Don’t give VAT the silent treatment

Don’t give VAT the silent treatment
Posted on 21/10/2014

A recent case* has highlighted the risks of not expressly dealing with VAT in a commercial property transaction.

The seller had opted to tax a commercial property but upon completion of the sale VAT had not been accounted for and had not been discussed by the parties before completion. A year after the sale, HMRC indicated to the seller that VAT should have been paid and tried to reclaim the VAT from the seller. The seller, in turn, tried to reclaim the VAT from the buyer.

The Court decided that the seller was liable for the VAT. As a result, the seller had to pay VAT of around £23,000 on the sale of the £130,000 property. If VAT is not properly taken into account in the sale contract, the seller could find itself liable for 20% of the purchase price to HMRC on a property sale. That’s £200,000 out of a property sale of £1.2 million – not a prospect that anyone would want to face!

So what did the contract say about VAT?

The Standard Conditions of Sale (which were incorporated into the sale even though the sale was of commercial property) generally protect the seller and allow them to reclaim the VAT from the Buyer because they state that:

“all sums made payable under the contract are exclusive of VAT”; and
“any obligation to pay money includes an obligation to pay any VAT chargeable”.
In this case the purchase price was not defined as being either ‘exclusive’ or ‘inclusive’ of VAT. In the absence of an express provision regarding the treatment of VAT, it could be presumed that the standard condition would deem the price to be ‘exclusive of VAT’ and allow the seller to reclaim the VAT from the buyer.

So, why did the standard conditions not protect the seller in this case?

The Court decided that the purchase price was deemed to include VAT because:

The contract was silent on the issue and because the parties did not intend VAT to be charged. The Court formed this view because the parties did not discuss VAT in the lead up to the completion;
The seller was not expecting VAT to be paid and communicated, on completion, that ‘all of the sale monies of £130,000′ had been received; and
The seller took 18 months before it requested the additional VAT from the buyer.
The Court therefore interpreted the contract as silent and the parties’ intention as to not charge VAT as a special condition of the contract. As with the majority of sale contracts, the special conditions prevailed over the standard conditions. The question is: was the contract’s silence (and the parties’ actions) sufficient to be considered a special condition, or should the default position of the standard conditions be relied upon in the absence of any express exclusion of VAT?

What could be learnt from this case?

To avoid this situation arising, all parties in a property transaction where VAT may be payable (i.e. not in a transaction involving residential property or a charity) should ensure that:

They openly discuss VAT arrangements at an early stage and check whether the property is subject to a VAT election;
State the purchase price as being “inclusive” or “exclusive” of VAT; and
Include in the contract an express obligation to pay the VAT where payable.
This post was edited by Louise Baker. For more information, email

*CLP Holding Company Limited v Singh [2014] EWCA Civ 1103

Avoid ‘waiving’ goodbye to your rights

Avoid ‘waiving’ goodbye to your rights
Posted on 21/10/2014

A recent case in the Northern Ireland High Court has served as a reminder to lenders that, if they become aware of a breach by a borrower under a loan agreement, prompt action is necessary to protect their position. If the breach is ignored, a lender may have waved goodbye to its rights (such as calling for early repayment) in respect of the breach. The English courts have also taken this approach.

Are ‘no waiver’ clauses enough?

Loan agreements usually contain a ‘no waiver’ clause which provides that the lender’s failure to exercise or delay in exercising its rights under the agreement is not to operate as a waiver of any of those rights. However, this may not be enough to protect the position.

In a case in 2009 [1], a supplier of prepaid phone cards had an ongoing distribution agreement with the Post Office. One requirement was that, by the end of every year, the supplier had to provide a parent company guarantee for the coming year. The guarantee for 2004 was not provided by 24 December 2003, as the agreement required, but the Post Office merely let the agreement run. It was not until nearly a year later that the Post Office claimed to be able to terminate the agreement because of the failure to provide the guarantee (which the agreement entitled it to do). The agreement contained a no waiver clause.

The Court of Appeal held that the clause did not help – the Post Office knew of the breach but continued to let the agreement operate, without any protest about the breach or any reservation of its rights. It was therefore treated as if it had abandoned its right to terminate because of this particular breach.

Don’t abandon your rights!

Practically, what should lenders do to prevent this happening?

