Category: Publications

Active Wear & Fore Fitness

The High Court decision in Re Active Wear Limited (In administration) [2022] EWHC 2340 (Ch) (“Active Wear”) clarified that a sole director can validly make decisions on behalf of a company that has adopted the unmodified Model Articles. This ruling represented a significant relief for sole directors and law practitioners, following uncertainty created by the earlier case of Re Fore Fitness Investments Holdings [2022] (“Fore Fitness”), where the Court held that at least two directors were required to make valid decisions, even under the Model Articles.

The contrasting outcomes of Active Wear and Fore Fitness underscore key distinctions in the interpretation of the Model Articles. In Fore Fitness, the company had adopted modified Model Articles, specifically altering the quorum requirements under Article 11 to require a specific number of directors to be present for decision-making. The court interpreted this modification as creating a de facto requirement for a minimum of two directors, which negated the operation of Model Article 7(2). In contrast, the Active Wear case involved unmodified Model Articles, where the court affirmed that Model Article 7(2) permits a sole director to act independently, rendering quorum provisions irrelevant. These differing interpretations highlighted the importance of whether the Model Articles were adopted in their original form or modified.

KRF Case

The issue was recently revisited and clarified in Re KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) (the “KRF Case”). The KRF Case builds on the principles established in Active Wear by clarifying how modifications to the Model Articles can override the default rule in Model Article 7(2) that allows sole director decision-making. It emphasises the need for precise drafting when altering governance documents to avoid unintended restrictions on director authority. The case concerned a company with a sole director, though this had not always been the case. Following the imposition of financial sanctions on the company’s ultimate beneficial owner (UBO), which restricted their ability to manage the business, the company found itself with only one director and no candidates willing to assume the role of additional directors. In May 2024, the sole director applied to place the company into administration due to its severe financial difficulties. Although the application was uncontested, questions arose about whether the sole director had the authority to act under the unmodified Model Articles.

What are Model Articles?

Model articles are default constitutional documents prescribed by the Companies Act 2006 for private and public companies in the UK. They govern a company’s internal management, outlining rules on director decision-making, shareholder rights, and administrative matters. Companies can adopt these articles as-is, modify them, or replace them with bespoke articles. For private companies limited by shares, Model Articles are particularly common, offering a standardised framework that simplifies governance while allowing flexibility for specific company needs. Understanding how these provisions apply is essential, especially in situations like sole director decision-making.

There are four key provisions which are relevant here:

• Model Article 7(1): decisions by directors must be taken either at a board meeting or by unanimous decision.
• Model Article 7(2): if a company has only one director and its articles do not require more than one, the sole director can make decisions without regard to other articles on directors’ decision-making.
• Model Article 11(2): the quorum for directors’ meetings is two, unless otherwise fixed, but cannot be less than two.
• Model Article 11(3): if the number of directors falls below the quorum, directors may only appoint new directors or call a general meeting to enable shareholders to appoint more directors.

Key findings in the KRF Case:

The KRF Case builds on the reasoning established in Active Wear, providing further clarity. In other words, it states that:

• Model Article 7(2) Prevails Over Article 11:

Model Article 7(2) allows a sole director to exercise all powers of the company unless a provision of the articles requires more than one director. The High Court confirmed that this article disapplies the decision-making requirements in Model Article 11 in their entirety, provided the articles do not explicitly require more than one director.

• Interpretation of Model Article 11:

Model Article 11(2) states that decisions can only be made at a quorate meeting (quorum being at least two directors unless otherwise stated). If this were read as requiring more than one director, it would render Model Article 7(2) meaningless when the company only has one director. The court thus rejected this interpretation as inconsistent with the purpose of the Model Articles.

• Sole Director Validity:

The court emphasised that the condition for Model Article 7(2) to apply, hinges on:

1. the company having only one director at the relevant time; and
2. the absence of a provision in the articles requiring more than one director.

• The Previous Multi-Director Structure is Irrelevant:

The fact that KRF Services (UK) Ltd had previously had multiple directors did not affect the application of Model Article 7(2). The present tense in the phrase “only has one director” means the director count is assessed at the time of the decision.

• Relationship with Model Article 11(3):

Model Article 11(3) limits the actions directors can take if their number falls below the quorum (e.g., appointing new directors or calling a general meeting). However, since Model Article 7(2) disapplies article 11 entirely when there is a sole director, no conflict arises between these provisions.

Practical Implications:

The decision in the KRF Case provides clarity and reassurance for sole directors of companies adopting the Model Articles. It confirms the validity of decisions made by a sole director, even if the company previously operated with multiple directors, and the intended operation of the Model Articles, emphasising their practical functionality for companies transitioning to a single-director governance structure.

It also establishes that sole directors can act confidently within the framework of the Model Articles without concerns over purported conflicts or historical directorship arrangements.

By Ezio La Rosa and Annie Jandoli – Corporate Finance London

In its efforts to bolster the United Kingdom’s status as a global business hub (also considering the negative impacts on business activity caused by Brexit and the pandemic), the UK government has proposed the introduction of a corporate re-domiciliation regime. This proposal draws on insights from the Independent Expert Panel (the “Panel”), established to provide independent, non-binding advice on how best to develop the framework. Chaired by Professor Vanessa Knapp OBE (Officer of the Order of the British Empire) and composed of leading financial and legal professionals, the Panel has finalised its report and presented it to the government, laying the groundwork for this transformative initiative.

