During the boom times, Dubai and the UAE seldom experienced insolvency cases, so it became a widespread rumour that the UAE does not have an insolvency law. In addition, it had also been widely speculated that the UAE has a very archaic regime in which debts can lead a debtor to jail.

By opposition to such rumour, an insolvency law does indeed exist and it is shockingly modern in more than one aspect. Looking more deeply at this law might be very useful in the near future, due to the credit and financial crisis that is affecting Dubai and its business sector.

By looking at Federal Law No 18 1993 (Commercial Transactions Law) it is clear that out of 900 articles of which this law is composed, 255 articles are dedicated to insolvency and bankruptcy procedures, which means that almost a third of the Commercial Transactions Law is dedicated to such procedures.1 This is not bad in a country considered to be without insolvency law.

The provisions apply solely to both individual traders and commercial companies when they have stopped paying their due commercial debts (Articles 645 and 650). The articles are subdivided as follows:

• Articles 645 to 763 are related to insolvency;
• Articles 764 to 799 are related to the arrangement by the court;
• Article 800 relates to small insolvencies;
• Articles 801 to 816 are related to companies insolvency (although Article 801 specifically provides that all above articles are applicable to companies in addition to the articles in this section);
• Article 817 to 830 are related to the rehabilitation of the insolvent individual (such as traders and partners in partnerships);
• Articles 831 to 877 are related to voluntary arrangement; and
• Articles 878 to 900 are related to bankruptcy.

It is clear that this a very comprehensive law with specific procedures. Unfortunately, it remains largely untested and only two judgments are published on the Dubai Courts’ website:

1. 1) a Dubai Supreme Court judgment dated 9 September 2008, which provides that a single unpaid commercial debt is enough to provoke the insolvency of a company; and
2. 2) an older, more interesting, judgment by the Dubai Court of Appeal dated 25 May 1998, where the court considered that the insolvency provisions and procedures are of public order since they were meant to promote confidence, and have been put in place to protect the creditors and to safeguard the debtor of good faith).2

The above judgment has clearly defined what the UAE insolvency law is all about: protecting the creditors and safeguarding the debtor of good faith.

The different procedures that are outlined in the Commercial Transactions Law are described in the remainder of this article.

Bankruptcy

In the event of bankruptcy (whether fraudulent, negligent or gross negligent bankruptcy), the Criminal Court shall be competent and shall sentence the bankrupt trader or manager of a company, or the member of its board or its liquidator, to a prison term that may not exceed five years in the event of fraudulent bankruptcy (Articles 878 and 879). Alternatively, a fine of 20,000 dirhams in the event of a gross negligent bankruptcy (Article 880) and no more than two years of prison or a fine of 10,000 dirhams in the event of negligent bankruptcy (article 881) may be issued.

In addition to the above, Federal Law No 3 1987 (the Criminal Code) contains provisions related to bankruptcy in Articles 417 to 422. Articles 417 to 419 of the Criminal Code are very similar to Articles 878 to 881 of the Commercial Transactions Law, while Article 420 provides:

‘If a commercial company is bankrupt, its board of directors and managers shall be convicted with the sentencing related to fraudulent bankruptcy if it was proven that they have committed any of the acts provided in Article 417 of this Code or assisted in the company ceasing its payment, whether by declaring wrongful facts about its subscribed capital or its paid-up capital, or by publishing wrongful balance sheets or by distributing fictious dividends, or by taking to themselves more than they are entitled to in the company articles of association.’

The discussion in this article does not apply to the member of the board of directors or the manager who proves that they were not involved in the crime or their objection to the resolution that was taken in its respect. It can be deducted from the above provisions that a shareholder of an insolvent company who was not involved in its management may never be considered as bankrupt. The board of directors or managers of a company that never committed any of the actions mentioned above shall never be considered as bankrupt themselves.

Insolvency

Insolvency is covered by Articles 645 to 763, 800 and 801 to 816.

Companies insolvency

Focus shall be made here on the articles more specifically related to companies.

Article 802 provides for the declaration of insolvency of a commercial company when it ceases payment of its commercial debts, due to the disruption of its financial activities.

Article 806 is very interesting, since it entitles the court, de facto, or on the request of the company to postpone the declaration of insolvency for a period not exceeding a year, if its financial position is likely to be supported or if the interest of the national economy so requires. The court can order that appropriate measures should be taken for maintaining the assets of the company.

This article is in addition to the provisions related to the arrangement that are discussed later, which gives the company a breath of fresh air, allowing it to arrange itself before being declared insolvent.

Article 809 provides that if the assets of the company are insufficient to satisfy at least 20% of its debts, the court who has declared the insolvency may order the members of the boards of directors, or some or all of the managers, jointly or individually, to pay the debts of the company, in whole or in part, in the cases where they are held responsible, in accordance with the provisions of the Commercial Companies Law (CCL).

The articles in the CCL provide for the liability of the chairman and members of the board of directors towards the company and its shareholders for all acts of fraud and abuse of power, and for any violation to the CCL or the articles of association, or the management violations, and any provisions to the contrary shall be annulled (Article 111 of the CCL).

The liability mentioned in the previous article shall be borne by all the board members if the violation has arisen as a result of a unanimous decision. Otherwise, if the resolution was approved by the majority, the opponents shall be absolved if they prove that they had opposed the resolution in the minutes of a meeting. An absentee may still be liable unless they prove that they were unaware of the resolution or were aware of it without being able to object to it (Article 112 of the CCL).

It is important to remember that Article 237 of the CCL provides that the liability of the manager of a limited liability company is similar to that of the board members and any stipulation to the contrary shall be annulled.

Procedure

The insolvency is declared on the request of the commercial company or on the request of one of its creditors. The court may declare the insolvency on the request of the public prosecution or ipso facto (Article 647).

The commercial company may request to be declared insolvent if its financial activities are disrupted and it has ceased paying its debts. Such a request becomes mandatory if 30 days have elapsed since the cessation of payments, otherwise this would be considered a case of negligent bankruptcy (Article 648).

The request shall be submitted within a report explaining the reasons for the cessation of payment and to which shall be attached several documents, such as the accounting books, the last audited financial statements, the profit and loss account, a detailed statement of movable and immovable assets, a statement of the names of the creditors and the debtors, their address, their rights and obligations, and security (Article 648).

