might be to agree a baseline holiday entitlement with staff, that’s in line with the WTR, and then offer discretionary unlimited holiday on top of this.

What are some of the advantages of unlimited holiday?

• Wellbeing – providing employees with the ability to take more time off could help improve work/life balance. If staff don’t have to worry about their remaining holiday entitlement when emergencies arise, or how to balance their work with other personal commitments, they may feel empowered to manage their own workload, which makes them feel trusted, valued, and respected. Some companies who have successfully implemented a policy like this have reported that staff are happier and more productive.

• Recruitment and retention – having unlimited holiday is a perk that could help attract more talent to the business. Equally, it could also help retain existing employees if they are given freedom and flexibility and trusted to manage their own workload.

• Improves productivity – Overwork can lead to stress, anxiety, illness and absence which can impact on productivity and also have tangible financial impacts on a business. Awarding staff with as much time off as they need, should help prevent this.

What are some of the disadvantages of unlimited holiday?

• The reality of fewer holidays – it has been suggested that unlimited holiday policies can actually result in fewer holidays being taken, as staff can experience anxiety around not knowing the boundaries of what is “appropriate” to take and not having a fixed number of days. Also, many employees are at the mercy of their workloads: some might feel too busy to take leave, whilst others will be deterred in the knowledge that they’ll have a mountain of work to return to. There will need to be management buy-in to ensure that employees truly feel empowered to take leave and that the overall effect is not to discourage employees from having a break from work.

• Added strain on fellow employees – If employees do make the most of the policy and book a large amount of time off, without careful scheduling, this could put an increased strain on those employees left behind who will have to take on extra work.

• Could lead to unfairness – While some employees will have no qualms about taking extra days off and making the most of the policy, others will be less inclined. This disparity between staff will leave some picking up the slack and having to work harder than others.

• Extra holiday no longer a reward – Another consequence of offering unlimited holiday is that you then can’t use extra days off as an incentive or reward. Providing an extra day’s paid leave is a common way to reward hard work, so companies will need to come up with equally as desirable methods of rewarding success.

Food for thought

It goes without saying that this type of policy won’t work for every company.

In the current market, where recruits are very much in the driving seat, offering unlimited holiday might be a great perk to entice new starters to join your company. That being said, in reality, it’s potentially quite a tricky area to manage and it doesn’t always have the positive impact on employee-wellbeing that you might hope. As such, it will be worth engaging with your staff and key stakeholders to get a better idea of the appetite for such a policy before committing to its implementation.

Written jointly with Katharine Everett Nunns.

In the recent case of Pitman & ors v Hicks [2021] the High Court considered an application by a landlord for permission to appeal an arbitrator’s award, which directed that the costs of the arbitration of a Notice to Repair be borne by the landlord, notwithstanding that the Notice was in part upheld.

In an Order dated 21 July 2021 (the Order) Mr Justice Fancourt refused permission to appeal the award having considered the matter on the papers.

The Court had to decide whether the question raised by the landlord was a question of law, that the Arbitrator had been asked in the original proceedings, because new points cannot be appealed. Although essentially the Arbitrator had been asked that question, the Court determined that it was not a question of law, as required. The only questions of law that could have come about in this case were not ones that the Arbitrator had been asked.  Further, even if it had been a question of law, the landlord had failed to satisfy the Court that, on the basis of the findings of fact in the award, the decision of the tribunal was obviously wrong.

Although it is unusual for an Order refusing permission to appeal to be published, Mr Justice Fancourt made specific provision for the decision to be cited in argument in other cases and to be reported.

Background

The landlord served a Case D notice to do work, under Schedule 3 of the Agricultural Holdings Act 1986 (AHA), which was then referred to arbitration by the tenant under article 3 of the Agricultural Holdings (Arbitration on Notices) Order 1987 (the 1987 Order).

The tenant referred, in 4 cases, whether he was liable to do the work, and in the other 4 cases, whether the work was necessary or justified. Then, in the course of the reference, the parties agreed that the Arbitrator should have power to modify the notice to do works by substituting different methods or materials, under article 5(b) of the 1987 Order.