What is Corporate Re-Domiciliation?

Corporate re-domiciliation refers to the process by which a company moves its legal domicile from one jurisdiction to another, without altering its legal identity. The primary goal of this initiative is to enhance the UK’s attractiveness as a destination for business relocation and foreign investment.

At present, while a UK company may transfer its central place of management and control – and, therefore, its tax residency – to a foreign jurisdiction (subject to the provisions of the relevant double tax treaty, in particular with respect to residence tie-breaker rules), the UK law does not permit corporate re-domiciliation. Rather, under existing corporate law, a UK company must maintain its registered office in one of the UK jurisdictions (England and Wales, Wales, Scotland, or Northern Ireland). While a company may relocate its registered office within the same jurisdiction, it cannot transfer it to a different one. For instance, a company with its registered office in England cannot move it to Scotland. Indeed, the transfer of the registered office of a UK company to a foreign country would be akin to a winding-up: should a UK company seek corporate re-domiciliation, it would be struck-off by Companies House (i.e., removed from the register of companies held at Companies House).

Common law jurisdictions such as Singapore, Canada, New Zealand, Australia and some US states allow companies to re-domicile, enabling them to move their place of incorporation while maintaining their legal identity and business continuity. This flexibility facilitates international expansion or relocation without the need to dissolve the company and re-incorporate.

Inward vs. Outward Re-Domiciliation

Corporate re-domiciliation covers – and the Panel has supported – both inward and outward re-domiciliation.

Inward re-domiciliation allows foreign companies to move their place of incorporation to the UK from another jurisdiction. This provides them with easier access to UK capital markets and the benefits of the UK’s corporate transparency and governance standards. Currently, companies wishing to move to the UK face a complex and costly restructuring process, typically involving the creation of a new UK entity (such as inserting a new UK holding company into its group) and the cross-border transfer of assets and management to the new UK entity.

On the other hand, outward re-domiciliation would enable UK-based companies to relocate their legal domicile to a foreign jurisdiction. This process currently involves the company forfeiting its original legal identity, as the company must be formally dissolved before it can establish itself under the legal jurisdiction of another country. As a result, the company ceases to exist in its original form and must essentially be reconstituted in the new jurisdiction, complying with the legal requirements of that country. The transition involves winding up the original company’s affairs and re-registering it abroad as a new entity. However, the proposed regime seeks to simplify this by allowing companies to maintain their original legal identity and directly transfer their incorporation outside the UK, thus avoiding much of the financial and operational burden associated with the current approach.

Through this regime, the UK government is seeking to give companies greater flexibility in responding to changing market conditions. The majority of respondents to the consultation supported a two-way regime, permitting both inward and outward re-domiciliation.

However, some highlighted the principles of reciprocity, which might prevent an outgoing jurisdiction permitting re-domiciliation to the UK if the UK did not conversely allow its own companies to re-domicile overseas. Similarly, the introduction of an outward regime could also encourage companies to incorporate in the UK, knowing they have the option to relocate abroad if necessary. Many noted that a two-way regime could increase the attractiveness of a UK regime to overseas companies who may wish to have flexibility to move to or from the UK in the future.

The Application Process for Corporate Re-Domiciliation

The process for inward re-domiciliation as envisaged by the Panel shall involve submitting an application to Companies House, along with key information about the company. Some of the required details include the company’s proposed name, whether it will be public or private, its intended future activities, whether it will have share capital and, if so, a statement of capital. The goal of this process is to ensure the company complies with UK corporate regulations post-re-domiciliation, including requirements under the Companies Act 2006.

On the other hand, the process for outward re-domiciliation involves the submission to Companies House of, among other things, a special resolution passed by the company approving the proposal to apply to re-domicile to another jurisdiction, a statement of solvency and confirmation that the laws of the jurisdiction to which the company wishes to re-domicile allow it to re-domicile there as a body corporate incorporated under its laws.

Different jurisdictions will have varying procedures for de-registering a company when it seeks to re-domicile elsewhere. However, the UK’s role will be limited to assessing whether the company’s application meets the UK’s own entry/exit requirements, while compliance with the rules of the foreign jurisdiction will remain the responsibility of that jurisdiction and the re-domiciling company.

Practical Considerations

Companies considering re-domiciliation need to assess several key factors:

(A) Tax Residency: should a company’s tax residence automatically follow its corporate re-domiciliation, or should tax residency be determined by where the company’s central management and control are located? The Panel considers that matters such as the practical difficulties in determining when UK tax residence starts together with other issues as to the process for addressing dual residence and treaty tiebreakers are best addressed in HMRC Guidance and/or in a statement of practice.

Currently, as previously mentioned, a UK company may transfer its central place of management and control – and, therefore, its tax residency – to a foreign jurisdiction (subject to the provisions of relevant double tax treaties). When a company ceases to be resident in the UK, UK tax law deems the company to have disposed of all its assets at their market value immediately before the relevant time, and to have re-acquired them at that value at the relevant time. The resulting corporation tax charge is known as the “exit charge”, subject to certain exemptions.