In its insolvency judgment the court shall determine a provisional date for the cessation of payment, shall seal the debtors premises and shall appoint a trustee (Article 655).

In all events, the date of cessation of payment may not be deferred back to more than two years prior to the insolvency judgment date (Article 659).

In the insolvency or in a subsequent judgment, the court shall appoint a remunerated attorney to manage the insolvency: the insolvency trustee (Article 668).

The judgment shall be published in the Trade Register and in the Court’s Board for 30 days. The trustee shall take care of the publication of the judgment in a daily newspaper, as determined by the court, with all the details pertaining to the insolvent company and the summon to the creditors to come forward with their debts.

The judgment shall also be published in the name of the Assembly of Creditors at the Land Register within 30 days of the issuance of the judgment (Article 661).

The insolvent shall be prohibited from managing its assets or disposing of them (Article 685).

Article 691 provides that any lawsuit emanating from the insolvent or against them shall be prohibited.

Any activities undertaken by the insolvent that are detrimental to the Assembly of Creditors may be cancelled if the counterparty was aware of the cessation of payment of the insolvent (Article 697).

An Assembly of Creditors shall be created by law on the issuance of the insolvency judgment composed of the insolvent’s ascertained creditors. Any holder of mortgage or special privilege shall not be a member of the Assembly of Creditors (Article 703). This is because these secured creditors are at liberty to sue the insolvent individually (in contradiction to Article 691 and 704 ) and they have preferential rights over the attached assets.3

Competent court

As mentioned above, the competent court to oversee the insolvency is the Court of First Instance in whichever jurisdiction the headquarters of the insolvent company is located (Article 653).

In the Dubai Court of Appeal judgment, the insolvency is related to the public order of the state and is therefore closely linked to its judicial system. Any arbitral proceeding should therefore be excluded.

However, Article 747 entitles the insolvency judge, after hearing the supervisor (being the creditors’ representative) and the insolvent, to allow the trustee to settle or approve the arbitration in any dispute related to the insolvency, even if related to rights in rem (Article 678).

This could mean that the arbitration agreements executed before the launch of the insolvency procedure may still be valid after such a launch. The arbitral tribunal will only be in a position to declare a debt and determine its amount without being able to sentence the debtor to pay.

Nevertheless, providing such a clause in the insolvency law is very innovative of the UAE legislator, considering the public order nature of the UAE insolvency law.

Arrangement by the Court and Voluntary Arrangement

Arrangement by the court

This procedure involves the invitation of the creditors by the insolvency judge to deliberate on the arrangement (Article 764). The creditors may attend personally or through an attorney. However, the insolvent must attend personally (Article 765). It is assumed that in the case of a company, it should be its authorised signatory (ie the manager in an LLC and the chairman of the board or the CEO in a joint-stock company).

The trustee must submit a report to the meeting, related to the insolvency procedure and their opinion about the arrangement. The insolvent shall also be heard (Article 766).

The arrangement shall not be approved unless a majority of creditors, holding two thirds of the debts, agrees. Any creditor not attending the meeting shall be considered as dissenting to the arrangement (Article 767).

The secured creditors are not part of the Assembly of Creditors and shall not be entitled to vote on the arrangement, unless they waive their privileges (Article 769).

However, no arrangement is possible in the event of fraudulent bankruptcy (Article 771), but it is possible in the event of negligent bankruptcy (Article 772).

The arrangement might involve delays for the insolvent to pay its debts or a waiver by the creditors of some parts of the debts (Article 773).

The arrangement shall not be applicable on the secured creditors for the reasons mentioned earlier. Nor on the ordinary creditors where debts have arisen during the insolvency procedure (Article 775).

The arrangement shall remove all effects on the insolvency, without prejudice to any criminal pursuit. The debtor shall be reinstated with all their belongings and effects (Article 777).

This is, when going through the voluntary arrangement, a deficiency in the UAE insolvency law, which has failed to give enough power to the judicial authority, allowing it to take the necessary steps to allow a good company to survive without its failed or dishonest management. Since at the exception of the criminal pursuits that shall de facto lead to the insolvency of the company again, no provisions entitled the judicial authority to replace the former management of the company to protect its staff. Indeed, the arrangement shall be dissolved if, after its ratification, the insolvent is condemned with the crime of fraudulent bankruptcy (Article 778).

Voluntary arrangement

46 articles (from Article 831 to Article 877) are related to a voluntary arrangement by the company, with the assistance of a trustee appointed by the court (Articles 843 and 844 of the law). The trustee’s role in this procedure is only as formal as evidenced in Articles 844 and 852, and the trustee will not intervene at all in the management of the company.

The voluntary arrangement may be initiated before or after the launch of the insolvency procedure.

These articles are progressive and protective of the company, provided that the latter submits a comprehensive plan evidencing means to continue operations and secure at least a payment of 50% of its debt within a period not exceeding three years.

Such a voluntary arrangement applies to both secured and unsecured creditors, and thus the secured creditors are bound by the voluntary arrangement and are not at liberty to pursue with their individual lawsuits.

However, as pointed out above, in relation to the arrangement by the court, very little is provided in relation to the management and operation of the company during the voluntary arrangement period. Nothing is provided in relation to the fate of the management of the company, since Article 846 of the law provides that the debtor shall continue to manage its assets and shall perform all regular acts necessary for the management of the business.

In that sense it may be argued that UAE insolvency law is not in tune with modern insolvency laws that have made a distinction between the failed management of a company and its survival, mainly to protect its staff. In other words, in modern legislation, if a company is able to survive, it should do so. However, it should not necessarily survive with the same management that could be subject to civil and criminal sanctions. In this sense the UAE insolvency law does need improvement and evolution.

Conclusion

The UAE has a very modern and comprehensive insolvency law, which has unfortunately been unnoticed by the most prominent legal experts, since they ask for its amendment without even having read it.

The main impediment for the application of insolvency law is the security asked by the creditors and mainly post-dated cheques, which if not honored would constitute a crime leading its drawer to jail.

So the creditors, instead of having recourse to the normal insolvency procedure, prefer resorting to a speedier process consisting of filing a criminal complaint for a dishonored cheque, thus avoiding any chance for the company to survive.

Therefore, it is best practice to decriminalise the cheque, and this security may be replaced by other security and further information on the debtors. A credit bureau was envisaged last year by the UAE, which could be the first step towards decriminalising the cheque and towards applying the insolvency law.

