Welcome to Private Matters, our bimonthly update keeping you informed about the issues that affect our private clients. Whatever the subject, at Mishcon de Reya we guard fiercely our clients' interests, making their problems our own, so that they can feel confident we will solve them quickly and professionally.
This month's edition focuses on art, tax, divorce, privacy and fraud.
Response to UK Government consultation on Capital Gains Tax (CGT) for non-UK residents
Mishcon de Reya has responded to the recent UK government consultation which aims to put non-residents in the same position as UK residents from April 2015 when it comes to UK residential property. The full consultation paper can be found here.
The new CGT charge on non-residents would apply to all UK residential properties of any value, whether occupied or rented out, owned by individuals, partnerships, trusts or companies.
The radical changes in the consultation also remove the ability of an individual with two or more homes to make an election with HMRC for the purposes of the CGT main residence exemption. Instead, HMRC would determine an individual's main residence by looking at the facts or by a statutory day counting rule. This impacts UK residents who were not the target of the consultation.
We cover the following issues in our consultation response
- we question why the government would keep the CGT charge on properties caught by the annual tax on enveloped dwellings (ATED) beyond April 2015, as all non-resident companies would be within the new CGT regime anyway;
- we propose alternatives to the wholesale removal of the main residence election; and
- we seek confirmation of the position with regard to main residence relief and non-resident trustees.
For more information please contact Andrew Goldstone
Reputation must have been seriously harmed: Distress is not enough for defamation claimants
Last month, judgment was handed down in Cooke and Anor v MGN, the first case in which the interpretation of the new Defamation Act 2013 (in force since 1 January 2014) has come before the courts. In the spotlight was the new requirement that to found a defamation claim, the offending publication must have caused, or be likely to cause, "serious harm" to the claimant. No serious harm, no defamation claim.
In this case, the Sunday Mirror published a front page and page 4 and 5 feature on landlords who receive rental payments from the residents of the street featured on the Channel 4 programme Benefits Street. The story on pages 1 and 4 centred around one named landlord "cashing in" on taxpayer's money, whose properties were alleged to be "damp and mouldy" and who consigned residents to "appalling conditions". On page 5 the story continued and another landlord was anonymously identified as a "wealthy dentist", though it was not alleged that his homes were substandard. Finally, in one paragraph on page 5, the article mentioned that three homes in the road were owned by the claimant (a Housing Association), whose CEO – whose name, age and salary were listed – lives in a large house in Stroud, Gloucestershire. Again, there was no suggestion that those properties were substandard.
The claimants – the Housing Association and its CEO – did not dispute the accuracy of the story, but they claimed that by putting them in a "rogue's gallery" of landlords, the paragraph referring to them in context is defamatory.
The Sunday Mirror published a page 2 apology the following Sunday which the judge regarded as sufficient to eradicate or minimise any unfavourable impression of the claimants created in the mind of the reasonable reader by the reference to them the previous week.
At the preliminary issue hearing, witness statements claiming that serious harm had been suffered were submitted by the CEO and by the Governance and Contracts Director and Company Secretary of the Housing Association. As they were not a body trading for profit, the Housing Association did not have to prove "serious financial loss", just serious harm. However, the claimants were unable to adduce evidence that any specific individual had as a result of reading the article thought less of them, or of any contracts lost as a consequence of the story.
Concluding that there was no specific evidence that the article had caused serious harm and that such serious harm cannot be inferred, the judge held that the claimants had failed to show that it is more likely than not to cause serious harm to their reputations in the future. Without satisfying the serious harm hurdle, the defamation claim could not proceed.
Some clarity was given on elements of the serious harm test. The judge confirmed that the date from which one looks backwards to see whether serious harm has been caused, or forwards to see whether it is likely to be caused, is the date on which the claim is issued. Furthermore, that "likely" serious harm will generally only be established where the court is satisfied that it is more probable than not that it will occur in the future. Furthermore, the judgment emphasised that a timely, prominent, sufficient apology is a factor weighing in the defendant's favour in assessing whether the harm suffered by the claimant can be evaluated as "serious".
The judge agreed that under the new Act, the bar had been raised for a defamation claimant. He said that while some statements are so obviously likely to cause serious harm to a person's reputation that likelihood can be inferred (citing as examples, allegations of terrorism or paedophilia), others less serious may require hard evidence to satisfy the serious harm test, implying that in those circumstances, commissioning an opinion poll survey or producing a selection of comments from the blogosphere may be evidential exercises of assistance to the claimant.