(B) Asset Valuation: should companies re-domiciling to the UK benefit from a “step-up” in the base cost of their assets, potentially reducing future capital gains tax liabilities? The Panel has declared that certain UK tax legislation should be amended in order to ensure a common approach for the tax base cost of assets to be revalued to market value for a body corporate re-domiciling into the UK where the assets are being brought into the charge to UK tax on re-domiciliation.

(C) Stamp Duty and VAT: companies will need to consider the potential implications of re-domiciliation on stamp duty and VAT. The Panel suggests that the law should clearly state that existing group relationships within the company for UK stamp duty purposes remain intact during the re-domiciliation. This would help prevent unexpected tax charges, like losing previously claimed tax reliefs which depend on the group staying together for a certain time. It would also avoid the need to treat the company’s shares as if they were transferred, which could potentially trigger foreign taxes.

On a general note, the respondents to the consultation showed general support for re-domiciled companies to be treated the same as a UK incorporated companies for tax purposes preferring a simple UK re-domiciliation regime that is consistent with existing tax regimes, but which does not favour a new category or distinct tax treatment for re-domiciled businesses.

Geographical Limitations

The Panel does not believe that there should be a list of countries from which companies can or cannot apply to re-domicile. Instead, it recommends giving the Secretary of State the authority to issue regulations to block applications from specific countries, if needed. Additionally, the Panel suggests that the UK government should consider whether companies, or those whose majority shareholders or controlling parties are subject to UK or international sanctions, should be barred from applying for inward re-domiciliation.

Eligibility

The Panel believes that corporate re-domiciliation to the UK should be available only to bodies corporate which are solvent and intend to carry on business following their re-domiciliation: it has been suggested that certain bodies should not be eligible to apply to redomicile to the UK (e.g., where the body corporate is being wound up or is in liquidation or any proceeding to liquidate or wind up the body corporate is ongoing, seeing as the re-domiciliation process should be available to existing bodies corporate which plan to carry on business in the UK).

Protection of members and creditors

The Panel has established a structured approach to creditor protection in corporate re-domiciliation to the UK, dividing responsibility between the departing and host jurisdictions. Protection of creditors before re-domiciliation remains the responsibility of the departing jurisdiction, ensuring creditors’ rights are upheld under its legal framework. The Panel rejected a government proposal to introduce a “good faith” assessment by the UK authorities in that respect, arguing that it would overburden Companies House, reduce efficiency, and expose the regime to judicial challenges.

After re-domiciliation, creditor protection becomes the responsibility of the UK. Companies must submit a solvency statement as part of their application, modelled on section 643 of the Companies Act 2006, requiring directors to confirm the company’s ability to meet current and foreseeable liabilities. Criminal penalties for false declarations and mandatory notification of material solvency changes before completion of re-domiciliation reinforce the system’s integrity. Furthermore, solvency statements must be refreshed if applications are not resolved within six months, with refusals for companies unable to reaffirm their solvency. This framework ensures robust creditor safeguards while maintaining efficiency and alignment with international standards.

What’s Next?

While the consultation on the initial proposals closed in January 2022, the Panel recommends that further consultation should take place once the UK government has developed more specific plans also suggesting that regulators such as the Takeover Panel, the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Pensions Regulator are called to advise on what changes to their rules may be required. This would give experts in particular fields the opportunity to provide feedback and help ensure that the re-domiciliation framework is both practical and effective.

Conclusion

The introduction of a corporate re-domiciliation regime would represent a significant change to UK corporate law and a major step in solidifying the UK’s position as a global business leader. As the framework continues to evolve, companies will need to stay informed about the legal, tax, and operational implications of re-domiciliation to fully leverage the benefits of this new opportunity.

By Ezio La Rosa and Annie Jandoli – Corporate Finance London

Lexsential is proud to have supported 1MED, a Contract Research Organization (CRO) specialising in high-quality regulatory and clinical services for pharmaceutical, medical, and biotechnology companies, along with UK-based private equity fund Apposite Capital, exclusively focused on the healthcare and medical sector, in the integration of LB Research.

Our team included partners Stefano Candela and Pasquale Di Mino, associate Marta Cosi, associates Teresa Candela and Silvia Sarracino, and of counsel Sabrina Peron and Antonio Di Mino.

LB Research, a leading CRO with comprehensive clinical trial management services across all stages of the product lifecycle, brings significant expertise to 1MED’s clinical offerings. Notably, LB Research has built a strong reputation          in oncology clinical trials, perfectly complementing 1MED’s capabilities. This strategic integration enhances 1MED’s clinical service portfolio for pharmaceutical and medical device studies, while solidifying its position in the European market.

For financial and tax matters, 1MED was advised by Mazars. The partners of LB Research were represented by BLF Studio Legale, with a team led by partner Andrea Corbelli and associate Davide Geraci, who managed the legal aspects of the transaction, including the partners’ reinvestment in the 1MED group.

Marco Polo Advisor assisted LB Research’s partners with financial matters and negotiations, ensuring a smooth and successful transaction.

By Ezio La Rosa and Annie Jandoli – Corporate Finance London

The UK Ratifies the 2019 Hague Convention

A Step Forward for Cross-Border Judgement Enforcement

On 12 January 2024, the UK Government took a significant step in facilitating international legal processes by signing the 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgements in Civil or Commercial Matters (the “2019 Convention”). The UK ratified the 2019 Convention on 27 June 2024, meaning that it will come into effect on 1 July 2025. This international treaty aims to streamline the recognition and enforcement of judgements issued in one contracting state (i.e., Ukraine, Uruguay, and all EU member states except Denmark; hereinafter “Contracting State(s)”) within the jurisdiction of another Contracting State.