Under section 61 of the Arbitration Act 1996 (the Act), the tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties. Further, unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event (i.e. the “loser” bears the costs of the case), except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.

Upon the basis that a substantial proportion of the works, as specified in the notice, were not ones that the tenant was required to carry out, the Arbitrator found that the tenant was the “winner” and awarded him all of his costs.

The landlord sought permission to appeal the final Arbitration Award as it related to costs.

Appeal

The Landlord sought the permission of the High Court to appeal the costs aspect of the award upon the basis that the Arbitrator had made an error of law under section 69(2)(b) of the Act.

Sections 69(3)(b) and (c)(i) of the Act respectively require that the question of law was one which the tribunal was asked to determine and, that, on the basis of the findings of fact in the award, the decision of the tribunal on the question was obviously wrong.

A question the tribunal was asked – condition not satisfied

The Court pointed out that the outcome of the arbitration reference (i.e. who is the “winner” / “loser”) was a question of fact, not law.

The Court found that the only questions of law that could arise from the award were not questions of law that the Arbitrator was required to decide.  The policy of the Act is such that “challenges to evaluative of (sic) discretionary decisions after the event” should be excluded except in very limited circumstances.

An obviously wrong decision – condition not satisfied

The Court went on to determine that even if the above had been a question of law, it was “far from clear that the Arbitrator was wrong in concluding that the Defendant had broadly succeeded, and certainly not obviously wrong.” Mr Justice Fancourt noted that:

“A different arbitrator might have taken a different view and awarded only a proportion of costs, but the Arbitrator correctly had regard to the conduct of the parties more generally before deciding to award the Defendant all his costs.”

Discussion

The arbitration of a works notice to remedy is never a straightforward affair and will always involve a degree of interpretation of the notices served, and consideration of the practicalities involved in the repairs themselves. These disputes are well suited to arbitration or expert determination before experienced rural surveyors.

The problem faced by landlords is that it is often difficult adequately to particularise the dilapidations, and the requirements for remedy. However, it is the tenant’s right to challenge the notice and to the extent that such challenges are successful, the tenant is likely to be the ‘successful’ party. The extent to which ‘without prejudice save as to costs’ offers were made in this case is unknown, but such offers are often very effective in mitigating cost risk.

As to the application for permission to appeal, perhaps there are no surprises in the decision. A costs determination rarely raises a question of law, let alone one which is “obviously wrong”. However, it is very welcome that the decision was taken to publicise the Order, since (due to arbitration confidentiality) many similar decisions do not see the light of day, and the guidance provided by the Court is helpful.

If you have any questions regarding this article, please do not hesitate to contact Adam Corbin by email or by telephone +44 (0)117 906 9324.

The Corporate team at Michelmores has successfully advised Freshways Dairy, the largest independent family-run dairy product supplier in the UK, on their merger with Medina Dairy. The merger will establish a c.£400 million turnover sustainable and progressive dairy business that has come together to promote the best interests of their combined staff, customers and the British dairy farmers that supply them. The merger fulfils both dairies’ strategic priorities and will support their joint goal of providing dairy farmers with a more sustainable future.

The aim of the merger is to create a viable, long-term, fresh liquid milk business that will have the requisite scale and agility to compete with the two large players that dominate the dairy sector in the UK.

The Michelmores team provided advice and guidance on all legal and regulatory aspects of the merger, which is subject to regulatory approval. The team was led by Adam Corbin, a Partner in the Agriculture team, and assisted by Samantha Billingham (Corporate) and Paul Beanlands (Property).

The new business will have a combined turnover of c. £400 million, employ 1,000 staff and process in the region of 500 million litres of British Red Tractor farm assured milk per year.  A newly-formed board and management structure will be put in place to oversee the merger and integration of the two businesses.

Commenting on the merger Bali Nijjar, Managing Director of the Freshways group of companies, and Sheazad Hussain, Chief Executive of Medina Dairy, said:

“Throughout our discussions it has become increasingly apparent how complementary both companies are.  As such, through merging we will be able to harness these synergies to create a leaner, more agile and fit for purpose business.  A business that will benefit customers, consumers and suppliers and ultimately, we believe, will be well placed to grow and develop in a sustainable manner for the long-term.”