It is important to reassure victims of defamation that every case turns on its own facts. The claimants in this case were not the focus of the offending publication and were concerned about contamination by association despite there being no specific allegations against them and having no evidence of consequential disadvantage. This judgment should not deter or intimidate claimants with a strong defamation claim.
For more information, please contact Ramona Mehta.
Reform of matrimonial finance laws: Flexibility vs. certainty
July saw the second reading of Baroness Deech's Bill which recommends wholesale reform of the existing matrimonial finance laws. Those existing laws were first introduced in the 1970s. The last time they were debated by Parliament was during the early 1980s. Since then, the law has been developed in reaction to societal change by the judiciary, rather than our elected representatives.
Whilst we agree that it is time Parliament debated the issue of financial provision following divorce, we believe that the proposals contained in Baroness Deech's draft Bill are manifestly unfair.
As we await the Government's response to the Law Commissions' recommendations for law reform in this area, this latest blog explains why we feel Baroness Deech's reforms miss the mark, and asks the question: can you have a system of matrimonial finance law that is both certain and fair? And if so, what would it look like?
For the last 30 years, judicial developments in the law on financial provision on divorce have been driven by societal change. Marriage is now viewed as an equal partnership, with no distinction made between the contribution of the home maker compared to the wealth generator.
This change in emphasis has seen increasingly generous financial awards being made by the courts following divorce. This, in turn, has led to London becoming the divorce destination of choice for the world's wealthy.
One could be forgiven for believing that Baroness Deech's proposals have also been made in response to societal change – namely, the increased incidence of dual income households where both parents are in employment. This appears to have influenced her recommendation, in particular, that lifetime spousal maintenance should come to an end and the period during which spousal maintenance is paid should be significantly curtailed.
However, empirical evidence confirms that there remains a significant pay gap between men and women. Furthermore, Baroness Deech's proposal fails to recognise the significant economic disadvantage faced by mothers who return to work following a career break taken to raise a family.
Rather than responding to societal change, Baroness Deech's Bill anticipates a future where there is neither a gender pay gap nor a reduction in earning potential as a result of a career break. This begs the question: should family law react to societal change or pre-empt it? Deech's proposals are certainly ahead of where society is currently in terms of the ability of wives to achieve financial independence from their husbands.
At the other end of the financial scale, the recent removal of legal aid from most matrimonial cases has left families struggling to resolve disputes whose consequences will affect them and their children for years to come. The family courts system is at breaking point due in part to increasing numbers of unrepresented litigants struggling with an archaic system and arcane laws.
Clearly, change is needed. We have a choice between certainty of outcome, or the flexibility to deal fairly with individual families. The default position we are left with at present is flexibility, but this means uncertainty and consequential significant pressure on the Courts and the legal system.
In February this year, The Law Commission recommended a set of measures to make it easier for couples to manage their financial affairs on divorce or at the end of a civil partnership. These included:
- guidance to help couples assess and agree their financial needs
- an assessment of the feasibility of producing a formula or narrative to help couples understand the parameters of any likely financial outcome, and
- “qualifying nuptial agreements” to allow couples to decide how their assets should be shared if they separate.
Again, we welcome this attempt to encourage debate. However, as we pointed out at the time, the proposal for written guidance or a formula to help people agree financial settlements may provide a ball park in which to play, but offers no certainty that the rules of the game will be any clearer. Written guidance and formulae still leave significant scope for dispute. We have our doubts that they will reduce the pressure on the courts sufficiently to make any significant difference.
For more information, please contact Sandra Davis.
Business bill introduces a brave new world for corporate disclosure and accountability
The government has introduced to Parliament its Small Business, Enterprise and Employment Bill, a key focus of which is to fight corruption by increasing transparency and accountability in relation to UK corporates. If the Bill is enacted, the UK will be the first nation to introduce a public register of "people with significant control" over unquoted companies. Bearer shares and, subject to certain exceptions, corporate directors (seen by some as devices to disguise true ownership and control) will become things of the past, and directors and others who control companies will be made more accountable. There will also be a simplified regime to replace annual returns and companies will even be able to elect to satisfy current requirements to keep corporate statutory registers by making them publicly available online at Companies House.