Implications for the UK

This development comes at a crucial time for the UK, following the complications posed by Brexit. Prior to leaving the EU, the UK was part of the so-called Brussels Recast Regulation, which facilitated the automatic recognition and enforcement of judgements across EU member states. Brexit, however, ended UK’s participation in this system, creating additional legal hurdles for businesses needing to enforce UK judgements in the EU and vice versa.

In an attempt to mitigate these issues, the UK sought to join the 2007 Lugano Convention, a treaty that regulates the free movement of court judgements in civil cases between the EU member states on the one hand, and Switzerland, Norway and Iceland on the other. In other words, this convention extends the regime of quasi-automatic recognition and enforcement of judgements that was applicable between EU member states at the time under the Brussels Recast. While the 2007 Lugano Convention is open to third countries, participation thereto is subject to the explicit consent of all parties to the convention. On this note, the EU Commission – acting on behalf of the EU as a party to the 2007 Lugano Convention – rejected UK’s application on the grounds that the UK is not a member of the single market (i.e., a market which ensures the free movement of goods, services, capital and persons in a single EU internal market). On this note, the EU Commission considers the 2007 Lugano Convention regime to be grounded on the notion of close economic integration and mutual trust and, therefore, considers that participation thereto should not be offered to any third country which is not part of the internal market (such as the UK).

Consequently, on 28 September 2020, the UK ratified the 2005 Hague Convention on Choice of Court Agreements (the “2005 Convention”), which partially addressed the problem by covering contracts with exclusive jurisdiction clauses. However, its scope was limited, excluding, among other things, non-exclusive jurisdiction clauses and asymmetric clauses (the latter allow one party to sue in any jurisdiction, while restricting the other party to suing in one exclusive jurisdiction). This meant that where parties were subject to a contract which provided a non-exclusive jurisdiction clause or an asymmetric clause, the 2005 Convention was not applicable.

Benefits of the 2019 Convention

The 2019 Convention promises to resolve many of these post-Brexit enforcement issues. Unlike the 2005 Convention, the 2019 Convention does not necessitate the inclusion of exclusive jurisdiction clauses in contracts for its provisions to apply. This broader applicability means that the recognition and enforcement procedures will cover a wider range of legal agreements, including non-contractual claims like torts. Additionally, the 2019 Convention is a multilateral treaty, reducing the risk of EU’s obstruction in UK’s accession.

This new framework will allow judgements made in the UK to be recognised and enforced in other Contracting States (and vice versa) without re-evaluating the merits of the case. However, it is important to note that the 2019 Convention is limited to civil and commercial judgements, explicitly excluding areas such as intellectual property, defamation, and family law.

Moreover, Article 5 of the 2019 Convention clarifies that to recognise and enforce a foreign judgement, several important criteria must be met, such as, inter alia:

• the judgement must be valid and have legal effect in the state where it was originally issued (e., it should be recognised as legitimate and binding in the state of origin);
• the judgement must be enforceable in the state where it was first issued – in other words, if it cannot be enforced in the state of origin, it cannot be enforced in other states;
• the judgement cannot be under review or appeal in the state of origin: if there is a pending review or the time allowed for appealing has not yet expired, the judgement may not be eligible for enforcement abroad;
• the judgement cannot pertain to matters involving residential leases or the registration of immovable property (such as land or buildings); and
• the person against whom the judgement is issued (the judgement debtor) must have a relevant connection to the state that issued the judgement.

Understanding Jurisdiction Clauses

A jurisdiction clause in a contract specifies which court has the authority to resolve any disputes that arise from the contract. These clauses can be either exclusive, designating a single court to have authority, asymmetric or non-exclusive, allowing multiple courts to have jurisdiction. The 2019 Convention enhances the enforceability of judgements regardless of whether the jurisdiction clause is exclusive or non-exclusive (including asymmetric clauses), thereby offering greater flexibility and certainty in international legal agreements compared to what provided for by the 2005 Convention.

Global Context

Outside the EU, countries like the US, Israel, and Russia have signed the 2019 Convention but have yet to ratify it. Should these states proceed with its ratification, the scope of the Convention’s benefits would extend further, aiding UK parties in enforcing judgements in these jurisdictions as well. Moreover, Uruguay has already ratified the Convention, with it set to take effect there in October 2024.

On a general note, there are certain safety measures in place for Contracting States to opt-out of the application of the 2019 Convention in certain relationships with other Contracting States. This ensures that countries can protect their sovereignty and legal interests, while still participating in the broader 2019 Convention framework. For instance, if Russia were to ratify the 2019 Convention, it could potentially choose to opt-out of applying the 2019 Convention in its dealings with other Contracting States (and vice versa). This safety measure may be invoked for geopolitical reasons or merely to maintain control over certain aspects of cross-border legal enforcement. Similarly, it may also be possible (theoretically) that the EU declares that the 2019 Convention should not apply between EU member states and the UK. This may be due to EU’s desire to maintain the existing legal framework established under EU law, which may differ from the standards provided by the 2019 Convention. In other words, the EU, by opting out, could ensure that its internal rules and agreements with the UK remain intact without being overridden by the provisions of the 2019 Convention.