Although potentially helpful in certain circumstances, the ‘no waiver’ clause should not be seen as the only protection. If a lender is or becomes aware of a breach by a borrower and (for what may be good commercial reasons or to take time to assess the effects of the breach) takes no action at the time, it should inform the borrower in writing that it reserves all its rights in respect of the breach. If the lender continues to deal with the borrower and perform its obligations under the agreement, it should be made clear (on a regular basis, if necessary) that the fact that no action has been taken does not mean that the breach has been waived. It is important that the matter should not just drift and the final resolution to the breach, whether it is early termination, a formal waiver or another negotiated position, should be formally recorded.

For more information, email

[1] Tele2 International Card Company SA and others v. Post Office Limited [2009] EWCA 9

A new company is born…

A new company is born…
Posted on 20/10/2014

Companies House has recently published its annual report and accounts for 2013/14 which shows that a record 533,032 new companies were incorporated last year. What options are there for setting up a new company and what key matters should be considered?

Type of company

The Companies Act 2006 confirms that there are three types of company to choose from:

company limited by shares (these are the most common form of company and may be incorporated as either public or private companies);
company limited by guarantee and not having a share capital (private companies only); or
unlimited company (private companies only).
Key considerations

What should the company be called? A name will be rejected by the Registrar of Companies if that name is offensive, sensitive, already in use by an existing company or too similar to that of an existing company. If the proposed name is similar to that of an existing company or group, but the new company is intended to form part of the same group of companies, then the application may be accepted if the written consent of that existing company or group is obtained and evidence of this is provided to Companies House. For sensitive names there are often additional consents required to be submitted as part of the application process. Certain companies are exempt from using the word ‘Limited’ in their name, for example if the company is a charity.
Directors of the new company? A public company must have at least two directors. A private company must have at least one director. Each company must have at least one ‘natural person’ director, that is a director who is a person and not a company and all directors must be at least 16 years of age. A new director must state his residential address for the purposes of incorporation but can state a service address which will appear on the public record so that his home address is not disclosed.
Will the company have a secretary? A public company must have a company secretary. There is no requirement for a private company to have a company secretary but it may do so if it wishes or if this is a requirement of its articles of association.
How do I incorporate a new company?

The documents which need to be filed with the Registrar of Companies to form a new company are:

a memorandum of association. This is a snapshot of the company’s constitution at the point of incorporation. It contains a statement that the subscribers to the memorandum wish to form a company and that they wish to become the members of that company. In the case of a company limited by shares, each subscriber must also take at least one share each. The memorandum must be signed by each subscriber.
articles of association. These set out the company’s rules. Standard form Model Articles are provided for each different type of company set out above which automatically apply to any new company. Those Model Articles can then be modified or excluded by the company’s bespoke articles.
an application for registration (Companies House form IN01). This includes information regarding the company’s proposed name, the type of company required, details of the company’s registered office, the articles of association, details of the directors and secretary (if any) and a statement of capital or guarantee. The application form must also be accompanied by the appropriate fee which can be between £13 and £100 depending on the speed and level of incorporation service required.
How do I know that my company has been incorporated?

If all of the filed documents are in order, Companies House will issue a certificate of incorporation containing the company number and date of incorporation. This certificate confirms that the company is properly constituted and that all of the requirements for registration have been complied with.

The subscribers will be deemed to be members of the company from the date set out in the certificate and the officers of the company are appointed from that date.

Other options?

A company structure offers limited liability for its members but this comes with all of the burdensome administrative company law requirements which accompany company status. If you would be keen to avoid this, there are plenty of other options available to consider when setting up a new business and incorporating a company may not always be the most attractive route. Alternatives to consider include a limited liability partnership, a limited partnership, a general partnership or simply operating as a sole trader. These should be considered at the outset to ensure you achieve the structure that is right for your business. (See our previous post for some guidance on the differences between these alternative business structures).

For more information, email

Sign your name…..Part two – Companies

Sign your name…
Posted on 20/10/2014

Part two – Companies

In a recent blog post we discussed the requirements for contracts being signed on behalf of individuals, in this post we will look at the requirements for executing contracts on behalf of companies

For contracts being signed underhand, the method in which the contract is signed will depend on the type of ‘legal person’ signing the contract. For example, if the authorised signatory for a company is an individual, the contract would be signed by the individual and no witness would be required.

For companies executing deeds, the method of execution includes, but is not limited to, two directors, a director and the company secretary or a single director in the presence of a witness (who attests that signature). If using a seal you would need to check the company articles to satisfy any additional signing requirements.