Notes

• The word bankruptcy is used to describe fraudulent or criminal insolvency. Insolvency is used to describe the procedure that does not comprise a criminal element.
• This is understood by the provisions of Article 645 of the Commercial Transactions Law, which provides that any trader that has ceased paying its commercial debts on its due dates may be declared insolvent for the disruption of its financial standing and precariousness of its credit.
• Article 704 provides that the individual lawsuits and measures taken by ordinary creditors and the holders of general privileges shall be frozen.

 

The popular consensus is that there will not be a return to pre-2008 levels of property transactions for at least a few years. It is also uncertain when, if ever, the property market will return to the boom times seen in the early part of the last decade. During this period, it was not uncommon to see tenanted buildings change hands with significant levels of capital appreciation for the sellers. Furthermore, the state of repair of the tenanted building was not often something that affected the sale price as property owners could claim that a tenant covenant would cover any repairs. However, during the recession the value of many landlords’ investments has plummeted, with the result that property owners are holding their stock pending an upturn.

In current economic conditions, should property owners and tenants change their approach to the management of their property interests? Broadly speaking, institutional leases will contain a full repairing obligation on the tenant. However, pre-recession experience suggests that interim enforcement of repairing obligations is not often high on a landlord’s agenda. Similarly, some tenants carry out minimal works during the currency of the lease and are therefore likely to fail in complying with their repairing obligations. Cash settlements are not unusual when leases come to an end. In effect, repairing obligations are often disregarded pending lease termination, when the landlord suddenly takes notice of the spectre of an empty dilapidated building looming on the horizon.

Why should landlords and tenants consider a strategy to enforce or comply with the repairing obligations during the currency of the lease? Every case will depend on its own facts and circumstances, as well as the extent of the repairing obligations in the lease, but there are several reasons for implementing such a strategy. These are as follows.

Cost of works

The cost of carrying out works in a recession is likely to be very competitive. Contractors have been hit hard by the recession and those that have survived are competing for work with what are, comparatively speaking, keenly priced tenders. Therefore, building and repair works can generally be done at a lower cost than in previous years. So it is possible that tenants could mitigate their liability by organising works during the lease term at a much lower cost than the landlord’s estimate of works at lease expiry. Of course, tenants will also have to bear in mind that carrying out works to the premises will not be risk-free and there is no guarantee that the landlord will agree that the works have been done to the requisite standard.

Break notices

Tenants are looking for the best deal more than ever, which switched-on property managers will know means they will serve break notices and notices to quit when given the chance. Landlords are therefore facing the prospect of empty properties that will be less attractive to potential tenants in their dilapidated state and should seek legal advice to prepare themselves for this possibility.

Tenants should be aware that break clauses sometimes stipulate that a break can only be exercised if there has been material compliance with all the obligations incumbent on them. If a break clause is worded in a sufficiently precise manner (see the comments of the Inner House of the Court of Session in Trygort (Number 2) Ltd v UK Home Finance Ltd & anor [2008]), a tenant could find themselves in a position where, in the absence of the works being done to keep the premises up to the standard required by the lease, the landlord could view the break as invalid. Litigation could then ensue as the parties argue over whether or not the break has been properly exercised.

Cost of repairs

Landlords should pay close attention to what the lease sets out in relation to repairs to both the premises and common parts. Some leases will make it clear that the landlord can only recover sums expended on work to the common parts if the work has been done and paid for during the currency of the lease. However, some leases will make it clear that if a landlord has incurred liability for repair to the common parts (by entering into a contract for the works, for example), costs can still be recovered from the tenant, albeit after termination.

If a tenant has complied with their repairing obligations, they are less likely to face a loss of rent claim from the landlord. Where a tenant has not complied with these obligations and the landlord is faced with a void following lease expiry, the landlord can claim for loss of rent for a reasonable period, given that they will be faced with repairing the premises. It is also worthwhile checking whether there are any liquidate and ascertained damages clauses in the lease to deal with loss of rent, as these can prescribe the sums due by the tenant. It is likely that these clauses will be held as enforceable against the tenant. The Scottish courts have held that a liquidate and ascertained damages clause will almost inevitably be upheld, even if the actual loss has proved to be much less or even non-existent. (See the decision of the Inner House of the Court of Session in City Inn Ltd v Shepherd Construction Ltd [2003].)

Specific implement

A clear dilapidations strategy will be more effective if the landlord begins enforcement action well in advance of the expiry of the lease. In Scotland, landlords have a powerful court remedy in their armoury called specific implement. A specific implement action allows landlords to force the tenant to comply with their repairing obligations during the currency of the lease. Once the lease comes to an end, and unless the parties have contracted to the contrary, the landlord’s primary remedy will be damages. Landlords should be aware of the identity and covenant of the relevant tenant. It is possible to envisage circumstances in which a damages claim could become more difficult, such as where the outgoing tenant is a foreign company retrenching its overseas operations.

Comment

While this article aims to give landlords and tenants some food for thought, there may be compelling reasons for either party not to consider carrying out works to comply with repairing obligations during the currency of a lease. In these situations, there is always the possibility of a cash settlement. However, where such a settlement is being considered, landlords and tenants should remember that there are other issues that can defeat or drastically reduce any potential claims for damages. While it is difficult to generalise, landlords and tenants should think carefully before they rule out action to comply with or enforce repairing obligations during the currency of a lease.

A sound corporate governance policy requires managing directors to guarantee compliance with competition law in the organisation. Violations can lead to penalties of millions of euros, and serious damage to the reputation of the organisation and the persons involved. In practice, it is difficult to identify and control competition law risks. This problem can be avoided by introducing a compliance program. Such programs are an internal control mechanism that promote compliance by making employees aware of the dos and don’ts in competition law.

Competition law

Competition law prohibits, among other things, price-fixing or market allocation agreements and the exchange of sensitive competitive information. Several forms of co-operation between competitors are therefore prohibited. Agreements between non-competitors, such as customer or territorial restrictions, and price restrictions in the context of a distribution relationship, may also be sensitive from a competition law perspective. Companies with a dominant market position may not abuse their position, force competitors off the market, or exploit customers by charging extremely low or high prices.

Competition law has been one of the few boom areas of the past few years. The Netherlands has changed from a cartel paradise to a country with active enforcement by the Netherlands Competition Authority (NMa) and the European Commission. Penalties for the violation of competition rules are increasingly high and may be as much as 10% of the company or group’s annual turnover. NMa has recently been given the right to impose maximum penalties of €450,000 on those involved in anti-competitive practices. It is likely that the violation of competition rules in the Netherlands will, in the near future, result in imprisonment.