In today’s everchanging business landscape, the role of directors goes beyond mere legal compliance and extends to embodying ethical leadership and fostering trust; in recent years, some high-profile corporate scandals and failures have dented public trust in businesses, highlighting the need for directors to be held accountable for their actions.

To this extent, the Institute of Directors (the “IoD”) has published a consultation document on a voluntary code of conduct (the “Code”) for directors: a practical framework designed to help directors navigate complex decisions and maintain public trust. The consultation document is open for feedback up until the middle of August 2024 and invites the public to offer input on matters such as, inter alia, whether there are additional issues that should be addressed and/or whether directors should make a public declaration of their adoption of the Code.

The Code applies to organisations of all sizes in private, public, and not-for-profit organisations. While directors are generally subject to duties by virtue of the Companies Act 2006 (see ss.171-176), their professional bodies, and/or their organisations, this Code seeks to complement the existing duties, rather than replace them. In other words, the Code is not a formal enforcement mechanism, rather, it establishes standards for directors’ conduct that go beyond legal requirements, aiming to enhance the credibility and reputation of directorship in society’s view.

This article delves into the six principles of the Code, exploring how they can catalyse positive change within businesses in the UK. These principles are inspired by the Seven Principles of Public Life (the Nolan Principles) published by the Committee on Standards in Public Life in 1995. This Committee advises the Prime Minister on arrangements for upholding ethical standards of conduct across public life in England. The Nolan Principles apply to anyone who works as a public officeholder, which includes all those who are elected or appointed to public office, both nationally and locally, including, inter alia, all those appointed to work in the Civil Service and local government.

Seeing as the principles are based on these Nolan Principles, the Code reflects certain provisions of other governance codes already in place in the UK, such as the UK Corporate Governance Code for companies with a premium listing on the London Stock Exchange, the Wates Principles for large private companies, the UK Sport/Sport England Code for Sports Governance for sports organisations in receipt of public funding, and the B Corp Legal Requirement for entities wishing to become certified B Corps.

Let us now delve into the six principles of the Code.

Principle 1: Leading by Example

A director is often, and rightly so, considered a model to look up to in a business. Therefore, this principle sets a benchmark for organisational behaviour and inspires professionals to adopt a culture of morale, corporate reputation, and respectfulness. Having a director who treats everyone with equal respect, strives for continuous self-improvement and considers the impact of his own behaviour on the work and mental health of his employees, ensures mutual trust, humility and empathy.

Principle 2: Integrity

The second principle entails the prioritisation of the organisation’s interests over personal gain, the management of conflicts of interest, and upholding high ethical standards. By ensuring the application of this principle, directors can foster a transparent and ethical corporate culture, strengthening stakeholder relationships and enhancing the organisation’s reputation. Integrity is considered crucial for building trust and respect within – and outside – the organisation and, as such, in the UK’s regulatory environment, integrity can form the differentiating factor of a business in a competitive market.

Principle 3: Transparency

Transparency implies that directors are open about decisions and actions affecting objectivity of the business, that they address mistakes openly, encourage reporting misconduct and communicate clearly with other professionals in the organisation. This way, business operations can be conducted with trust and confidence while also fostering a culture of honesty and accountability. In the UK, where regulatory scrutiny and public expectations are high, transparency can mitigate reputational risk.

Principle 4: Accountability

This principle entails complying with legal duties and taking personal responsibility for actions. Moreover, it implies being open to feedback, holding management accountable, seeking independent advice and reflecting on one’s personal capabilities. This ensures that directors answer to their own decisions and actions which, in turn, reinforces trust and confidence among professionals and improves the quality of decision-making. Ensuring that this principle is implemented amongst directors in the UK can enhance governance frameworks and promote sustainable success.

Principle 5: Fairness

This comprises, inter alia, making decisions impartially and based on merit, respecting interests of all stakeholders, promoting equality of opportunity and fair treatment and encouraging diversity. Making sure that decision-making is governed also by the principle of fairness, enhances loyalty and confidence among professionals. It promotes an inclusive environment in which all employees feel valued and respected. Embracing fairness can enhance workplace diversity and inclusion while driving innovation and better business outcomes.

Principle 6: Responsible Business

Directors should consider the broader impact of their decisions on society and the environment, prioritise long-term goals over short-term financial gains, promote high standards across the supply chain and reject questionable practices. These broader societal and environmental outcomes foster trust and confidence in directors’ leadership and support a more sustainable and equitable business landscape. Generally, this principle enhances corporate reputation and supports UK’s commitment to ethical business practices.

Overall, the IoD’s Code provides a robust framework to enhance ethical standards and governance in UK businesses.

It may be argued, however, that the necessity of the Code is debatable, given that directors are already bound by comprehensive duties outlined in the Companies Act 2006. This existing framework covers a wide range of responsibilities, and additional guidelines may be viewed as redundant and burdensome, especially for smaller organisations with limited resources. Concerns have also been raised about the effectiveness of a voluntary code with no enforcement mechanism or register of signatories, as observed for instance by ICAEW, whose members are already subject to the ICAEW’s code of ethics.