Richard Cobb, Senior Partner, and Head of Corporate at Michelmores said:

“We are delighted to have been involved with the strategic discussions around this highly important merger, which will help to boost the milk and dairy sector in the UK.  Freshways is a forward-looking business that has shown exceptional growth over the last 30 years – this merger will leave them even better placed in the dairy industry, which is a dynamic and fast-moving market.”

Mark Gibson, Partner at DWF, commented:

“We are delighted to have advised Medina Dairy on this significant merger that will see the new business become one of the top 10 UK dairy processors and greatly benefit both suppliers and customers through the creation of a progressive and sustainable business.”

The new Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (Regulations) came into force on 4 May 2021. The Regulations provide for individuals who are either facing problem debt or receiving mental health crisis treatment to be afforded the protection of a moratorium from legal action being taken by their creditors.

In this article we focus on the Breathing Space Moratorium and explain its scope and its potential implications for rural landowners and businesses.

Breathing Space Moratorium

The Regulations were introduced with the aim of encouraging those who have problem debts to seek professional advice and implement an appropriate strategy for dealing with their financial situation. Such a strategy may involve an informal arrangement being reached with one or more creditors, or the entry into a formal insolvency procedure such as a Debt Relief Order (DRO), Individual Voluntary Arrangement (IVA) or bankruptcy.

As such, the Regulations allow for individuals, who have accessed the services of a professional debt adviser, to benefit from a 60-day period of relief (referred to as a Breathing Space Moratorium, or simply a moratorium). In this regard, it is similar to the protection that is accessible to companies considering appointing administrators or to certain companies preparing a CVA proposal.

The Breathing Space Moratorium prevents certain charges, fees and interest accruing against debts, as well as preventing creditors from taking enforcement action. However, any liabilities which are due for payment during the moratorium must still be paid.

Practicalities for debtors

In order to take advantage of a Breathing Space Moratorium, an individual must have sought advice from either an FCA authorised debt counsellor or a debt adviser accessed via their local authority.  The scheme is being administered by the Insolvency Service, although its role is largely limited to operating a private electronic register of participants.

As long as an individual can demonstrate that they are unable to repay their debts, they can apply for a moratorium and all applications must be considered by debt advisers. However, a debt adviser may refuse an application where is appears that the debtor has better options, such as an immediate insolvency process or being provided with assistance with budgeting where funds are available to them.

In addition to this, there are standard criteria the debtor must fulfil which include:

• being an individual
• owing a Qualifying Debt
• being resident in England or Wales
• not being the subject of a Debt Relief Order, Individual Voluntary Arrangement or being an undischarged bankrupt; and
• not having taken advantage of a previous breathing space within the previous 12 months.

Qualifying debts include credit cards, personal loans, overdrafts, utilities arrears and mortgage or rent arrears (to the extent these are not secured).  It is also possible to include jointly owed debts.

Practicalities for creditors

A Breathing Space Moratorium will begin on the day after its details are entered onto the Insolvency Service Register and often the first time a creditor becomes aware of a moratorium is when they receive the requisite notification. As noted above, the register administered by the Insolvency Service is private and, although the Service will send notifications to creditors, they are unable to assist with individual enquiries. Once contact has been made with a debt adviser, that person becomes the point of contact for the debtor, their creditors and the Insolvency Service.

Once notification has been received, creditors must:

• stop charging certain interest, fees and charges on the debt for the period of the moratorium;
• stop any enforcement or recovery action being taken (including by agents);
• notify the relevant Court where any proceedings are being taken against the debtor;
• not contact the debtor to request payment of the debt without permission of the Court.

However, the Regulations do not prevent liabilities that fall for payment during the moratorium from being paid. The moratorium is not a payment holiday.