On a practical note:

you should check that the correct company details including company number have been inserted into the Deed (so that contract is being entered by correct parties). You can check company details on the Companies House website free of charge
the execution clause wording should reflect the requirements of the entity executing (as there are different requirements depending of the nature of the entity)
the Deed must be signed by an authorised person. If the signatory is not a director/ company secretary registered at Companies House then evidence should be provided that the signatory is an authorised person, for example, by way of a Power of Attorney or board minutes.
As stated in the previous blog post, above all else make sure that you know what you are signing. Because as a general rule, if you execute a document without reading it you will still be bound by its terms. Again, Deeds must not be back dated.

For more information, email

EU obesity ruling will mean extra furniture bills for firms

EU obesity ruling will mean extra furniture bills for firms
17th October 2014
Companies could soon be faced with having to buy specialist office furniture for overweight members of staff if a European court case rules that obesity-related problems qualify as a disability issue. It is often said that an organisation’s greatest asset is its workforce. With business plans being put into action across the country, expectations are high that the growth potential will finally be realised.

However, an area gaining increasing scrutiny under European law is a pending legal ruling with the potential to place a greater onus on companies to ensure working conditions change to cope with the emerging issues associated with obesity.

Employers currently have an obligation to make reasonable adjustments to the working environment to reduce the barriers for staff with a disability to participate in life on an equal basis with other employees.

Those reasonable adjustments might include providing height adjustable desks for wheelchair users, for example. The numbers of people suffering from obesity is increasing at an alarming rate.

So what should employers have to do to help those employees?

The European Court of Justice in Luxembourg might be about to tell us the answer. Earlier this year the ECJ’s Advocate General issued his opinion regarding the case of Karsten Kaltoft, a 25 stone childminder from Denmark, who claimed he had been sacked from his council job in 2010 because of his weight.

The ECJ will decide whether it agrees with the Advocate General’s opinion that morbid obesity (a BMI of more than 40) should be considered a disability and whether this has a long term, adverse effect on the person’s ability to carry out day-to-day activities. If the answer is yes, the decision would have far reaching consequences for employers.

The growing issue of obesity has already been widely discussed in the UK. Earlier this year, the Overseas Development Institute estimated that 64 per cent of people in Britain could be classed as overweight or obese.

Therefore it should come as no surprise that the changing shape of the workforce is already on the radar of companies across the country. Laura Jevons, director of Aberdeen-based office furniture business Claremont Office Interiors, recently said that many employers were aware of the benefits of height-adjustable furniture for all employees, and that she had seen sales of large or specialist chairs for the workplace rise in recent years.

Height-adjustable desks are used to give employees the opportunity to spend more time standing, and are already used extensively. Victoria Beckham has previously tweeted a picture of herself working on a treadmill desk. Companies use specialised furniture as a pre-emptive measure, to avoid issues with repetitive strain injury and bad backs – sitting for eight hours a day isn’t good for anyone. There’s also a growing demand for furniture, such as seating, which is suitable for larger or heavier people.

It’s now one measure in what has become a significant focus on employee wellbeing, and extends to some quite well-developed promotion of healthy eating at work – not just the provision of fruit in the office or offering healthy options in the staff restaurant but also the positioning and contents of vending machines are changing. Employers are also offering subsidised memberships to gyms and weight loss programmes as well as pedometers or electronic activity monitoring devices to raise staff awareness of their activity level.

Employers know that making it easier for their employees to stay healthy not only has a positive impact on wellbeing at work, but also reduces sickness absence which can otherwise add significant cost over the course of a year.

Employers can’t be too paternalistic in their approach, since ultimately employees have to make their own lifestyle choices. However, there is potentially a legal imperative for employers to adapt the workplace around the impact of those choices.

The ECJ is expected to make its ruling in the next few months but in the meantime it might pay to do your homework. By carrying out basic research now your business might save valuable time in the long term. Simple tasks such as factoring in additional costs to your budget will ensure staff can to do their jobs to the best of their ability. At the very least it makes sense to look into the costs for new office furniture such as chairs and tables for those people affected. Those that don’t might be left picking up the pieces in the advent of a change in the law.

Administrators’ commercial judgment prevailed over creditors’ committee wishes

Administrators’ commercial judgment prevailed over creditors’ committee wishes
Posted on 16/10/2014

Last month the Court considered an application by a company’s former administrators to fix their remuneration*. The administrators had to make the application when the creditors’ committee refused to sanction their fees for work undertaken while the company remained in administration beyond the period set in the approved Proposals. The creditors’ committee included representatives of two of the company’s largest unsecured creditors. Those creditors were the driving force behind directing the period of administration should be as short as possible and that independent liquidators should then investigate into the company’s affairs.