Small businesses are the backbone of any economy: they drive innovation, create jobs and foster community growth. At the start of 2023, the UK counted 5.1 million small businesses consisting of fewer than 50 employees. While the private sector business population increased by 0.8% compared to 2022, small businesses still face significant cash flow challenges which hinder their growth and sustainability. Therefore, it goes without saying that addressing these issues is crucial for economic stability and prosperity and, as such, the importance of small businesses is being reflected in the variety of proposals set forth by the Conservative Party, the Labour Party and the Liberal Democrats. This article seeks to delineate these major proposals in the UK.

The Conservative Party

The Conservative Party proposes to improve the enforcement of the Prompt Payment Code (PPC). The PPC is a voluntary code of practice for businesses, established in December 2008, which sets general standards for payment practices between, on the one hand, organisations of any size and, on the other, their suppliers. The PPC seeks to tackle late and unfair payment practices in both public and private sectors by implementing payment to suppliers on time, giving guidance to suppliers on terms, dispute resolution, and prompt notification of late payment, and supporting good practice throughout the supply chain by encouraging its adoption to mitigate the risk of insolvency.

They also propose a shift towards digital invoicing to modernise small businesses practices and enhance resilience and adaptability in an ever-changing economic landscape. This proposal encourages the reduction of administrative burdens on small businesses, with the aim of enhancing their operational efficiency and allowing them to focus on growth and innovation.

The manifesto includes several other pro-small business measures, such as cuts to Business Rates (i.e., taxes paid by businesses on their property) and amendments to the Jobs Tax. In practice, these cuts seek to support job creation and ease financial pressures on small businesses.

The Conservative Party also focuses on improving skills. This includes providing extra funding for adult requalification and retraining to help existing workers expand their skills, especially in digital areas, while also improving the apprenticeship funding system.

The Liberal Democrats

The Liberal Democrats’ manifesto for small businesses delineates various key proposals to support and strengthen the sector, one of which being also centred on the importance of rigorously enforcing the PPC. Such enforcement would ensure that all government agencies, contractors, and companies with more than 250 employees, sign up to the PPC.

Additionally, the Liberal Democrats seek to support local banking by collaborating with major banks to create a local banking sector dedicated to small and medium-sized enterprises to strengthen the financial infrastructures supporting such businesses.

Moreover, the Liberal Democrats propose to cut Business Rates for small businesses. One of the proposals is that of a Commercial Landowner Levy (CLL): a tax reform which, unlike Business Rates, would be based on the value of the land itself rather than the rental value of the property. This would mean that the tax would be levied on the landowners rather than the business occupying the property. Clearly, implementing this type of system would require an in-depth analysis of land which, in turn, would impose significant administrative burdens.

Additionally, the Liberal Democrats plan to enhance access to finance for small businesses by encouraging more investment in small businesses through government-backed schemes and incentives. Their manifesto also highlights the importance of boosting small business exports to help such businesses enter international markets.

Lastly, the Liberal Democrats also emphasise the need to invest in skills and training. They propose to establish new training programmes and support for apprenticeships to ensure that small businesses have access to a skilled workforce. This initiative aims to address the well reported skills shortages in the UK and enhance the productivity and competitiveness of small businesses.

The Labour Party

The Labour Party pledges to acknowledge and improve cash flow issues faced by small businesses by imposing a requirement on large businesses to report on their payment practices. This additional transparency measure aims to expose – and mitigate – late payments, thereby enhancing cash flow to such businesses. By enforcing disclosure of payment practices and ensuring timely payments, the Labour Party primarily seeks to enhance accountability of large companies, ensuring that small businesses receive timely payments which are, in turn, crucial for their financial health and stability, considering the chronic cash flow issues they continuously face.

Additionally, the Labour Party emphasises the need to modernise business practices and adopt new technology. This initiative mirrors the Conservative Party’s stance and highlights a bipartisan recognition of the need for small businesses to stay abreast of the rapidly evolving economic landscape.

Another cornerstone of the Labour Party’s manifesto is the promise to replace the current Business Rate systems with a more equitable system. The Labour Party has stated that it seeks to find a “system that works better, because at the moment, there’s not a level playing field between businesses that are online and those that are sort of bricks and mortar” (i.e., the traditional physical stores). In other words, physical stores often face higher costs due to Business Rates, while online businesses may not be taxed as heavily.

Another proposal is that of establishing a local banking sector to improve access to finance for smaller businesses by accelerating the rollout of bank hubs; bank hubs are shared banking facilities that offer services from multiple banks under one roof, providing essential banking services like cash deposits, withdrawals, and basic financial advice. Therefore, this initiative is designed to ensure that small businesses and local communities have convenient and accessible banking services, especially in areas where traditional bank branches may have closed.

Moreover, in seeking to support small businesses, the Labour Party promises to revitalise Britain’s high streets: they plan to tackle anti-social behaviour by introducing new police patrols in town centres. This initiative is designed to make shopping areas safer and more welcoming, encouraging more foot traffic and, in turn, boosting sales for local businesses.

In addition, the Labour Party seeks to give small businesses a better chance to win public contracts by opening up competition. This means that smaller enterprises will have fairer access to lucrative government procurement contracts, which were often dominated by larger corporations.