The position of creditors with regard to the calculation of interest, fees and charges during the moratorium; the notification of additional debts that have not been included on the initial notification; and the scope of the moratorium on enforcement, are not straightforward and creditors would be well advised to seek legal advice on receiving notification that one of their debtors has taken advantage of the Regulations.

Challenging a moratorium

In terms of challenging a moratorium, in each case the debt adviser must carry out a review of the moratorium between days 25 and 35, which is intended to ensure the debtor is complying with their obligations. If this hurdle is satisfied, the moratorium will continue until day 60. However, if the debt adviser considers it appropriate (for example if ongoing liabilities have not been paid on time or the debtor is failing to engage with the process) they have the ability to cancel the moratorium immediately following their review.

Importantly, there is a system whereby a creditor can request the review of a Breathing Space Moratorium if they consider their position has been unfairly prejudiced, or there is a material irregularity with the debtor’s eligibility.  Such a request must be made within 20 days of the moratorium start date (or within 20 days of an additional debt being added). However, reviews must be requested in writing and be supported by evidence, and there is no obligation on the debt adviser to consider such a request prior to the midway review.  In the event a debt adviser refuses to bring the moratorium to an end, a creditor’s only recourse is via Court proceedings.

As the Regulations are still reasonably new, there is little information available as to the circumstances in which a debt adviser is likely to cancel a moratorium, or where the Court will intervene to overturn the decision of an adviser. In circumstances where such cancellation may shorten the period of the moratorium by less than 25 days (even less where a Court challenge is required), creditors will need to consider carefully whether the costs of such a challenge are worthwhile.

End of moratorium

Once a Breathing Space Moratorium ends, whether via expiration of the 60 days or cancellation by the debt adviser or Court order, a creditor can begin applying interest, charges and fees once again. However, no such sums can be backdated to the period of the moratorium unless ordered by the Court. Importantly, unless a debtor has used the moratorium to put in place a DRO or IVA, or has successfully petitioned for their bankruptcy, enforcement action and any legal proceedings can also be started or continued.

Comment

Farming and rural businesses will doubtless come across Breathing Space Moratoriums in the coming months in connection with payments due under tenancy agreements, or other commercial agreements with individuals. It should be noted that some (but not all) business debts will qualify for a moratorium.

The Regulations will undoubtedly be of value to those who legitimately require assistance with an untenable financial position, providing them with time and advice to enable them to restructure their financial affairs. We are, however, already seeing the potential for the moratorium to be abused by those seeking to use any means available to stymie or delay enforcement action by their creditors.

Any business faced with one of these moratoriums as a creditor, should consider obtaining prompt legal advice as there are issues which creditors should check and options for challenge.

Should you wish to discuss any of the issues raised in this article, please contact Sacha Pickering.

From 1 August 2021 new permitted development (“PD”) rights (Class MA) to allow for the change of use from commercial, business use and service use (Class E) to residential use (Class C3) will come into force creating potential new development opportunities for farmers and landowners.

The introduction of new Class MA follows the reclassification of the use classes in September 2020, when Class E was introduced to replace the previous use classes of A1, A2 and A3 (retail, financial services and cafés/restaurants); B1a, b and c (offices, research establishments and light industry) and D1 and D2 (health clinics, nurseries and gyms). Notably, Class B2 (general industrial) and B8 (storage and distribution) remain unchanged and are therefore excluded from new Class MA PD rights.

The new class MA replaces the two, existing commercial-to-residential PD rights, being, Class O (office to residential) and Class M (A1 shops and A2 financial and professional services to residential). These rights will continue to apply until 31 July 2021.

Restrictions

As with other PD rights, those seeking to utilise the new MA right will have to satisfy prior approval requirements on transport, contamination, flooding, noise, and natural light. Restrictions also apply to a change of use under Class MA, including that the building’s floorspace:

• must have been in commercial business and service use (Class E) (or, prior to 1 September 2020, within any predecessor use class: A1, A2, A3, B1, D1(a), D1(b), D2(e)) use for 2 years continuously prior to the application for prior approval. must be an unused commercial building that has been vacant for the 3 months prior to the application; and

• must not be any bigger than 1,500 square metres.