The Bill follows the Government's confirmation in April of its intention to proceed with most of the proposals it had set out in two 2013 discussion papers: "Transparency & Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business" and "Red Tape Challenge: Company filing requirements". We reported on the proposals in the first discussion paper in our April briefings, Business owners' details to be public in a register of beneficial ownership" and "The accountable director: 'front directors' and their controllers, corporate directors and compensating creditors" and have been following the arguments both for and against reform in our Business Shapers blog. The key proposals which have made it into the bill are summarised below.
Register of people with significant control
A company will be required to keep a publicly available "register of persons with significant control over the company", to be called the "PSC register". Except in certain exceptional circumstances, the register will include information on an individual’s name, date of birth, nationality, address, and details of the nature of their control of the company.
An individual (or individuals acting together) will be a "person with significant control" if one or more conditions are met. Those conditions are, broadly: ownership of 25% of the shares in a company; the right to exercise or control the exercise of more than 25% of the voting rights in a company; the right to appoint or remove a majority of the board; and (the anti-avoidance condition) other rights to exercise significant influence or control over the company. The government will issue guidance on the last of these conditions; given its broad wording, it remains to be seen how they will interpret it and therefore how wide its scope will be. Could it even extend, for example, to veto rights in shareholders' agreements? If trustees of a trust meet any of these conditions in relation to a company and an individual has the right to exercise significant influence or control over the trust's activities, then that individual will also be a "person with significant control over the company". Both direct and indirect control will be caught: the new provisions require looking up the chain of corporate ownership to find out who are the individuals really controlling the company.
Companies will be under a duty to take reasonable steps to find out if there are any persons with significant control and identify those people. Those who know or ought reasonably to know that they are persons with significant control will also be under their own duty to disclose their status to the company, where the company itself has failed to identify them.
The Bill also introduces a right for companies to impose restrictions on the shares of persons with relevant interests with respect to that company who fail to comply with the new regime. If the restrictions are imposed, the person may not, for example, transfer his shares or exercise voting rights. There is also a right for a company to seek a court order that an interest subject to restrictions is sold. It will be interesting to see whether these provisions, designed to incentivise compliance with the new regime, might also be used as tactical tools in litigation.
The government views bearer shares as incompatible with its ambitions for corporate transparency. The Bill therefore introduces into the Companies Act a prohibition on a company issuing bearer shares, irrespective of whether a company's articles purport to authorise it to do so. There will be a transitional procedure for the cancellation of existing bearer shares or their surrender for conversion into registered shares.
As envisaged by the government's response to its consultation, there will be a requirement for all directors to be natural persons. Corporate directors will therefore be prohibited. In its response to its consultation the government had said it was considering exemptions to this general prohibition in relation to group structures including large listed companies, group structures including large private companies and charities. None of these are exempted pursuant to the revised Companies Act provisions introduced by the Bill, but the Secretary of State will have the power to make exceptions by regulation.
The Bill extends the application of the Companies Act general duties of directors, so that they will apply to shadow directors "where and to the extent that they are capable of so applying". Again, the Secretary of State will have the power to specify that certain duties are adapted for shadow directors or that certain duties do not apply.
The Bill will also allow the Secretary of State to apply to the court for a disqualification order on the grounds that a director has been convicted of certain offences overseas.
Changes to company filing requirements
Companies will no longer be required to file an annual return. They will instead be required to file at Companies House a confirmation statement to the effect that they have delivered all the information required to be delivered to the registrar for the relevant confirmation period. This can be filed when any other filing is made, but must be filed at least annually.
The Bill also amends the Companies Act so that there will no longer be a requirement to include in a company's statement of capital the amount paid up and unpaid on each share. This has been problematic for companies with a complex share capital history. In a welcome move, a company will instead be required to include in its statement of capital only the aggregate amount unpaid on the total number of shares.
Finally, the Bill amends the Companies Act so that a private company will be allowed to opt to keep on the public register held by the Registrar of Companies certain information that it currently keeps on private registers, including its register of members, register of directors, register of directors' residential addresses and register of secretaries. Private companies will also have this option in relation to their registers of persons with significant control. Much is left to delegated legislation, but if this is carefully implemented and companies take up this option, it will be the first time that live and completely up to date information identifying the shareholders of a company is publicly available at Companies House (this information can currently be up to a year out of date, depending on when the last annual return was filed).
