Month: October 2009

The inaugural meeting of the Scottish Privacy Forum took place today in Edinburgh.  Initiated by a number of data protection and privacy experts in Scotland, it was sponsored by the Information Commissioner's Office and designed to "to facilitate the exchange of information and good practice between the different sectors (private, voluntary and public) and key individual stakeholders with an interest in the processing of personal data in Scotland."

Eighteen participants, from a range of sectors, met for a day of roundtable discussions.  The focus of the day was the Scottish Government's Data Handling Review, published in June 2008.  The Assistant Commissioner, Ken Macdonald, started proceedings by welcoming everyone, while Maureen Falconer, the Senior Guidance and Promotions Manager for the ICO's Scottish office, provided a succinct summary of the Government report.  

The rest of the day comprised three focus group discussions, each taking a different aspect of the Report.  To ensure a full and frank discussion(!), the ICO representatives left the room for these sessions, returning for each plenary session.  The three topics under discussion were the three themes identified in the Government report:  Leadership and Governance; Process and Compliance; and Communication and Culture.  Questions such as developing good practice and communicating data protection policies within the workplace were discussed.  Issues such as the difficulty of engaging colleagues in data protection arose, especially where this was seen as impeding the business needs of the organisation.  Clear data protection policies can help to ensure that data protection becomes integrated into the business of the organisation and is not regarded as a cumbersome "add on".

It was agreed that the Scottish Government was in a good position to play a stronger role in devising data sharing policies, especially in respect of projects or initiatives it introduced in the public sector.  In contrast, the ICO's office was seen as providing more specialist guidance, in response to specific queries – and to provide a mediation service where disputes arose!

The inaugural meeting came the day after another announcement of extensive data losses, this time within the private section:  insurance company Zurich confirmed it had lost a back-up tape of customers' personal data – containing information relating to 51,000 UK customers.  The loss took place in South Africa, giving rise to concerns of a breach of the eight data protection principle (regarding transfers of personal data outwith the EEA), as well as of the seventh data protection principle (which requires appropriate technical and organisational measures to be taken to keep data secure).  With high profile personal data losses continuing, it seems there is still a pressing need for an improvement in data collection and management, and it is to be hoped that the Scottish Privacy Forum will contribute to the ongoing development of workable policies in Scotland.    Our next meeting will be in the first quarter of 2010.

 

 

Introduction

The Inner House decision in Commonwealth Oil & Gas Company Ltd. v Baxter [2009] CSIH 75 raises a great number of interesting issues which are deserving of analysis and comment. The issues straddle trust law, company law and bankruptcy law. However, due to constraints of space, this blog attempts to limit itself to scratching the surface of some of the issues which gripped the attention of the blogger as he read through the respective judgments of the Inner House. The leading judgment was delivered by Lord Nimmo Smith and the Lord President also delivered a judgment which concentrated more on the legal issues in hand, rather than the facts.

The case concerned the exploitation of a corporate opportunity by a director and whether that director was in breach of his fiduciary duty to avoid a situation of conflict of interest and duty. The company sought to disgorge the profits which the director had personally made from the misappropriation of the opportunity. More significantly, the company sought to hold the third party to whom the opportunity had been directed liable on the basis that any profits it had made were held on constructive trust for the company on the basis that the third party was in ‘knowing receipt’. The ‘knowing receipt’ point was pled as the director was also the president and CEO director of the third party which it was thought may have been sufficient to establish the requisite linkage between the director and the third party. As articulated accurately by the Lord President, the position of Scots law on the latter point ‘is sparse’ (para. [15]).

Director’s Fiduciary duty to avoid a conflict of duty and interest

Of particular interest was the obiter statement of the Lord President on the scope of a director’s fiduciary duty to avoid a situation of conflict of interest and duty (formerly a common law duty, but now codified in section 175 of the Companies Act 2006). His Lordship was of the view that the extent of that duty may fluctuate depending on the facts of the case at para. [10]:
 