Advantages

A compliance program offers various advantages:

• It reduces the risk of a high penalty or other sanction. The Commission has stated that, in some circumstances, a compliance program can even be reason to mitigate the penalty if the rules are accidentally violated.
• It guarantees an organisation’s integrity and offers protection against serious damage to its reputation. It should also reduce the risk of claims for damages from competitors, suppliers or customers. Market parties are increasingly attempting to recover losses incurred as a result of restraints of trade from companies involved in anti-competitive practices.
• It can help to avoid a situation in which it becomes apparent at a late stage that crucial agreements are not enforceable or that certain actions must be changed in the interim. An important aspect in this context is an analysis of the day-to-day management and new market initiatives.
• It limits the risk of market parties making a formal complaint about an organisation to NMa or the Commission, which may result in close monitoring by competition authorities. By establishing a compliance program, organisations avoid the loss of management time and resources entailed by time-consuming and expensive investigations. In the past, the introduction of such programs in the pharmacy, metal-working and insurance industries has resulted in NMa ending its investigation of prohibited conduct.

Objective

The main objective of a compliance program is to promote compliance with competition rules in an organisation. This is primarily achieved by giving more internal publicity to the applicable rules and risks. Employees can also be instructed on how to recognise situations in which action can be taken against restraints of trade by other market parties, such as suppliers or competitors. Organisations must also ensure that agreements and arrangements are structured to minimise the risk of violation. It is advisable to instruct employees to avoid the use of any wording in documents and correspondence that may lead to an investigation by NMa or the Commission. Employees also need to know how to deal with correspondence, documents or advice exchanged with an attorney or in-house lawyer. These documents are usually legally privileged. An organisation should also inform its employees about their rights and obligations in the event of a company visit by one of the competition authorities. For example, they must co-operate with an investigation but are not required to answer questions that might incriminate themselves or the organisation.

Fixed components

NMa has announced that an effective compliance program must consist of several fixed components, the most important of which is education. Employees must have sufficient basic knowledge of competition regulations and that knowledge must be continually updated. This can be achieved, for example, by organising an internal workshop each year. It is also important to introduce a control system to the organisation. This is usually achieved by appointing a compliance officer, often an in-house lawyer, responsible for actively monitoring compliance with competition rules and acting as a source of information for employees (anonymously, if necessary).

An effective compliance program also requires sanctions on violation of the rules. Employees must formally declare that they will observe the applicable regulations and will report any violations internally, or face disciplinary measures. Another obligatory component is that restraints of trade, if discovered, must immediately be terminated. Contact with competitors who are known to have violated regulations must also be ended.

Extra components

Several components can be added to a compliance program to protect an organisation against the violation of competition rules more effectively. For example, a risk analysis of an organisation can be made by a review of its contracts and correspondence.

Employees can also be obliged to observe specific rules of conduct. An example is the ‘ten golden rules’ that employees must follow when in contact with market parties. These rules of conduct can be recorded in employment contracts or standing employment conditions. Employees can be required to answer several on the applicable regulations when entering the company’s service or on an annual basis. Such a ‘Highway Code’ examination can, of course, also be taken electronically. It is also possible, after an organisation has introduced a compliance program and risk analysis, to obtain a positive recommendation by competition authorities that an organisation complies with current regulations.

External advice

Organisations can draw up their own compliance programs. However, it is usually advisable to engage an external expert, particularly in light of the obligatory training of employees and the organisation’s risk analysis, if any. Employees do not usually have sufficiently detailed knowledge of competition law. There is also the risk that employees are not able to form a sufficiently objective opinion on the risks in their organisation and companies often do not have sufficient capacity to make an employee available to set up such a program. An external expert is usually cheaper because they can work more effectively and efficiently, allowing employees to focus on their key tasks.

Time and costs

The introduction of a compliance program need not take a great deal of time or money. Programs can often be introduced at an organisation in a period of one month. Naturally, that will depend on the form chosen. Boekel De Nerée will be pleased to advise on how to set up or amend a program that best suits a specific organisation.

Boekel De Nerée is a leading independent Dutch law firm of advocaten and civil law notaries.

Based in Amsterdam, it offers specialist advice to clients in a wide range of industries. Its corporate practice includes an Anglo-American advisory group specifically geared to serving the interests of clients from English-speaking parts of the world, providing clients with a peace of mind when dealing with matters in the Netherlands jurisdiction.

www.boekeldeneree.com

The threat from modern methods of communication is that the potential damage to an individual, company or brand’s reputation is fast and global. As international companies and their brands grow, so does the need for a trusted reputation and the need to protect the brand. The speed at which information travels, especially in this internet age, means that damage to reputations can be swift and far-reaching. Clients doing business worldwide need advice on an international scale. A media crisis affecting a brand’s product in Spain can rapidly spread online through the EMEA region, or even globally, and can then be picked up by the mainstream media in newspaper articles across many different countries. Having a proactive cross-border media strategy is a vital element in damage control.

An internationally renowned client would do well to know the details of the approaches of different jurisdictions to reputation protection, or at least have access to someone who does. It may be that their interests are better protected by the laws of another jurisdiction. This is not meant to advocate forum shopping, but to promote a sophisticated and intelligent attitude to reputation protection. A defamatory article concerning a client published on a French website can be dealt with from the UK, as it is ‘published’ here. However, it would be much faster, less expensive and certainly more subtle to use the droit de réponse procedure in France.

One of the best methods is to have instant access to the appropriate advisers, who have in-depth knowledge of the law of that country as it relates to reputation protection, and how best to use it: a little black book of reputation protection specialists around the world, available at a moment’s notice. Schillings has an established and trusted network of such lawyers, and has acted as the single point of contact to manage multi-regional threats to reputation and ensuing litigation. This allows clients to outsource the inevitable time and resources that would be required to manage such an eventuality to people who know what to do and, most importantly, who to call.

Acting swiftly and keeping ahead of the latest developments is essential in a crisis scenario. Having access to this efficient pan-European resource can make all the difference in providing a fast solution, while allowing the in-house legal team to concentrate on other matters and the communications teams to work on the positive messages to help limit the damage to the corporate or brand reputation.