The Labour Party also aims to boost small business exports, similarly to the Liberal Democrats’ manifesto. This involves providing clear advice and publishing a comprehensive trade strategy to help small businesses enter international markets.

The creation of Skills England (mirroring the Liberal Democrats’ proposal to invest in skills and training) is intended to address skills shortages by working with local industries to ensure that the workforce has the necessary skills. This initiative includes the establishment of new Technical Excellence Colleges, which will offer specialised training aligned with industry needs. By developing a skilled workforce, small businesses can find the talent they require to innovate and grow.

Finally, positioning Britain as a Clean Energy Superpower is another key facet of the Labour Party’s plan. This involves cutting energy bills for small businesses and creating new opportunities for tradespeople in the green energy sector.

While each strategy is different, each of the Parties recognise the urgent need to address the issues which small businesses face in the UK.

These comprehensive measures are designed to create a supportive and dynamic environment for small businesses, ensuring they have the (financial) resources, opportunities, and infrastructure needed to thrive in a competitive marketplace. Overall, all Parties are promising to take steps to ameliorate the economic field by making it an environment in which small businesses can grow and thrive.

By Ezio La Rosa and Annie Jandoli – Corporate Finance London

What Employment Law changes should we expect after the UK general election?

As the UK general election approaches, significant changes in employment law are on the horizon and, therefore, professionals are eager to know how the potential shifts in government could impact them. This article will discuss some of the major changes proposed by the Labour Party’s “New Deal for Working People”; the Conservative Party’s “Bold Action. Secure Future. Strong Leadership.” and the Liberal Democrats’ “For a Fair Deal” plan Manifestos.

Employee status

The first potential change to note is the change in “employee” status. The Labour Party and the Liberal Democrats have two contrasting opinions on the matter. Generally, unlike Italy, France or the US – which generally recognise the statuses of “employees” and “self-employed” – the UK, through its case law, recognises three different employment statuses, i.e., “employees”, “self-employed contractors” and “workers”. Employees generally enjoy a broad range of employment rights and protections which are not extended to those who are genuinely self-employed. “Workers”, on the other hand, fall into an intermediate category, receiving certain statutory rights (such as, for example, the national minimum wage, paid holidays and protections against unlawful wage deductions). However, unlike employees, workers lack rights to statutory unfair dismissal and do not qualify for statutory sick pay or leave benefits (such as maternity leave).

The Labour Party have indicated their intention to recognise a single “worker” status for all (thus, including “employees”) – save for the genuinely “self-employed” – as they sustain that ongoing litigation over employment status and a rise in “bogus, rather than genuine, self-employment” contracts have created significant inequality and distrust between individuals and employers. Labour Party aim to eliminate ambiguity and extend statutory rights (such as, inter alia, sick pay and family leave) to all individuals currently classified as “workers” or “employees”. As such, a person classified as a self-employed contractor by their employer only needs to convince an employment tribunal that they are a worker (a less stringent requirement than the employment test) to qualify for minimum benefits like holiday pay, the national minimum wage and sick pay.

Let us consider, however, the impact of this potential change on the gig economy, i.e., a labour market characterised by the prevalence of short-term contracts or freelance work as opposed to permanent jobs, created out of a desire for services to be on demand with limitless flexibility. This change would mean that any action effectively abolishing the “worker” status, will likely result in everyone who is not genuinely “self-employed” being classified as an “employee”: they would gain extra protections, including – for example – protection against unfair dismissal. For business models which depend on summoning individuals on short notice and having no obligation to provide them with work by using, for instance, the so-called zero-hour contracts described below, the measures proposed by the New Deal will pose significant challenges, which have been already highlighted by commentators.

Zero-hour contracts, also known as casual contracts, are usually for ‘piece work’ or ‘on call’ work. In practice, this means that zero-hours workers are on call to work when needed, and, while there is no obligation to offer them work, they are also not obliged to do the work when asked. In light of their proposal to abolish the “worker” status, the Labour Party also proposes to abolish zero-hour contracts in order to remove the uncertainty and the ‘one-sided flexibility’ that these arrangements offer.

The Liberal Democrats, on the other hand, seek to ‘modernise’ employment rights to make them fit for the age of the gig economy. One of the proposed changes on the matter is to establish a new ‘dependent contractor’ employment status, entitled to basic rights such as minimum earnings levels, sick pay and holiday entitlement. The Liberal Democrats also argue that the so-called zero-hour workers should receive 20% higher minimum wage at times of normal demand, to compensate them for the uncertainty of fluctuating hours of work.

Employee rights

Let us now delve deeper into the topic of employee protection. The Liberal Democrats propose to enforce employment rights through the creation of a new Worker Protection Enforcement Authority. This would consolidate responsibilities currently dispersed across three agencies, including enforcing the minimum wage, tackling modern slavery and protecting agency workers. This initiative aims at a more streamlined and efficient enforcement of workers’ rights, ensuring better compliance with employment laws and providing stronger protections for vulnerable workers. By centralising these functions, the Worker Protection Enforcement Authority could respond more swiftly and effectively to violations, thereby enhancing overall workplace standards. However, it has to be seen how quickly the new agency can be established and whether businesses may expect experience increased regulatory scrutiny, which could raise compliance costs and administrative burdens, particularly for small and medium-sized enterprises.

