Company law update

The recent case of Ilott v Williams & Ors [2013] EWCA Civ 645 served as a useful reminder of the requirements for the formation of a partnership. The Court of Appeal held that a partnership had not been formed by four individuals who had a concept for a business but no means of creating profit.

A "partnership" is defined as "the relation which subsists between persons carrying on a business in common with a view of profit" (section 1, Partnership Act 1890). This means that just having an idea or a desire to form a partnership together, does not necessarily mean that a partnership has been formed; there must be some steps taken to run the business.

The case of Khan v Miah [2000] 1 WLR 2123 clarified this position as follows: "The rule is that persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question".

Business concept

In 2008, the claimant and three other individuals decided to set up in business together. They had a concept for the business and discussed the need to acquire finance from an external investor. They discussed the need to limit their respective liabilities in relation to the business.

They managed to secure investment from BC LP, which was a limited partnership. The business was to be run through BC and the claimant and the three individuals were appointed as limited partners of BC.

The assets and liabilities of BC were later transferred to an LLP and the business was, as a result, restructured. The claimant and the three individuals became members of the LLP.

In 2009, there were disagreements between the claimant and the three individuals. The LLP board served notice of removal on the claimant.

The claimant brought a claim for his share of the profits against the other three individuals on the basis that they had all entered into a partnership together in 2008, which, in his opinion, continued to exist in conjunction with the membership of BC and the LLP (NB: the Claimant also brought claims against BC and against the LLP)

The judge found that the four individuals were not partners. The claimant appealed.

The Court of Appeal dismissed the appeal. Arden LJ upheld the decision in Khan v Miah by concluding that there must be more than a mere decision to set up a business to be a pertnership, there must also be an actual carrying on of business with a view of profit. In this case, the claimant and the three individuals had merely agreed a concept but, as they had no means of creating any profit, they had not been deemed to have done enough to be found to have commenced that business.

Further to this point, the fact that the claimant and the three individuals wanted to limit their liability in relation to the business conflicted with the concept of unlimited liability connected to a partnership.

The Court of Appeal concluded that, even if there had been a partnership, it had been dissolved on the entry on the arrangements'¨ with BC.

Directors' remuneration

Shareholders are to receive binding vote on director's remuneration under new framework laws which came into force at the beginning of '¨the month.

In the last few years newspaper have been littered with stories about directors who have'¨ been responsible for the bad management of companies benefitting from massive remuneration packages. In response to this the government '¨has been focused on reforming the way in which UK companies formulate their policies on directors' remuneration and from 1 October 2013 legislative reforms will be implemented which aim to '¨create an all encompassing framework within which executives' pay will be set, agreed '¨upon and applied.

The new regime has been introduced by the Enterprise and Regulatory Reform Act 2013 (ERRA 2013) and the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (SI 2013/1981) and it is being implemented by way of changes to Part 15 of the Companies Act 2006. It will affect all UK quoted companies.

A duty will be imposed on the board of every quoted company to prepare a directors' remuneration report for each financial year. The board must approve the report and then there'¨is a duty to send a copy of it to every member of the company, file a copy with Companies House and make it available on a company website for public view.

The directors' remuneration report will be split in two parts. The first is the forward looking Directors' Remuneration Policy (DRP). This will set out the company's future policy on directors' pay and shareholders' will have a binding vote (by way of ordinary resolution) on the proposals. Once this has been approved directors are only able to act within its scope. It is to include information on what directors will receive if they meet, exceed or miss targets and the principles on which payments for loss of office will be made. The DRP will have to be put to a shareholder vote at least once every three years.

The second part of the report is an annual report on remuneration; this should document directors' remuneration in the relevant financial year and should include the actual amounts paid to executives, presenting the link between pay and performance. It must also summarise any key decisions made in respect of remuneration policy, any major changes to the policy in the relevant year, the reason for the changes and how the policy will be implemented in the next year. This report will be subject to an advisory vote of the shareholders (by way of ordinary resolution) and although it will not be binding, directors' are encouraged to view the result as a strong signal as to whether the policy is supported or not and to take appropriate action.

Approved policies

If the directors wish to operate outside the terms of the approved policies they must first seek shareholder approval, therefore the extent of any flexibility within the policy must be given careful consideration and be precisely drafted. One area where directors' may wish to maintain some level of flexibility is in relation to the recruitment of new directors and their remuneration packages. All proposals must be set out in the DRP, including the maximum level of remuneration which can be awarded and if these policies are not sufficient it could affect a company's ability to recruit.

If the requirements imposed by the new regime are not met then it is the directors themselves who will face the consequences. Directors may be liable for fines, for example where they fail to prepare the report or fail to provide information needed to prepare the report. Where payments are made without approval they would be unenforceable, and if an unauthorised payment had already been made, the recipient would be held to be holding the monies on trust for the company. The directors who authorised the payment would also be jointly and severally liable to indemnify the company for any loss. Therefore it is vitally important that directors of all quoted companies understand their new obligations and work within the imposed framework or they may find themselves personally liable. SJ