Designations

In addition, development is neither permitted by Class MA in AONBs, SSSI, the Broads, any National Park and World Heritage Sites; nor if the site is occupied under an agricultural tenancy, unless the express consent of both landlord and the tenant is obtained.

Development is however permitted under Class MA in Green Belt, Conservation Areas and the open countryside, where it is more challenging to establish new residential use in planning policy terms. This represents a significant change by the Government and will create new and interesting opportunities for delivery of residential housing.

Applications under Class MA can only be made after 1st August 2021.

Michelmores’ Agricultural Team is pleased to announce that they have contributed to the UK’s first Report on the future of insect protein in pig, poultry and aquaculture feed, ‘The Future of Feed: a WWF roadmap to accelerating insect protein in UK feeds‘, produced by WWF and Tesco. The Report was launched Thursday 1^st July during a virtual panel discussion where leading Michelmores’ Agricultural Lawyer, Ben Sharples, discussed the existing legislation and urgent need for the UK government to introduce new regulations for this important sector.

The Report highlights the huge potential for insect farming in helping to tackle the climate and environmental crisis, and considers how using insect meal to feed fish and livestock could cut the UK’s future soy footprint by a fifth protecting critical landscapes like the Brazilian Cerrado. The research, commissioned by WWF-UK in partnership with Tesco, highlights the huge potential for insect farming in helping to tackle the climate and nature crisis.

Michelmores has provided guidance and support on the environmental legislation, regulations, and recommendations that are laid out in the Roadmap. Existing legislation is placing a stranglehold on insect farming, restricting what materials insects can be reared from and preventing insect meal from being used in livestock feed. New EU legislation is being drafted to allow the use of insect meal in pig and poultry feed and this needs to become law in the UK along with the ability to use a broadened range of feedstocks to feed farmed insects.

Commenting on the Report, Michelmores Agricultural partner, Rachel O’Connor, who led the Michelmores team inputting on the report’s legislative components, said:

“Legislation plays a central role in shaping the commercialisation of food production. It is essential that regulation continues to protect human and animal health, but without unnecessarily inhibiting development of the UK insect sector. Unlike other livestock production processes, the regulations governing animal feed bite at two feed chain stages for insect protein: firstly, what may be fed to insects; and secondly, in determining which farmed animals insects may be fed to. This report highlights the need to update legislation to take into account the emerging role of insects in the feed market.”

Ben Sharples, Partner at Michelmores & Head of the Agriculture Team said:

“The work we have undertaken with WWF and Tesco is highly important as it outlines the importance for legislation to evolve with new agricultural practices and environmental sustainability. The current legislative restrictions in place around feedstock substrates that can be used to rear insects, and the sales and uses of the by-products that result from insect farming, are preventing many opportunities that ultimately can contribute to minimising environmental impact”

Michelmores has several Legal Teams that advise on sustainable issues including natural capital, impact investing, environmental law, sustainable agriculture, and energy. The Agriculture Team is the national specialist in agricultural law and a trusted advisor ranked as a top tier firm by independent legal guides, the Legal 500 and Chambers and Partners.

Summary

Hospitality venues will be comforted to learn of a recent decision permitting a venue represented by Michelmores to retain costs of preparing for a wedding cancelled at the start of lockdown. Counter to CMA’s guidance, the judge in Offley Place v Willis [2021] found that all categories of attributable costs qualified as just expenses under the Law Reform (Frustrated Contracts) Act 1943 (the “1943 Act“).

Background

The Claimant’s wedding was due to take place on 21 March 2020; on 20 March the first lockdown was announced and the venue cancelled the wedding. The Claimant held a small ceremony at the venue and a reception elsewhere. Having paid £8800, the Claimant demanded a refund (less a small amount for costs of the ceremony) and brought a small claim in the Oxford County Court. Offley sought to retain reasonable expenses.

First instance

Deputy District Judge found the contract was frustrated and, despite Offley putting a lot into the event, he found that the Claimant was entitled to a full refund (save £600 for the ceremony). “It is not open to those who are unable to perform their obligations to offset their costs against what the claimant can recover unless the claimant had some benefit from those things“.  Permission to appeal was given on a single point, whether the judge had misdirected himself on the application of the 1943 Act.