The increased use of technology and AI in recent years is also topic of discussion when considering employee protection. AI has, in fact, raised numerous issues relating to, inter alia, GDPR by increasing risks related to personal identity exposure and/or privacy invasion. The Labour Party, therefore, has proposed that, in relation to AI and digital workplaces, any proposal to introduce surveillance technologies in the workplace be subject to consultation and negotiation with trade unions or elected employee representatives. On the one hand, this indicates the Labour Party’s desire to balance the power dynamics between employers and employees, however, on the other, one may also consider the issue of compliance costs of such proposal, in that consultation and negotiation with trade unions or elected employee representatives would require additional time and costs which may, in turn, discourage employers from adopting beneficial surveillance technologies and therefore hinder innovation and security.

On a similar note, proposals to expand employee rights include making certain entitlements effective from the first day of employment. The Labour Party, for example, seeks to render unfair dismissal claims an automatic right. To date, an employee can only claim that they have been dismissed for an unfair reason if they have worked for a qualifying period of two years. The Labour Party, however, seeks to implement the so-called “Day-One Rights” which entails removing the qualifying period requirement and, rather, being able to claim unfair dismissal from the first day of employment (similarly to wrongful dismissal claims which are an automatic right).

The Liberal Democrats’ proposals to expand employee rights comprise expanding parental leave and pay, making them day-one rights: “millions of parents are being denied the choice to spend more time at home during that all-important first year with their child because the UK still lags behind other countries on shared parental leave”.

Flexible working

Flexible working has become a central topic of discussion in the post-pandemic world. The Labour Party’s proposed “Right to Switch Off” initiative addresses the notion that remote working should not equate to being available 24/7. Advocates argue that this policy would significantly enhance work-life balance and mental health, ensuring that workers are not overburdened. By promoting fair employment practices, they believe it would also lead to increased productivity. However, this initiative raises several questions. For instance, what happens if an employer needs to contact an employee after hours for a genuine work emergency? Critics question whether this should provide grounds for a complaint and whether employees are justified in completely disconnecting from work duties outside their regular hours. While the policy aims to protect employees, it may also need to consider the realities of modern work environments where flexibility can sometimes mean being responsive to urgent matters outside traditional working hours.

The Conservative Party, if elected, has pledged to introduce new legislation for Predictable Work Patterns by Autumn 2024. This Act aims to address unpredictability in employment, affecting aspects such as tasks performed, work schedules, the number of hours worked, specific days of work, times worked on those days, and the duration of employment contracts. Proponents argue that this legislation would enable employees to plan their work schedules in advance, reducing the stress of receiving timetables on short notice or dealing with last-minute changes. This predictability would, in turn, allow for better management of personal commitments and improve overall flexibility. Supporters believe that such a policy would increase job satisfaction, potentially leading to higher retention rates and productivity. However, critics raise several concerns: they question whether this predictability might lead to decreased motivation among employees who may feel less compelled to adapt to changing demands.

Wages

On the pay front, the Liberal Democrats plan to establish an independent review to recommend a genuine living wage across all sectors, and to reform the Statutory Sick Pay (SSP) system.

The proposed living wage review aims to align the SSP with the National Minimum Wage (currently set at £11.44/h for those aged 21 and over) – and make it available from the first day of absence for workers earning less than £123 a week – to provide better financial security for sick workers, promoting health and well-being in the workforce. What is the SSP system currently? In brief, if eligible for the SSP system, you would be paid SSP for all the days in which you are off sick that you normally would have worked, except for the first three, for an amount equal to £116.75 per week for up to 28 weeks. Therefore, the Liberal Democrats aim to reform the SSP regime in response to criticisms that the rate is too low and too many people are excluded, either because they do not earn enough, or because their period of sickness absence lasts fewer than four days.

On a similar front, the Conservative Party aims to cut National Insurance (NI) contributions by 2%, to continue their campaign of NI reduction, which has seen the main rate cut from 12% to the current rate of 10% this year.

Equality Act

Another potential major change worth noting is that of the Conservative Party’s intention to change the Equality Act 2010 to apply to ‘biological sex’. Having been introduced in 2010, the Conservative Party argues that the Equality Act is not up to date with the evolving interpretations of sex and gender. Equalities minister Kemi Badenoch stated that “whether it is rapists being housed in women’s prisons, or men playing in women’s sports where they have an unfair advantage, it is clear that public authorities and regulatory bodies are confused about what the law says and what to do – often for fear of being accused of transphobia”. The Conservative Party is “clear that on fundamental matters of personal identity there should be one approach across the country, so [they] will also legislate so that an individual can only have one sex in the eyes of the law in the United Kingdom”.

In terms of employment law, this change could potentially affect various aspects of workplace equality and non-discrimination policies. Currently, the Equality Act 2010 protects individuals from discrimination on the grounds of gender reassignment, alongside other protected characteristics such as sex, race, and disability. If the Act were amended to refer only to ‘biological sex’, it might exclude protections specifically for transgender individuals, making it legally permissible to differentiate based on biological sex in situations where it was previously prohibited.

All of these proposed changes highlight a pivotal moment for UK employment law, where the direction taken could significantly impact both the workforce and employers. As we await the election results, it is clear that the outcomes may re-shape the future of work in the UK, potentially setting new standards for employee rights and business practices.