Corporate Law Update

This week:

• The court confirms that serving legal proceedings on a service agent in accordance with a contractual requirement will be effective, even if the agent's appointment has come to an end
• The Financial Reporting Council publishes some useful frequently asked questions on the forthcoming 2018 UK Corporate Governance Code
• The European Commission publishes a draft regulation setting out the format and content of prospectuses under the EU Prospectus Regulation
• Legislation has come into force preventing contracts from imposing conditions that restrict a party to the contract from assigning sums owing to it under that contract

Service on agent may still be valid even if the agent's appointment has come to an end

The High Court has held that the lender under a series of loan notes had validly served notice on the debtor by sending the notice to the debtor’s service agent, even though the agent's appointment had come to an end.

What happened?

The Bank of New York Mellon, London Branch v Essar Steel India Limited revolved around a set of unsecured loan notes, under which Essar owed certain amounts to BNY Mellon. BNY Mellon had asked the court for a declaration of the amount due and payable.

The trust deed that created the notes stated that Essar had irrevocably appointed Law Debenture to receive notice of any legal proceedings in England on its behalf. This kind of provision, often called a “service agent” clause, creates a place in England where one party to a contract can serve proceedings on another party. This avoids the significant cost and delay involved in serving process overseas.

It is common to include service agent provisions in all kinds of commercial contract, including share sale agreements, investment and shareholders’ agreements, joint venture agreements, supply contracts and securities instruments.

When bringing proceedings for the declaration, therefore, BNY Mellon served notice of its claim on Law Debenture. The question arose whether BNY Mellon had validly served notice, particularly if Law Debenture were no longer authorised to accept it for Essar. The court said it had.

The judge’s view was that the relevant clause in the trust deed created a “binding promise” between BNY Mellon and Essar that serving notice on Law Debenture would be effective to bring proceedings in England. This was so, even if Essar had ended Law Debenture’s appointment as its service agent.

Practical implications

This is the latest in a line of decisions that show how careful commercial parties need to be when drafting and complying with service agent clauses.

The clause in this case was particularly strict. Essar had “irrevocably” appointed Law Debenture as its agent, and was able to appoint a substitute agent only if Law Debenture ceased to be able to act for Essar or no longer had an address in England. Often, a service agent clause is more flexible and allows a party to appoint a substitute agent in England, provided it notifies the other party.

However, regardless of how “flexible” the service agent clause is, it is critical to ensure arrangements remain in place to collect any notices of claim. If the original service agent is to be removed or replaced, it is vital to follow any procedures set out in the contract and inform the other side.

Failing to do so could mean the appointing party remains oblivious to legal proceedings and may risk default judgment being entered against it.

FRC publishes FAQs on UK Corporate Governance Code 2018

The Financial Reporting Council (FRC) has published a series of frequently asked questions on the new UK Corporate Governance Code, which will apply to financial years beginning on or after 1 January 2019.

Among other things, the FAQs clarify the following:

• Although formal reporting on the Code will not be required until 2020, the FRC envisages that companies may wish to adopt the 2018 version of the Code early.
• In particular, the FRC notes that companies intending to comply with new Code Provision 4 will need to begin reporting to shareholders during the 2019 season. Provision 4 requires a company to explain what actions it intends to take in response to a significant shareholder vote against a board-recommended resolution when it announces the results of that resolution. The FRC has also clarified that Provision 4 applies regardless of whether the resolution originates from the board or one or more shareholders, provided that the board has recommended it.
• Although premium-listed companies will need to report against the Code on a comply-or-explain basis, they will not need to do so against the FRC’s revised Guidance on Board Effectiveness.
• The FRC will be monitoring compliance with the 2018 version of the Code throughout the coming year and intends to publish a statement about progress in late 2019.
• The Code does not formally apply to subsidiaries of premium-listed companies, but there is nothing to stop subsidiaries of premium-listed companies from adopting it.
• The new Code deliberately uses the term “workforce”, rather than “employees”. This captures not only formal employees, but also agency workers, contractors and “zero-hours” workers.
• Chairs of premium-listed companies do not need to retire after nine years. Rather, the new nine-year limit in Provision 10 is designed to provoke “careful consideration” of the chair’s position.
• The FRC intends to publish a revised version of its Guidance on Audit Committees in due course.
• The FRC will assess whether any further amendments are required to Code Provision 31 (which requires a premium-listed company to prepare a longer-term viability statement) and its associated guidance in light of the collapse of Carillion.

Draft regulation on format and content of prospectus published

The European Commission has published a draft regulation, to be made under the EU Prospectus Regulation, setting out the format and content of an EU prospectus (the Prospectus Format Regulation). If approved, the draft regulation would come into force on 21 July 2019 and would effectively replace the prospectus “building blocks” in the EU Prospectus Directive.

Assuming the UK leaves the European Union as scheduled on 29 March 2019 (exit day), the Prospectus Format Regulation would not become part of UK law automatically under the European Union (Withdrawal) Act 2018, as it would not be in effect on exit day.

However, the Government has introduced the Financial Services (Implementation of Legislation) Bill into Parliament, which would allow it to make regulations to implement the provisions of the Prospectus Regulation that come into effect after exit day.

The Prospectus Format Regulation sets out the format, contents and order of items for full prospectuses, tri-partite prospectuses, base prospectuses and EU Growth prospectuses. In particular, a full prospectus will need to contain a table of contents, a summary, risk factors and the information required by the relevant annexes to the Prospectus Format Regulation.

The information required by the Annexes to the Prospectus Format Regulation is broadly similar to that currently required by the EU Prospectus Directive Regulation (and, hence, the Prospectus Rules), although the ordering is different in places. We will provide a more comprehensive comparison of the new content requirements against the old requirements when the Prospectus Format Regulation is enacted.

Regulations on assigning receivables now in force

The Business Contract Terms (Assignment of Receivables) Regulations 2018 have now been published and are in force. The Regulations nullify any clause in a contract that attempts to restrict a party from assigning a sum payable under the contract. Specifically:

• The Regulations apply to any contract for the supply of goods, services or intangible assets entered into on or after 31 December 2018.
• A term of a contract is ineffective if it prohibits the assignment of receivables, imposes a condition on assignment, or prevents someone from valuing or enforcing the receivable. This includes if it prevents the person wishing to assign from obtaining certain kinds of specific information.
• The Regulations do not apply if the supplier under the contract (i.e. the person who can enforce the receivable) is a “large enterprise” or “special purpose vehicle”. In other words, it will still be possible to restrict these kinds of supplier from assigning their contractual receivables.
• Certain kinds of contract are exempt from the Regulations. These include certain financial services contracts, real estate contracts, consumer contracts, petroleum licences, certain derivatives, contracts for the sale of a business or undertaking, low-carbon contracts for difference, PPP contracts, rental contracts and contracts with a national security dimension.
• In general, the Regulations do not apply to a contract that relates to a non-UK business. However, it is not possible to contract out of the Regulations merely by making the contract subject to foreign law, if the only reason for doing so is to circumvent the Regulations.