GLOBAL THREATS TO REPUTATION

Modern communication is international and instantaneous. As such, the potential for damage is immense. The internet has completely changed the battleground, and it is constantly evolving. Online news, Facebook, blogs and Twitter all contribute to the dissemination of information, and if that information is harmful the effect can be devastating. A disgruntled employee or dissatisfied customer only has to post one negative comment on a backstreet blog for it to become a raging fire in the mainstream press. The need for news, 24/7, also results in journalists churning out unresearched articles to meet increasingly unrealistic deadlines and demands. This practice is referred to as ‘churnalism’. Facebook, blogs and Twitter are the first port of call for many journalists, scouring the sites for any signs of a story.

As modern communication knows no borders or boundaries, and there is no international charter on reputation protection, corporates are confined to the laws of each country to seek to protect a reputation, and each country’s laws are different (as illustrated in the case study on p57). However, this is not as much of a nightmare as it sounds. While each jurisdiction’s law, and application of the law, differs, so do the options and opportunities for protecting reputations.

A EUROPEAN SOLUTION

Right of reply

In France, criminal libel law offers a droit de réponse, which provides that the record must be set straight within months, with the defamer getting a criminal record and being obliged to publish a prompt and appropriate retraction. Defendants are only afforded three months’ notice to appear before a tribunal, and have just ten days from receiving that notice to file evidence in defence if they want to assert that the statement is true and to provide a list of witnesses that they intend to call. If the evidence and list is not filed within the ten days, the evidence will not be admitted and the witnesses will not be heard. Hearings are brief, generally lasting less than a day.

In England, there is no right of response. Defamation proceedings must be issued to oblige a defendant to set the record straight. Defamation proceedings can be long (generally 18 months) and expensive, and result, if successful, in a judgment clearing the claimant’s name and an award of damages and costs. The court cannot compel the defendant to publish an apology or retraction. What sets England apart is the amount of damages awarded, which are usually much higher than the amounts awarded by European courts.

Injunctions

You cannot, yet, prevent the publication of defamatory material in the UK, following Bonnard v Perryman [1891]. Damages are perceived to be an adequate remedy. Reynolds v Times Newspapers Ltd & ors [1999] (a case that established a defence for responsible journalism) outlined principles that unsettled publishers. The questions raised were:

• What is the urgency?
• Who are your sources?
• What are the precise allegations?

This is a very effective tool to tone down, and even prevent, the publication of defamatory allegations.

Contrast this with Germany, where injunctions are commonly used to restrain the media from repeating allegedly false and defamatory reports. Injunctions to prevent the first publication of a possibly defamatory statement are rarely ever issued because of the difficulty that claimants face in substantiating the contents of the prospective statement. An injunction can be permanent, through final judgment, or temporary, through an inhibitory order pending litigation. Injunctive relief is available where:

1. a claimant can prove that the defamatory statement is untrue; and
2. the defendant fails to meet the burden of showing that they have conformed to the duty to investigate the facts.

Who to sue

In France, under the rules of the press, each media organisation nominates a person who is responsible for statements published by that organisation. The directeur de la publication is the one who is sued, personally, in the event that those statements are defamatory. France operates a ‘cascading’ system of responsibility, first in line being the directeur de la publication who assumes full responsibility for their team. This allows for easier identification of the person against whom proceedings should be initiated. A similar system operates in Spain and Italy. In England, you can sue anyone responsible for publishing the defamatory statement, including the author, editor, publisher and even, in certain circumstances, the distributor.

A frequent conundrum is how to approach the anonymous blogger posting defamatory material on a website. In Spain, the internet protocol (IP) address of the author is protected by data protection laws. In France, as in this country, you can apply to court for an order that the internet service provider (ISP) reveals the individual’s details. In England, the ISP is treated as a publisher of the defamatory statement and is the usual port of call. Aside from the traditional defences of justification, fair comment, qualified privilege and absolute privilege, an additional defence is available under s1 of the Defamation Act 1996 if a person can prove that:

1. they were not the author, editor or publisher of the statement complained of;
2. they took reasonable care in relation to its publication; and
3. they did not know and had no reason to believe that what they did caused or contributed to the publication of a defamatory statement.

In Europe, the Electronic Commerce (EC Directive) Regulations 2002 define the circumstances in which internet intermediaries (including ISPs) can be held liable for material hosted, cached or carried by them. In brief, the Regulations give immunity from liability to internet intermediaries who act as ‘mere conduits’ and qualified immunity to internet intermediaries who act as ‘cachers’. To qualify for this immunity, cachers must act in accordance with industry standards and must have immediately removed material on receipt of a complaint. The Regulations also give an even more qualified immunity to internet intermediaries who act as hosts. Again, this is dependent on the host immediately removing material on receipt of a complaint.

Where to sue

A defamation action can only be issued in the UK if there has been publication in the jurisdiction. If the newspaper or manuscript was not available in the UK, no claim could be brought. The internet has radically changed this. Under UK libel law, the tort is committed in the place where the publication is received by the hearer, reader or viewer. Therefore where material is posted on a blog in France, but accessed by a person in England, the tort is committed in England (see Dow Jones & Co Inc v Gutnick [2002]) .

In Fiona Shevill & ors v Presse Alliance SA (convention on jurisdiction and the enforcement of judgments)[1995] the European Court of Justice (ECJ) held that a party seeking compensation can sue in a state where they suffered direct damage. In Shevill, a person resident in England claimed compensation for an article published in a French magazine. The ECJ considered whether the ‘place where the damaging event took place’ could be every location where the allegedly insulting publication was circulated or whether jurisdiction can only be conferred on the courts of the state in which the publisher has its registered office. The ECJ held that the victim of damage to honour and reputation can bring a claim before the courts of every single state in which the insulting statement was circulated. This principle applies only to damage sustained in the particular state. Compensation for all damage sustained can only be brought in the courts of the state where the publisher has its registered office.