“This reflected the analysis favoured by Lord Upjohn in Boardman v Phipps at page 107. As Rix LJ put it in Foster Bryant Surveying Limited v Bryant [2007] 2 BCLC 239 at para.[65] (a case where the director had intimated his resignation but it had not yet taken effect), "… although [the] general principle is not in doubt, the extent of a director's duty in particular situations may depend on the circumstances". In the same way, if a director were to draw to the attention of his company a particular commercial opportunity, whether in an embryonic or developed state, and to obtain the company's consent to pursue that opportunity on his own personal behalf, his duty to avoid a possible conflict of interest would not extend to that opportunity. Similarly, it seems to me that if, without the identification of any particular opportunity, the company, expressly or implicitly, were to give its prior consent to a director pursuing possibly competing interests, his duty would not extend to avoiding such conflicts. If, for example, in the present case agreement had been reached between [the director] and [the company] that some opportunities (say, any onshore) would be brought to [the company] but that others (say, offshore) could be exploited by [the director] for his own interest and benefit, the scope of [the director]'s duties would have been modified by that arrangement. Even without express agreement, the actings of parties could in some circumstances have given rise to a modification of [the director]'s duties. However, the [director] did not argue that what might otherwise have been his fiduciary duties had in fact been modified by the actings of the parties. Accordingly, I need say nothing further about this possible approach.”

Thus, in terms of the underlined text above, where the company’s actions are such that they expressly or implicitly provide their consent to the director exploiting an opportunity, the director will not be deemed to be in breach of duty. Express consent is one thing, but the difficulty lies in determining how and whether the company has implicitly consented to the director’s personal exploitation of the opportunity. For example, one might argue that common sense dictates that there must be a presumption that a company will be taken to have implicitly consented to the director personally exploiting an opportunity where that opportunity (i) falls outside the scope of [the company’s] business activities and (ii) was not actually taken up by the company. However, such a presumption would clearly conflict with (i) section 175(2) of the Companies Act 2006 (“…it is immaterial whether the company could take advantage of the property, information or opportunity”) and (ii) the recent judgment of Rimer LJ in the Court of Appeal in O’Donnell v Shanahan [2009] EWCA Civ 751 at paras. [70]-[71] which takes a particularly uncompromising approach to the director’s power of personal exploitation. Here, Rimer LJ stated that:

“The statements of principle in the authorities about directors' fiduciary duties make it clear that any inquiry as to whether the company could, would or might have taken up the opportunity itself is irrelevant; so also, therefore, must be a 'scope of business' inquiry. The point is that the existence of the opportunity is one that it is relevant for the company to know and of which the director has a duty to inform it. It is not for the director to make his own decision that the company will not be interested and to proceed, without more, to appropriate the opportunity for himself. His duty is one of undivided loyalty and this is one manifestation of how that duty is required to be discharged. This was a case in which, in the course of acting as directors on behalf of the company in an estate agency capacity, the [directors] obtained information relating to the [opportunity] and were given the opportunity of personally sharing in the opportunity… It may have been improbable that the company could or would want or be able to take up the opportunity itself. But the opportunity was there for the company to consider and, if so advised, to reject and it was no answer to the claimed breach of the 'no profit' rule that [the opportunity] was something that the company did not do… There was no bright line marking off [of] what [the company] did and did not do. ”

In the blogger’s opinion, there can be no such thing as a presumption of implicit consent in such circumstances. Instead, it is suggested that something akin to a form of personal bar through conduct on the part of the company may require to be established by the director to demonstrate such implicit consent. It is submitted that the situations where the appropriate quality of conduct is present will be rare and so this must represent a high hurdle for a party to negotiate.

Director’s Fiduciary duty to disclose his/her own misconduct

Another interesting point to emerge from Lord Nimmo Smith’s and the Lord President’s judgments is the fact that (i) Lord Nimmo Smith and counsel for the parties were of the view that there was no duty incumbent on the director to disclose his own misconduct or wrongdoing to the company and (ii) the Lord President reserved his opinion as to whether Scots law recognised such a duty on the part of a director to disclose his or her own wrongdoing. In the case of Item Software (UK) Limited v Fassihi [2004] IRLR 928, in the Court of Appeal, Arden LJ ruled that a director had a positive "duty to disclose … information of relevance and concern" to the company. Whilst this is clearly the position in English law, both Lord Nimmo Smith and the Lord President were clear to the effect that their judgments should not be taken as endorsing the proposition in Item Software as one which applies to Scots law. Indeed, they were positively circumspect (Lord Nimmo Smith slightly more so than the Lord President) regarding its applicability in Scots law. Perhaps their Lordships were subconsciously influenced by the classic exhortation of Lord Atkin in Bell v Lever Bros. [1932] AC 161, 228 that 'to imply such a duty would be a departure from the well established usage of mankind and would be to create obligations entirely outside the normal contemplation of the parties concerned.'