Decision on appeal

HHJ Melissa Clarke overruled, saying: “the Deputy District Judge was wrong to direct himself that the appellant (Offley) could not offset its costs against what the respondent could recover, unless the respondent had some benefit.” She exercised her discretion under section 1(2) of the 1943 Act and considered what would be a ‘just’ sum to deduct from the refund for expenses incurred. HHJ Clarke accepted that all expenses were potentially recoverable and that due to the lengthy lockdown Offley was not able to mitigate its loss. She allowed a two third retention in respect of ‘attributable costs’ plus an additional £500 for ‘direct costs’ (food): £4500 in total (51% the contract value/64% of the costs incurred).

Impact of the decision

One of the first decisions to apply the provision of the 1943 Act to venue contracts impacted by Coronavirus, it shows:

• The 1943 Act was not specifically aimed at protecting consumers and should not be treated as such.
• Claimant obtaining a ‘benefit’ is not a prerequisite for retaining expenses.
• Section 1 seeks to achieve a just outcome for all parties in light of all the circumstances.
• Costs such as repair, cleaning, gardening, IT and wages are recoverable even if not incurred specifically in relation to an event; necessary and fundamental to hospitality contracts, they are recoverable because they are incurred “in part for the performance of the contract.”
• CMA’s guidance is wrong to state that such categories of cost are unrecoverable.
• County Court decisions are not binding but can be persuasive in other courts.
•  and illustrative of how other courts may rule.
• The facts of this case are unique and unlikely to be replicated in many circumstances.

Michelmores’ lawyers have been assisting the Wedding Venues Support Group (“WVSG”) and its members with devising new template terms and conditions and negotiating with the CMA and large insurance companies. We recommend that hospitality venues facing small claims make use of the WVSG member guidance in the first instance and engage local legal services as appropriate. Venues can contact WVSG here.

As discussed in the article published last month Planning & nitrate neutrality: Legal challenge to Natural England’s guidance the High Court granted permission for the judicial review of a planning consent granted in August 2020 by Fareham Borough Council (the “Council“).

Natural England’s guidance and the EU Habitats Directive

R (Save Warsash and the Western Wards) v Fareham Borough Council (CO/3397/2020) was heard consecutively with R (Brook Avenue Residents Against Development) v Fareham Borough Council (CO/4168/2020) as both raised issues about the validity of guidance issued by Natural England (the “Guidance“)

The Guidance issued to the Council following the European Court of Justice’s decision in 2018 Dutch Nitrogen Case, advised that planning permissions should only be granted in the Solent region if the development is considered to be ‘nutrient neutral‘ preventing protected sites from being harmed by pollution generated by new developments.

One of the grounds advanced by the claimant was that the Guidance did not meet the ‘standard of certainty‘ that is required by Articles 6(2) and 6(2) of the EU Habitats Directive (92/43/EEC) (which forms part of EU retained law following Brexit) due to there being a lack of scientific certainty for the Council to base its decision on when granting planning consents. This point led the claimant to contend that the Council had infringed the so-called ‘precautionary principle’.

Judgment

In his judgment dated 28 May 2021, Mr Justice Jay dismissed the claimant’s application for judicial review and said it was based on a misunderstanding of the precautionary principle. The judge said that “that is the whole point of the precautionary principle: the uncertainty is addressed by applying precautionary rates to variables and, in that manner, reasonable scientific certainty as to the absence of a predicated adverse outcome will be achieved.“

The Judge held that the Guidance, which advises councils to apply precautionary rates to variables when calculating nutrient budgets and to add a precautionary buffer to the total nitrogen calculated for developments, was “impeccable in all material respects“. Consequently, the judge found that “by requiring the competent authority effectively to rule out, to a very high standard, the possibility of relevant harm, the requirement… of the Habitats Directive is fully satisfied.”

It is anticipated that Natural England will publish national advice once it has had the opportunity to consider the terms of this judgment.