The Bill, as drafted, will bring about significant change to UK company law and, as it passes through Parliament, we can expect continued debate as to whether increased disclosure requirements are proportionate to the benefits likely to be brought in tackling corruption and as to whether the bill will increase or decrease the UK's competitiveness as a venue to incorporate a company and do business. Even when it is enacted, there will be some way to go before all the changes become a reality, as many of the proposals depend on delegated legislation being passed and system change at Companies House.
For more information please contact Kate Higgins and Nicholas McVeigh.
Mishcon de Reya is hosting a 'Question Time' style panel debate entitled 'Corporate Ownership: Privacy v Transparency' on Tuesday 18 November 2014. A distinguished group of leaders in their fields will provide their thoughts on the proposals to put in place a public register of beneficial interests in UK companies, and to impose mandatory obligations on UK companies and beneficial owners to disclose any such interests. If you are interested in attending this event, please contact Natasha Managarova.
Lifting the shroud of anonymity: Protecting privacy and reputation online
Social media and mobile technology provide a myriad of opportunities for positive engagement with numerous audiences. But when they are used maliciously and anonymously the effect can be extremely damaging and highly disturbing. Blackmail, harassment and threats to reveal private information online, potentially to a global audience, are more distressing when perpetrated by those who try to hide their identities, whether behind hoax Twitter accounts, fake email addresses, or unregistered mobile phones. Malicious and intrusive publications online can cause significant and lasting reputational damage, as images and information dissemination across various platforms can prove almost impossible to completely remove.
Recent media reports about hacked nude images of celebrities leaked online by anonymous publishers have ignited a debate about the general public's appetite for unfettered access to sensitive information. This recent example highlights a cultural shift whereby the public increasingly demands more intrusive and intimate information about those in positions of power or celebrity. The demand is fed by paparazzi, glossy magazines and tabloid newspapers, and compounded by hackers, bloggers and online publishers, many of whom seek to gain financially from others' embarrassment and avoid the consequences of their actions by remaining anonymous.
Threatened or actual malicious publications are by no means limited to celebrities, and affect individuals and businesses across all industries. The private and financial affairs of wealthy individuals, entrepreneurs and well-known companies are ripe for public discussion and criticism, particularly if touching on the controversy of the day, be it political donations or off-shore tax structuring. The presumption that what is published is true, no matter what the source, means that negative publications can be devastating; wreaking havoc on personal and business relationships, profitability and investment opportunities.
The modern challenge is how to keep private matters truly private, how to react when disclosure is threatened or a breach occurs, and how to ensure those who cause the breach are held properly accountable. Time is often limited in our social media world, and strategic reactions must be considered and planned for, preferably in advance of any crisis happening.
* Keep confidential cards close to your chest:
Whether you are a private individual or business, or more well-known and open, it is essential to heighten efforts to keep truly sensitive and confidential information safe. This may include encrypting email and securing remote access systems, strengthening privacy settings on social media accounts, ensuring confidentiality terms in employee and other contracts, and regularly 'stress testing' areas vulnerable to abuse.
* Monitor and control your public profile:
Many individuals and corporates shy away from publicity, and have preferred to keep a low profile. Careless public connections or rash communications with the media or antagonists may undermine such attempts, however, and can leave you exposed if negative publicity occurs. Having a controlled public presence, for example by way of an informative and moderated website, is a proactive step that can help manage public perception and dilute the impact of a reputational attack.
* Prepare for a crisis:
Being unprepared in the face of attack can result in panic, delays and mistakes which will invariably escalate and exacerbate the damage caused. Time spent honestly appraising potential vulnerabilities, and planning a crisis strategy and crisis team ahead of time, pays dividends. Working through a reputation crisis simulation exercise, such as Mishcon Spotlight, will allow mistakes to be made in private, and highlight where improvements may be made before a reputational attack strikes.
* Trace and bring perpetrators to account:
Anonymous publishers may believe that their activities can go undetected, but they invariably leave evidence as to their identity online. Through strategic and forensic investigations, engagement with social media hosts and targeted disclosure applications against third parties, it is possible to piece together relevant evidence and track down aggressors so that they may be held accountable for their actions.
Any party who values their privacy and public reputation must prepare carefully and thoroughly to pre-empt and avoid damaging reputational attacks, and ensure that they have the right team in place to deal with anonymous threats or public exposure at times of crisis.
For more information, please contact Emma Woollcott, Associate, Reputation Protection and Alexandra Whiston-Dew.