The ‘Knowing receipt’ and ‘constructive trust’ issue

The case also casts light on the applicability of the doctrine of ‘knowing receipt’ and the role of constructive trusts in Scots law where an asset is transferred to, or secured by, a third party pursuant to, or in connection with, a director’s breach of duty. In such circumstances, to what extent can that third party be held liable to the company who has suffered loss as a result of the director’s breach of duty, i.e. to what extent does a 'right to trace' exist in such circumstances in Scots law? At paras. [16]-17], the Lord President stated:-

“Authority in Scotland on the requisites of liability for knowing receipt is sparse. It is, however, clear that its foundation lies in the law of trusts, under which a stranger to a trust may in certain circumstances become liable to the trustees (or the beneficiaries) in respect of trust property. Menzies on Trustees (2nd ed.) at para.1271 in a section headed "Following Trust Estate" identifies the second situation where a constructive trust may arise as "… where funds affected with a trust come into the hands of another than the beneficiary, either gratuitously or with knowledge of a breach of trust, the transferee is a constructive trustee". The cited passage imports that prior to their coming into the hands of a stranger there are funds affected with the trust, that is, trust property. It has been recognised in Scotland that remedies based on the misapplication of funds may be afforded where a fiduciary relationship arises commercially. In Style Financial Services Limited v Bank of Scotland 1996 S.L.T. 421 the court observed at page 426J-K:

"If the defenders were aware of the existence of this fiduciary relationship and that the funds paid into Goldberg's account were the pursuers' funds, then we are satisfied that sufficient has been averred to entitle the pursuers to seek to make out a case based on recompense."

Again the passage describes pre-existing funds – in that case monies collected from debtors.

In England, where the law on knowing receipt is more developed, the classic statement of its requisites is that of Hoffmann L.J. (as he then was) in El Ajou v Dollar Land Holdings plc [1994] 2 All E.R. 685 at page 700 where he said:

"This is a claim to enforce a constructive trust on the basis of knowing receipt. For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable through a breach of fiduciary duty."

That statement appears to me to be consistent with Scots law. Again the passage proceeds upon the basis that there are assets [of the plaintiff], that they are disposed of and that they are, with certain knowledge, beneficially received by the defendant. The assets in that case comprised a large sum of money. The cited passage from El Ajou was endorsed by Nourse L.J. in BCCI (Overseas) Limited v Akindele [2001] Ch. 437 at page 448 (the pre-existing funds again being a sum of money). At page 450, in introducing a passage on knowledge, Nourse L.J. speaks of "misapplied assets of companies" and "assets received … traceable to a breach of trust". There is no support there for the view that liability in knowing receipt may arise when assets are created, as distinct from transferred, in breach of trust.”

For the purposes of the facts of Commonwealth Oil & Gas, the last sentence from the above passage was crucial. Since the third party entered into an agreement and this could not be classified as the transfer of an asset, and instead was treated as the creation of an asset/property, the company was unsuccessful in its cross-appeal which sought to secure a remedy to the effect that the profits enjoyed by the third party would be held on constructive trust for it on the basis of knowing receipt. Neither was it deemed to be obvious that a claim in damages would be open to the company by reason of the receipt itself, since the remedy was restitutionary in nature (which, of course, stems from the fiduciary nature of the obligation).

What is particularly noteworthy is the assertion by both Lord Nimmo Smith and the Lord President that Scots law and English law are both at one on the establishment of a constructive trust in terms of knowing receipt. At this juncture, it would be extremely remiss of me not to mention my erstwhile colleague, Professor George Gretton and his influential views on the institution of the constructive trust in Scots law. In a series of articles written in the Edinburgh Law Review and elsewhere, Gretton has argued cogently that the constructive trust only operates at the margins of Scots law and that it is an unhelpful doctrine which can serve to generate injustice. Indeed, Gretton demonstrates how cases which are labelled as raising constructive trust issues are nothing of the sort. These articles do not appear to have been considered by the Inner House. The Inner House’s judgments may perhaps suggest that the Scottish courts are generally not averse to doctrines which empower parties a right to trace, i.e. recover assets and monies dissipated in breach of fiduciary obligation. That proposition, in itself, is worthy of rigorous analysis in a journal article, since the equitable nature of the tracing mechanism is such that the full ramifications of its recognition for the laws of bankruptcy and property really ought to be worked out in full.

