Corporate Law Update

In this week’s update: an insurer had a duty to act rationally when deciding whether an insured had acted fraudulently, Aquis consults on changes to its Growth Market and a few other items.

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Insurer was under duty to act rationally when evaluating potential fraud

The High Court has held that, when exercising a discretion under an insurance policy to decide whether an insured had acted fraudulently, the insurer was required to act rationally.

What happened?

UK Acorn Finance Limited v Markel (UK) Limited [2020] EWHC 922 (Comm) concerned a rolling policy of professional indemnity insurance. The insured was in the business of providing property valuations to lenders in connection with agricultural properties.

The insurance policy contained an “unintentional non-disclosure clause”. This prevented the insurer from attempting to avoid cover if the insured failed to disclose relevant information or made a misrepresentation.

However, the clause applied only if the insured could establish “to [the insurer’s] satisfaction” that the non-disclosure or misrepresentation was “innocent and free from any fraudulent conduct or intent to deceive”. In other words, the insurer could still avoid cover in cases of deliberate non-disclosure.

Two claims were made under the policy. The insurer rejected both. It said the insured had failed to disclose certain material matters when renewing its policy for 2013 and 2014, and that the insurer, after an internal process, had determined that those non-disclosures were fraudulent.

A key question for the court to decide was whether the insurer had been under a duty to act rationally when reaching this decision. This duty is usually referred to as the “Braganza duty” (after the case of Braganza v BP Shipping Ltd [2015] UKSC 17).

Often, the Braganza duty applies where one party to a contract is entitled to exercise a discretion that involves an assessment from a range of options. It is an “implied term” and will apply only if it doesn’t conflict with the express terms of the contract. However, it is thought to be very difficult to include language in a contract that effectively excludes the duty.

Where the duty applies, the decision-maker must not act arbitrarily, perversely, capriciously or irrationally. They must, when coming to their decision, take all relevant circumstances into account and disregard any irrelevant circumstances. In essence, they must follow a proper process when reaching their decision.

What did the court say?

In this case, the court said the duty applied. The fact that the unintentional non-disclosure clause used the phrase “to [the insurer’s] satisfaction” made it clear to the judge that the insurer was responsible for determining whether any non-disclosure or misrepresentation had been fraudulent. This was enough to engage the Braganza duty.

The judge then went on to find that the insurer had not followed a proper process when concluding that the insured had acted dishonestly. In particular, the insurer had not taken into account that, in the circumstances, it was more likely than not that the insured had simply been negligent when failing to make full disclosure under the policy.

What does this mean for me?

This is just the latest in a spate of recent cases involving the so-called Braganza duty. It again highlights the need to take care when reaching a decision under a contractual mechanism.

Where the Braganza duty might apply, a contract party should not assume that it has carte blanche to reach whatever decision suits it. Any decision should be taken carefully, considering all relevant circumstances. Ultimately, the conclusion must be one that a rational person could reach, based on the relevant evidence.

The judge’s comments on the likelihood of fraud are also important. Although his remarks that the insured was more probably negligent than dishonest must be seen in context, they demonstrate that a determination that a party has acted dishonestly or in bad faith should not be reached lightly.

The Braganza duty is sometimes described more casually as a duty to act “in good faith” when reaching a decision. It is important, however, to distinguish this from the separate implied general duty to act in good faith (sometimes called the Yam Seng duty) that may be found in certain types of “relational contract”. For more information on the difference between those duties, see our previous Corporate Law Update.

It is also worth remembering that other duties to act reasonably apply to insurance contracts. These include a duty on the insured to make a “fair presentation” leading up to policy inception, and the broader “duty of utmost good faith” (or uberrimae fidei), which applies to some extent during the life of an insurance policy and which continues to apply in full to certain other kinds of contract.

AQSE announces proposals to restructure its Growth Market

Aquis Stock Exchange (AQSE) (formerly NEX Exchange) is consulting on changes to its Growth Market. The changes are generated by what AQSE calls a need for “radical change to tackle the challenges confronting small companies” and to “improve the SME sector of public markets”.

In broad outline, the current AQSE Growth Market would be split into two separate segments:

  • AXS (access), a segment for earlier-stage companies whose securities may naturally attract less liquidity. Applicants would publish an “admission document” from a standard template, rather than a prospectus, and would need to appoint a market maker to maintain a degree of liquidity.
  • APX (apex), a segment for larger companies with a track record. Applicants would need to demonstrate (among other things) a market capitalisation of £10 million or more and two-year trading history. APX companies would publish an FCA-approved Growth Prospectus, making them eligible for retail IPOs and so fostering public participation in SME IPOs.

Companies currently admitted to AQSE Growth with a market capitalisation of £10 million or more and 35% or more of securities in public hands would automatically be placed within APX. The remainder would transition to AXS. Companies would be promoted automatically from AXS to APX once they satisfy the APX criteria.

Both segments would remain non-regulated growth markets, and companies admitted to trading on them would not need to be officially listed (and so would not be subject to the FCA’s Listing Rules).

Finally, under the proposed changes, existing AIM nominated advisers would qualify automatically and immediately to act as AQSE Corporate Advisers.

Although presented neutrally, the proposed changes are clearly designed to position the AQSE Growth Market as a genuine alternative to the London Stock Exchange’s AIM. According to the respective markets’ own data, at the end of March 2020 there were 843 companies with equity securities admitted to AIM with a combined market capitalisation of approximately £74.3 billion, versus 72 companies on AQSE Growth with a combined market cap of approximately £1.3 billion.

AQSE has asked for any comments by 15 June 2020.

Also this week…

  • AGM deadline extension proposed for SEs. The European Commission has published a proposed regulation which would extend the deadline by which European companies (societates europaeae or SEs) must hold their 2020 general meeting. Currently, an SE must hold a general meeting within six months of its financial year-end. The Regulation would extend this to 12 months after financial-year end or to 31 December 2020 (whichever occurs earlier). The wording is not clear but suggests that an SE would still be able to hold its general meeting in 2021 if its financial year ends in the second half of 2020. The Regulation makes a similar change for European cooperative societies (SCEs).
  • FRC Financial Reporting Lab newsletter. The Financial Reporting Council (FRC) Financial Reporting Lab has published its first newsletter of 2020. The newsletter provides updates on the Lab’s on-going projects, including reporting in times of uncertainty, climate reporting and digital reporting. It also contains a useful summary of recent Covid-19-related public guidance.
  • ICMA publishes guidance on sustainability disclosures. The International Capital Market Associations has published new guidance on disclosures under the EU sustainability disclosure regime. The guidance aims to provide a comprehensive and practical overview of key developments in this area.
  • Companies House adds more forms for emergency filing service. Further to our update last week, Companies House is now accepting the limited liability partnership (LLP) equivalents to the forms that can be filed through its emergency filing service.