Case Study

In a recent example, an international client encountered an issue with a journalist from a national newspaper in Switzerland. The journalist contacted the client’s local office in Zurich with a series of questions, which all seemed to point to an allegation that the client was insolvent. The allegation was entirely without foundation and, if published, would be extremely damaging to the client’s business worldwide. The local office called the head office, who then called Schillings. Schillings contacted a Zurich law firm, well versed in Swiss media law and reputation management. The Swiss lawyer wrote to the journalist, editor and in-house legal team of the regional newspaper, reminding them of their responsibilities, both legal and journalistic, under Swiss law, and warning them that any deviation would be met with swift legal action. Schillings contacted lawyers in several other European jurisdictions where the client had a significant presence, to warn them of the potential of a similar threat arising in those countries. After an initial and brief resistance, the Swiss newspaper undertook not to publish the article and the story disappeared. It was not the international catastrophe that the client had feared. However, if it had ended down that route, the client would, at least, have been prepared.

 

European approach to defamation law

 England

English defamation law is divided between libel and slander. If the publication is made in a permanent form – eg in a letter, on a billboard, on a blog – it is libel. If it is made in some transient form – eg it is spoken or an instant message – it is slander. The limitation period is one year from the date of the defamatory statement. The claimant must prove that the statement is defamatory, ie that it damages their reputation, and it is for the defendant to prove that the words are:

1. a) true;
2. b) fair comment; or
3. c) made on a privileged occasion (absolute or qualified).

Defamation actions, which are brought in the civil court, are conducted before a jury, unless there will be a prolonged examination of documents, in which case it is tried by judge alone.

France

In France, unlike the UK, there is no distinction between libel and slander. The limitation period is very short – only three months starting from date that the defamatory material was first published. The defences are:

1. a) justification;
2. b) good faith;
3. c) privilege/immunity; and
4. d) the defamatory material was an expression of an opinion, not fact.

Defamation is a criminal offence in France, actionable in civil and criminal courts, and tried by judge alone.

Germany

In Germany, libel includes statements in verbal, written or other form that injure a person’s reputation. The limitation period for bringing a claim is three years after the end of the year when the defamatory material was published. The defences are:

1. a) the libel was a statement of opinion;
2. b) it was in ‘fulfilment of journalistic diligence and carefulness’;
3. c) that a false allegation of fact may be justified if the maker of statement has acted ‘in the pursuit of legitimate interests’; and
4. d) fair comment on a matter of public interest.

Like the UK, the burden of proof is on the defendant.

Spain

In Spain, there is a distinction between libel and slander. Libel is defined as an imputation of a crime made with knowledge of its falsehood or rash disregard for truth. Slander is an act or expression that harms the dignity of another person, discredits their reputation, or undermines their self-esteem. Defamation is both a criminal and civil offence. Slander is punishable by a prison term of between six months and two years, and a fine; libel is punishable by a fine. The principal defence is whether the statement was true. Unlike the UK, the claimant bears the burden of proof and must establish elements of the offence. However, the defendant has the burden of proving that the defamatory imputation is true and that there was no willful misconduct.

Health, safety and environmental management is increasingly at the top of the corporate agenda. With many companies putting the environment and safety at the heart of their corporate social responsibility policy, the consequences of falling foul of the law are becoming all the more significant, not just in terms of financial liabilities but, more importantly, in relation to brand reputation. While consistency of approach to sentencing remains a problem for everyone who practices in the field of health and safety, the courts are increasingly imposing penalties for offences in this area. Environmental penalties are also on the increase and a convergence of approach is beginning to develop in the principles of sentencing for health, safety and environmental offences. There are two recent developments that anyone concerned with the management, governance or brand protection of a company should be aware of. This article looks at Sentencing Guidelines Council (SGC) guidelines (the Guidelines) on corporate manslaughter, and health and safety offences causing death, specifically in relation to the Court of Appeal decision in the Environment Agency prosecution, R v Thames Water Utilities Ltd [2010].

SGC guidance

On 9 February 2010 the SGC issued its long-awaited guidelines. The mooted proposal of linking fines to turnover was not adopted. The first point to note is that the Guidelines only apply to the sentencing of organisations and do not cover individuals. The second, more significant, point is that the Guidelines apply retrospectively and will affect organisations sentenced after 15 February 2010, even if the offence for which they are sentenced was committed before the Guidelines took effect.

The Guidelines set out the factors likely to affect seriousness, and what will be considered aggravating and mitigating features of the offence. They recommend that the seriousness of the offence should ordinarily be assessed by asking the following questions.

How foreseeable was serious injury?

The more foreseeable the injury, the more serious the offence will be.

How far short of the applicable standard did the defendant fall?

This looks at the risk gap. The further below the requisite standard, the more serious the offence will be. Prosecuting authorities are increasingly referring to Heath and Safety Executive (HSE) guidance, and industry-specific publications, in demonstrating how far short of the required standard defendants have fallen.

How common is this kind of breach in this organisation?

If it was an isolated incident, the offence would be less serious than if it was indicative of a systemic failing or widespread non-compliance. It is, in effect, an invitation to the sentencing court to look at the health and safety culture of an organisation.

How far up the organisation does the breach go?

Usually, the higher up the organisation that responsibility for the breach goes, the more serious the offence will be. However, it would be wrong for companies to drive down health and safety management to a lower level. Companies should ensure that there are proper governance systems in place so that health and safety is given appropriate priority and resources, and that there is buy-in from those at the highest level of the organisation.

Aggravating features

The following factors will constitute aggravating features and will lead to a more substantial penalty being imposed:

1. The occurrence of more than one death or grave personal injury.
2. Failure to heed warnings or advice, whether from officials of organisations, such as the HSE, or by employees (especially health and safety representatives) or other persons, or to respond appropriately to near misses arising in similar circumstances.
3. Cost cutting at the expense of safety.
4. Deliberate failure to obtain or comply with relevant licences that involve some degree of control, assessment or observation by independent authorities with responsibility for health and safety.
5. Injury to vulnerable persons.

With the exception of points 4) and 5), the aggravating features listed above reflect those identified in previous cases dealing with principles of sentencing in health and safety offences, primarily R v F Howe & Son (Engineers) Ltd [1998]. Vulnerable persons are defined as those who are susceptible to exploitation, such as young or immigrant workers.

Mitigating features

The mitigating features set out in the Guidelines are:

1. A prompt acceptance of responsibility.
2. A high level of co-operation with the investigation, which goes beyond that expected by the court.
3. Genuine efforts to remedy the defect.
4. A good health and safety record.
5. A responsible attitude to health and safety, such as the commissioning of expert advice, or the consultation of employees or others affected by the organisation’s activities.

The mitigating and aggravating features set out above are not exhaustive, and other considerations may emerge from the facts of specific cases.