And now for some employment law – and in particular, the interpretation of the provisions of the Working Time Regulations 1998 which govern workers' annual holiday entitlements. In a recent decision of the European Court of Justice, it was ruled that where a worker is ill during a period which had been allocated as annual leave, that worker will be entitled to receive his or her annual leave at a time other than that which has originally been scheduled, i.e compensatory holidays for the days in which he/she was ill during the original holidays.

The case of Pereda v Madrid Movilidad concerned a worker’s rights under the Working Time Regulations 1998.  The facts of the case are straightforward. The worker’s employer had drawn up a planned staff annual leave schedule for 2007 in conformity with a collective agreement. In terms of that staff leave schedule, the worker had been allocated a period of annual leave from the 16th of July to the 14th August 2007. However, before such period of annual leave was due to begin, the worker was unfortunate enough to sustain an accident at work. Due to that accident, the worker was unable to return to work until the 13th of August 2007. The result was that the worker missed out on the planned period of annual leave from the 16th of July to the 14th August 2007. After his return to work, the worker requested that he be allocated a new period of annual leave for the year 2007 on the basis that he had been sick during the period of annual leave which had originally been allocated to him. The employer refused this request and the worker raised legal proceedings.

The European Court of Justice ruled that Article 7 of the Working Time Directive 2003 had to be interpreted as precluding national provisions or collective agreements which provided that a worker who was on sick leave during a scheduled period of annual leave did not have the right after his recovery to take his annual leave at a time other than that which had been originally scheduled. It should be clarified at this juncture that regulation 13 of the Working Time Regulations 1998 implements Article 7 of the Working Time Directive 2003. The European Court stated that the right to be paid annual leave had to be considered a particularly significant principle of Community social law from which there could be no derogations. The purpose of the entitlement to paid annual leave was to enable the worker to rest and enjoy a period of relaxation and leisure. However, the purpose of sick leave entitlement was to enable the worker to recover from illness. Although the Working Time Directive did not preclude national legislation or practices which enabled a worker on sick leave to take annual paid leave during that sick, where that worker did not wish to take annual leave during a period of sick leave, annual leave had to be granted to him for a different period.

The analysis of the European Court of Justice in the case of Pereda ties in logically with what it decided in the cases of first, Robinson-Steele v RD Retail Services Limited [2006] IRLR 386 and secondly, Stringer v H M Revenue and Customs [2009] IRLR 214. In each of the three cases of Pereda, Robinson Steele and Stringer, the European Court has stressed the importance of employers taking positive steps to ensure that their workers take their annual leave.  This is an important reminder that the essential question in deciding whether or not an employer has breached regulation 13 of the Working Time Regulations 1998 is whether a worker has been deprived of his or her annual leave and the fact that the worker had consented to this at the time is irrelevant. In Pereda, this uncompromising position leads to the rather bizarre situation whereby a worker who becomes ill whilst on holiday will be entitled to further annual leave to offset those days during which he or she was ill. One might wonder if this is tantamount to something akin to a ‘chancer’s charter’? Discuss…

Last month we noted that two bills in the Scottish government legislative programme had a commercial law content. The first of those bills was introduced to the Parliament this morning.

The Home Owner and Debtor Protection (Scotland) Bill and the explanatory notes and policy memorandum can be found on the Scottish parliament website here and as noted in our earlier post is based on the work of the Debt Action Forum.

The following is intended to give an overview of the proposed reforms, based on a quick reading of the bill.

Under the current law a secured creditor can sell secured property without judicial intervention. This is done through service of a calling up notice or a notice of default. The bill provides that where a standard security over property is called up (whereby the creditor requires the debtor to pay the outstanding amount in full) or a notice of default is used (whereby the debtor is required to remedy a breach of the security agreement) the secured creditor will only be entitled to its usual remedies (including the power to sell the secured property) if there is court authorisation – unless new s 23 A (to be inserted into the Conveyancing and Feudal Reform (Scotland) Act 1970) applies. The new section 23A will apply where the property is unoccupied and has been relinquished by the debtor, proprietor and family. This deals with those cases, which occur occasionally in practice, where the debtor moves out and hands in the keys to the creditor or its agent. To relinquish under s 23A though will require a degree of formality.
 
