Corporate finance update - November 2011

Welcome to the November edition of Taylor&Emmet LLP’s Corporate Finance update.  We are now well into the traditionally busy Autumn period and despite a prevailing atmosphere of uncertainty and turmoil in the financial markets due to the problems in Greece and the wider Eurozone, we are seeing quite a lot of activity locally.  Hopefully this will continue to be a theme as we move into 2012.

Many thanks to all of you who came to Sheffield Beer Festival recently.  Despite being inside Ponds Forge sports hall on the hottest day on record for the time of year, I think it is fair to say that a good time was had by all!

As always, your feedback is welcome, so if you have any comments on the bulletin itself or the developments or deals that we report upon, then please do have your say through the link in the left hand column.

Deal News

Taylor & Emmet’s corporate team recently advised SCX Limited on the disposal of its subsidiary, Guardian Cradle Maintenance Limited to Premier Technical Services Group Limited.  Accountancy advice was provided by Roddis Taylor Robinson.

Simon Eastwood, SCX’s managing director explained that:  “for a variety of commercial reasons, it was necessary to complete the transaction on a very short timescale.  Peter and his team provided prompt, pragmatic advice and support throughout the transaction and were key to achieving its timely completion.”

Peter Crawford added:  “it was very good to work with SCX Limited on this deal, which makes sense from a strategic perspective for all parties.”

The corporate team has also just completed a £12 million reduction of capital in a North Midlands based farming company.  Tax and accountancy advice was provided by Grant Thornton.

Briefcase News

Banking Blunder

In the case of Rayford Homes Ltd v Bank of Scotland plc and another, the High Court considered whether a definition in a standard bank contract was capable of enforcement, if the term had not been used anywhere else in the agreement.

The Facts

A property investment company, R, obtained finance from its trustee shareholder, T, and a bank, B. R, borrowed £2 million from T and £45 million from B, and granted both parties security. However, B’s security ranked above T’s.

The parties entered into an inter-creditor agreement which regulated the relationship between them and set out the rights of each party. This agreement was in B’s standard form. The same agreement contained a definition in its schedule which related to a “B priority”. The definition provided for a sum in pounds sterling, which was left blank when the agreement was executed. In addition the definition had not been used in any of the provisions in the agreement.

The parties had ignored this definition, until B agreed to make a further advance to R, for which it asked T to sign another document that acknowledged the “B priority” figure equalled the maximum amount that B had agreed to advance.  T agreed the figure and duly signed, despite the fact that the definition was still not used anywhere in the agreement.

Eventually, R’s funds were depleted, and an administrative receiver was appointed. It was at this point that the definition had some relevance. In a reversal of its previous position, B who had asked T to agree the “B priority” figure now claimed it was completely irrelevant and that in any event, since it had not been used in the agreement, it could not have any legal effect.

The High Court judge agreed with T insofar as the definition did have some meaning in the commercial thrust of the agreement.  However, the Court did not agree that the definition should be interpreted so as to wholly benefit T. Despite the agreement being B’s standard form (for T’s benefit) the Court preferred an alternative approach which took into account the intention of the parties at the outset of the deal.

Summary

The case highlights the risks of using standard form agreements without adapting them to the deal structure required. Furthermore, the case showed that whilst lawyers may be involved with drafting the document at the outset, they are often sidelined when the agreement is varied.

Finally, as T bore the brunt of the decision in the above, it serves as a reminder for all professional trustees and their advisors to remain vigilant and scrupulous in understanding the contracts they enter into.

Directors: Fiduciary Duties

In Towers v Premier Waste Management Limited the Court of Appeal considered whether a Director had breached his duty to the company by accepting a free, undisclosed and unapproved loan of equipment from a customer of the company.

Facts

F ran a small business supplying machinery for sale and hire. His customer, T, was a director of P Ltd. P Ltd’s Operations Manager R, usually dealt with F in relation to any business between the parties.

In January 2003 R arranged for F to loan a second hand excavator to T. T had no direct dealings with F and R made it clear to F, that there was nothing in it personally for him.

The excavator remained at T’s property until 28 May 2008, during which time it became dilapidated and required remedial work. T carried out some of the repairs and fittings at his own expense, however the excavator’s tracks had broken before T had finished using them. R had arranged for the purchase of new tracks via P Ltd and for them to be fitted. T left R to arrange for the payment of the tracks which R put through P Ltd. R then raised an invoice for £1,860 payable by F in December 2005 for the tracks that had been replaced on the basis that F was getting the excavator back in better condition than when it was originally loaned. T later discovered the financial arrangements that R had made and reprimanded him for having put the transaction through P Ltd.

In April 2008 F sent P Ltd an invoice for £45,825 alleging that P Ltd had hired a small excavator from him in 2004 and 2005 that had not been duly returned. A further invoice was sent to P Ltd by F for £1645 to cover the period until May 2008 when T returned the equipment.

During this time P had conducted an internal investigation and had issued proceedings against T and F in February 2009.

The High Court held:

T had not appreciated the trust and confidence imposed on him by his position as a director. In addition the focus of the Court was not on the condition of the equipment or the amount involved but the principle of no profit and the secrecy of the undisclosed facts of benefit. A duty is imposed on a director to disclose any potential conflicts and as he borrowed the equipment for personal use, over an extended period from a corporate customer, he should have disclosed it.

The Court also held that T should not be excused or relieved of any liability by virtue of R conducting the majority of negotiations on behalf of T.

The Judge ordered that T pay the sum of £5200 to P Ltd for the use of the equipment for 6 months plus interest and the costs of the action.

Upon dismissing T’s appeal, the Court of Appeal reiterated that T’s fiduciary duties were to his loyalty to P Ltd and the duty to observe the no conflict principle.

The commercial defences that T sought to rely on were irrelevant for the purposes of establishing whether there had been a breach of duty, as it did not matter whether P Ltd had suffered any loss or would have taken the opportunity at first instance. Nor did it matter that the value of the benefit to T was small or that F had dealt with R directly and not T. In addition, the ordering of new tracks through P Ltd was merely another factor that militated against any possible relief for T.