The Court held that while creditors’ views should be considered, it was for the administrators to decide how best commercially to carry out their Proposals and secure the objective of the administration. Although the Proposals stated the administration would be closed within six months, this did not mean the administrators were not entitled to remuneration while they remained in office after that period. They were entitled to remuneration for their work as administrators during the term of their office, even if that work took longer than expected*.

The administrators had also asked the Court to fix their remuneration for work that they carried out at the request of the new liquidators after the company had gone into creditor’s voluntary liquidation. Administrators are entitled to remuneration for their services. Not surprisingly the Court decided that it could not fix any remuneration for any period following the end of the administration. Any time costs the former administrators had incurred after the company went into liquidation were simply a matter for agreement between them and the liquidators.

So – success on the first issue in principle – the administrators were entitled to remuneration while they remained in office beyond the Proposals deadline. The Court went on to consider the supporting evidence provided by the administrators for their remuneration. The Court applied the criteria and guiding principles contained in the Practice Direction on Insolvency Proceedings. The Court held the supporting information provided for the remuneration the administrators claimed was not enough to justify all the time they had spent.

The learning point is that Courts want to see contemporaneous time recording information showing what work was done at the time, rather than a reconstruction after the event when the information is needed to support a remuneration application. The case is timely in the context of the Government’s review into how IPs will be able to charge fees in the future and a reminder that office holders should approach the administration of their cases with this in mind from the outset so that if called on to justify their remuneration they are fully equipped to do so.

This post was edited by Fiona Emms. For more information, email

*Under Insolvency Rule 2.106

Distressed Debt – The Basics

Distressed Debt – The Basics
16th October 2014

Distressed debt can be an attractive acquisition for the right investor and with the volume of distressed debt deals increasing and a secondary market for distressed debt emerging, it’s a topical subject. This article covers the basics of distressed debt

1. What is distressed debt?

At a basic level, it is any form of debt where there is a concern that the borrower will not be able to repay the debt in full on time.

2. What is the attraction with distressed debt?

The economic downturn has meant that there are opportunities for investors to buy debt at a discount and therefore make a profit. From a lender’s perspective, it is a relatively quick and easy way to free up capital on their balance sheet. Non performing loans are being packaged up by lenders and sold to buyers, typically private equity firms. These types of deals have been going strong for the last 5 years, and the market is showing no signs of cooling off. There were 11 UK only deals closing in the first half of this year, amounting to almost £10 billion.

3. Why buy distressed debt?

Investors may buy distressed debt with a view to selling it on in the short term to make a quick profit. A secondary market is emerging where private equity purchasers are re-packaging loans and selling them on. Other strategies may involve holding the debt for a longer period of time to allow value to return to the underlying assets. Alternatively buying distressed debt can be a way to acquire the underlying assets or control of the borrower through a loan to own strategy. Finally, borrowers (or related parties) may acquire their own debt in a debt buyback scheme to gain control of their future.

4. What are the different ways to acquire distressed debt?

From a legal perspective, this is typically done by way of assignment, novation or sub participation of the loan agreement and underlying security. It could also be acquired through swaps or loan notes.

5. What are the key issues in selling distressed debt?

A detailed review of the existing loan documentation will be required at the outset to ensure the facility and security can be assigned to the purchaser. The loan may only be able to be sold to certain types of parties (for example if the debt is regulated). There may be confidentiality or disclosure issues, which will make it difficult to provide loan information to a purchaser. Availability of information can be key, as often documentation might be missing or incomplete, which frequently results in a price reduction. Distressed debt is usually sold for a substantial discount to reflect the risk involved, so the lender must be prepared for this, although returns have increased as the market has become more competitive.

6. What are the key issues in buying distressed debt?

Diligence may be limited, due to the volume of loans and/or availability of documentation. The essential points are that the purchaser can recover the debt under the facility documentation and enforce the underlying security if required. It will also depend on the strategy for the distressed debt, for example if the investor wishes to hold the debt on the long term they need to make sure no other creditor will put the borrower into an insolvency process, or if they wish to pursue a loan to own strategy there must be a default and other necessary circumstances to allow the loan to be converted.

If you would like any more information on distressed debt please contact Fiona McKerrell 0141 574 2441 or Addi Shamash 0131 222 9498