Section 24 of the 1970 Act (which is the current route to require judicial authorisation for sale and which will be the required route for sales by secured creditors under the bill), will be amended to introduce new subsections (1A) to (1D) to require the creditor to apply for a warrant to exercise the powers in the standard conditions only where: (1)  pre-action requirements under new s 24A of the 1970 Act have been complied with; and (2) after consideration of factors listed in new s 24 (7) (these are (a) the nature of and reasons for the default; (b) the ability of the debtor to fulfil within a reasonable time the obligations under the standard security in respect of which the debtor is in default; (c) any action taken by the creditor to assist the debtor to fulfil those obligations; (d) where appropriate, participation by the debtor in a debt payment programme approved under Part 1 of the Debt Arrangement and Attachment (Scotland) Act 2002; and (e) the ability of the debtor and any other person residing at the security subjects to secure reasonable alternative accommodation.

Section 24A requires the creditor to give details of the security and the obligations that trigger default; and must take reasonable efforts to reach agreement for future payments, and the creditor cannot apply if the debtor is taking steps that will allow payment of arrears (or satisfaction of obligations) within a reasonable time. As is normal with the debt enforcement provisions now advice on debt management must be provided (although there is no reference to the statutory debt information and advice package which appears in the diligence legislation). The pre-action position can also be influenced by ministerial advice, and be amended by SSI.
 
Amendments would also be made to the Heritable Securities (Scotland) Act 1894, s 5 (which allows the creditor to apply to eject the debtor from the secured property) with the insertion of new s 5 (2) and (3) requiring compliance with new ss 5A and 5B. The former  will require recorded delivery notices to be served in conformity with the forms in Part 2 of the schedule to the Mortgage Rights (Scotland) Act 2001 and notice of the application for ejection to be given to the local authority where the property is located (mirroring the requirements in the 1970 Act to notify the local authority as inserted by the Homelessness etc (Scotland) Act 2003. New s 5B will introduce a pre-action procedure in relation to ejection which mirrors that in the  proposed s 24A of the 1970 Act.
 
New s 24B of the 1970 Act and s 5C of the 1894 Act will allow those who benefit from the provisions of the Mortgage Rights (scotland) Act 2001 (namely, children, family members, non-entitled spouses) to make an application for a court order which could postpone the exercise of the remedies. Thus, a person that is not a party to the secured loan could effectively raise a matter in the action seeking authority to sell – which would justify the postponement of the sale.
 
New s 24E of the 1970 Act and s 5F of the 1894 Act will introduce new rules in relation to lay representation in proceedings regarding residential property. Approved lay representatives will be permitted to represent the debtor/family. The lay representatives that can be approved will include bodies (presumably bodies such as the CAB? – given that they can appear in certain benefit tribunal cases at the moment).

The main import of the bill was explained by Alex Neil, the minister for Housing and Communities.  He said,

"The Scottish Government recognises the responsibility it has to take prompt action where it can to help the Scottish people, particularly in the context of continuing economic uncertainty. With an increasing number of families facing financial difficulties, it is imperative that they are protected with the full weight of the law. Acting on the recommendations of the expert Debt Action Forum and the Repossessions Working Group, I am pleased that this Bill has attracted backing from across the political spectrum. When families are feeling the pinch it is important that politicians pull together to increase protection for those who are facing repossession or become bankrupt. Through the forthcoming Housing Bill and Debt and Family Homes Bill we are committing to giving even more support and protection for those hard pressed families."

The bill also proposes amendments to the Bankruptcy (Scotland) Act 1985 – rendering the piecing together of that legislation even more difficult. The reforms there include the introduction of certificates for sequestration; and a new notice requirement added to s 40 in relation to the powers over the family home. Without a map, a clean text of the current version – rather than a much annotated copy of the 1985 Act with the variety of amendments from 1993, and the various parts of 2007, as well as reforms from elsewhere – and a degree in physical geography it's probably best not to comment on the effect of these at the minute. The sooner that a consolidated Bankruptcy (Scotland) Act is produced to aid those advising debtors and creditors in the field of bankruptcy law, the better.