Level of fines

The new guidelines go further than previous guidance in that they suggest appropriate starting points for sentences. For corporate manslaughter, the Guidelines state that:

‘The appropriate fine will seldom be less than £500,000 and may be measured in millions of pounds.’

In health and safety offences, where the offence is shown to have caused death, the Guidelines state that:

‘The appropriate fine will seldom be less than £100,000 and may be measured in hundreds of thousands of pounds or more.’

When sentencing, the courts will have to take account of the resources of a corporate defendant and its ability to pay. Credit will also be given for guilty pleas. The Guidelines also provide that defendants ought ordinarily be ordered to pay properly incurred costs of the prosecution, subject to their ability to pay. This includes legal and investigative costs, which in major investigations can amount to hundreds of thousands of pounds, if not more.

Non-Financial Penalties

On conviction for an offence of corporate manslaughter, a court may order the publication of:

• the fact of conviction;
• the specified particulars of the offence;
• the amount of any fine; and
• the terms of any remedial order.

The Guidelines state that a publicity order:

‘Should ordinarily be imposed in a case of corporate manslaughter. The object is deterrence and punishment.’

Given the potential damage to brand reputation of the publicity surrounding a conviction, the impact of a publicity order should not be underestimated. Conversely, remedial orders that are available both for corporate manslaughter and offences under health and safety legislation are unlikely to be frequently used. Section 42 of the Health and Safety at Work etc Act 1974 requires remedial measures to be undertaken but it is a remedy that is rarely used. The reality is that appropriate remedial measures are likely to have been taken by the time an organisation comes to be sentenced and the failure to do so will have a significant adverse impact on efforts to mitigate the damage to a company.

R v Thames Water Utilities Ltd [2010]

Thames Water was a decision of the Court of Appeal on an appeal against sentence by Thames Water Utilities Ltd (TWUL). Judgment was handed down on 19 February 2010.

Background

Briefly, the facts were that sodium hypochlorite, commonly known as bleach, was being used to clean effluent tanks. Due to a failure to close the valve, 1600 litres of sodium hypochlorite was flushed out into the River Wandle and one of its tributaries. TWUL pleaded guilty to an offence of causing polluting matters to enter controlled waters contrary to s85(1) of the Water Resources Act 1991. TWUL was fined £125,000 and ordered to pay £21,335.19 towards prosecution costs in the Crown Court at Croydon. TWUL appealed the sentence before the Court of Appeal.

One of the striking features of Thames Water was the remedial measures taken by TWUL. The pollution had had a catastrophic affect on the aquatic life in the waters. However, in the aftermath of the incident TWUL pledged £500,000 in compensation to restore the river, covering local education projects, compensation for local angling clubs, the costs of restocking and an ongoing survey to assess damage to the river’s ecology. TWUL also provided core funding for the Wandle Trust, which included support for the cost of an employee responsible for raising additional project funding to deliver access and habitat improvements along the length of the river, and a restoration fund to support local projects to improve the river environment.

Court of Appeal Decision

The Court of Appeal was plainly swayed by the remedial measures undertaken by TWUL, but recognised that there could be no question of a wealthy defendant buying off an appropriate penalty. The Court went on to consider the principles that should be applied in sentencing for environmental offences. It recognised that there was ‘clearly an overlap with the sentencing principles applicable to health and safety cases’. This statement is helpful for those who have responsibility, as is increasingly the case, for both environmental and health and safety management. Significantly, the Court also recognised that:

‘Punishment, deterrence (thereby protecting the environment and the public in the future) and reparation are all particularly important purposes of sentence in this type of case.’

Many potentially aggravating features were identified, including:

• Pollutants that are noxious, widespread or likely to have long-lasting affects.
• Human health, animal health or flora being adversely affected, especially where protected species or a site designated for nature is affected.
• The requirement of an extensive clean-up, site restoration or animal rehabilitation operation.
• Other lawful activities being prevented or significantly interfered with.
• The extent to which the defendant falls short of its duty and, as such, its degree of culpability.
• The deliberate breach of a duty to maximise profit.
• The omission of proper precautions to make or save money, or to gain a competitive advantage.
• Evidence of repetition, or failure to heed advice, caution, concerns or warnings from the regulatory authorities, employees or others.
• A poor attitude and/or response after the event.
• Previous convictions.

Mitigating features were identified as :

• A good record of compliance with the law.
• A good attitude and/or response after the event, including prompt reporting of the offence, co-operation with the enforcement authorities, the taking of prompt and effective measures to rectify any failures, and the payment of compensation.
• A timely admission of guilt and a plea of guilty at an early stage.

The Court of Appeal gave very significant weight to the reparation made and pledged by TWUL, and reduced the fine from £125,000 to £50,000. It is apparent from the judgment that the reparation was a very significant factor indeed. There was a recognition that it is often difficult for courts to make compensation orders and that the reparation exceeded any punishment that the Court could reasonably have imposed. Accordingly, the need for the deterrent element of the penalty was eliminated.

What should companies do to protect themselves?

All companies should have in place adequate and dynamic systems for the management of health, safety and environmental issues based on risk assessment and review. The way in which these issues are managed should reflect best governance and practice. A critical incident policy that allows a company to respond to an incident efficiently and reduce potential consequences is essential. In environmental incidents, very careful consideration should be given to putting in place appropriate restorative or remedial measures at an early stage. It should be noted that TWUL had numerous previous convictions. Where an organisation has a good record and no previous convictions, prompt and wide-ranging remedial measures might be sufficient to persuade the regulatory authorities that prosecution is not in the public interest and should be avoided. Such action is also persuasive mitigation.

Comment

Companies that have appropriate systems in place, and pro-actively manage health, safety and environmental issues, will be best placed to avoid prosecution or mitigate its consequences. Organisations that do not give sufficient priority to the management of these issues risk the substantial consequences of prosecution, in terms of penalties imposed by the court, the significant management time and disruption involved in a formal investigation, and, above all, irrevocable damage to reputation.

There have been several significant developments concerning examinerships in the Irish jurisdication recently. In Re Vantive Holdings & ors [2009], the criteria laid down in Vantive Holdings’ applications for the appointment of an examiner have raised the evidential bar significantly. Applicants now have to ensure that they are armed with a very credible Independent Accountant’s Report, based on reliable projections and assumptions, before the High Court will consider exercising its discretion to appoint an examiner. In Missford Ltd t/a Residence Members Club [2010], Kelly J made it clear that the use of money deducted by way of VAT and PAYE or Pay Related Social Insurance (PRSI) as working capital was a major factor in influencing the court not to exercise its discretion in favour of appointing an examiner.

More recently, judgments of the Supreme Court and the High Court in Linen Supply of Ireland Ltd v Companies Acts [2010] have clarified how certain provisions of the Companies (Amendment) Act 1990 (the 1990 Act) are to be interpreted in so far as leases are concerned.

Repudiation of leases

The law in relation to the repudiation or disclaimer of contracts (including leases), in the context of examinership, is governed by s20 and s9 (s9 brings in s290 of the Companies Act 1963) of the 1990 Act.

Section 20 provides:

1. where proposals for a compromise or scheme of arrangement are to be formulated in relation to a company, the company may, subject to the approval of the court, affirm or repudiate any contract under which some element of performance (other than payment) remains to be rendered both by the company and the other contracting party or parties;
2. any person who suffers loss or damage as a result of such repudiation shall stand as an unsecured creditor for the amount of such loss or damage;
3. to facilitate the formulation, consideration or confirmation of a scheme of arrangement, the court may hold a hearing and make an order determining the amount of any such loss or damage, and the amount so determined shall be due by the company to the creditor as a judgment debt; [and]

…

1. where the court approves the affirmation or repudiation of a contract under the section, it may, in giving such approval, make such orders as it thinks fit for the purposes of giving full effect to its approval, including orders as to notice to, or declaring the rights of, any party affected by such affirmation or repudiation.’

Section 9 affords a less direct means to disclaim a lease, allowing an examiner to apply to court for an order that the examiner shall have all or any of the powers that they would have if they were a liquidator appointed by the court. This opens up the possibility of a section 290 disclaimer application. However, in Fate Park Ltd & ors v Companies Acts [2009], the court held that an examiner will only be given the powers of an official liquidator if an order has made pursuant to s9(1), vesting in the examiner some or all of the functions or powers vested in, or exercisable by, the directors. Therefore, it is not a stand-alone order.

In Linen Supply, the Supreme Court had to rule on an appeal by the company against the decision of the High Court that it was not possible to repudiate a lease under s20. The High Court was of the view that s25(b) of the 1990 Act was inconsistent with the proposition that a company could repudiate a lease under s20 of the 1990 Act. Section 25(b) essentially states that an examiner’s proposals shall not allow for a reduction in rent that falls to be paid after the compromise or scheme of arrangement would take effect.

The majority of the Supreme Court (Hardiman J dissenting) held that the company could repudiate a lease pursuant to s20 of the 1990 Act. In doing so, the court accepted that:

1. leases fall within the definition of ‘contract’ as contained within s20;
2. s25(b) of the 1990 Act applies to situations where a scheme of arrangement has already been formulated and did not prohibit the repudiation of a lease pursuant to s20, prior to the formulation of such a scheme; and
3. positive and negative covenants contained in commercial leases relating to user, repair or quiet enjoyment, are sufficient to constitute the non-monetary element of performance that is required to be outstanding on behalf of both parties to invoke the jurisdiction of s20. (This is where Hardiman J dissented, saying that he accepted that a lease is a ‘contract’ for the purposes of the section, but that covenants of quiet enjoyment or insurance are not obligations requiring to be performed by both landlord and tenant.)

Impairment of sums payable to landlords in respect of loss of rent and/or delapidations post-repudiation

Following on from the Supreme Court decision in Linen Supply, the High Court permitted the company to repudiate several leases entered into by the company and the examiner-formulated proposals that were opposed by numerous landlord creditors. Their main objection was that the damages due to them should not be subject to impairment under the 1990 Act and that the court had no jurisdiction to confirm the scheme that makes provision for impairment of the sums due by way of future rent.

The parties had agreed the sums due in respect of loss or rent and/or dilapidations that arose in the event of the court making an order pursuant to s20, permitting a repudiation. There were five leases involved and the damages figures ranged from €500,000 to €1.1m approximately. (These figures do not include loss of rent during the course of the examinership, as the court directed it should be paid in full.)

The landlords complained that under the scheme, they would only receive 30% of the figure agreed as the damages that follow the repudiation of the leases. They argued that a scheme is only intended to apply to debts due at the date of presentation of the petition (none, in the case of these landlords). They contended that post-petition liabilities (including a judgment debt against the company following its repudiation of a lease) can only be written down if there is express statutory authority to this affect (there is none).

McGovern J held that the landlords were prospective creditors at the date of commencement of the examinership. While they also argued that their claim was not a claim for unpaid rent, but for damages arising on the repudiation of their leases, in McGovern J’s view this did not alter their status as prospective creditors. He held that the intent of the legislation was clear to the effect that a court could appoint an examiner who may present a scheme that impairs the rights of a creditor, including a prospective creditor.

conclusion

Leases may now be disclaimed on application and the resulting damages can be impaired under a scheme of arrangement.

These decisions make life easier for the examiner and the company once court protection is granted. Whether the decision is fair to landlords is another matter entirely, particularly where they have repayment obligations to their own funders based on a certain income stream.

As China speeds towards becoming an innovation-based economy, foreign businesses have no choice but to engage with the Chinese intellectual property (IP) system. However, uncertainties in the efficacy of that system mean that due diligence is more vital than ever for IP rights holders.

The IP landscape in Asia, particularly China, is changing. On one side of the equation, foreign businesses are moving to invest in real research and development in China, and are consequently moving from filing in Asia only when there is a key strategic need to adopting a ‘must file in Asia’ strategy for all major developments. On the other side of the equation is China’s unprecedented commitment to becoming an innovation-based economy by 2020, as a consequence of which domestic research and development, and patent filings, are set to grow significantly. Continue reading “China’s changing IP landscape”

Although the courts are often at pains to point out that insurance law is merely a subset of general contract law and should be applied without any concession or discrimination simply because the subject matter is insurance, there are, in fact, several aspects that are peculiar to insurance. An understanding of these anomalies will assist in penetrating the sometimes arcane depths of insurance law. They include:

• the payment of brokerage and premium;
• secret commissions;
• the status of warranties and conditions;
• the role of the broker;
• consequential loss;
• mitigation;
• the Block Exemption Regulation; and
• the courts’ attitude towards insurers in the interpretation of their contracts.

Continue reading “Anomalies of insurance law”