• An indemnity on a business sale covered historic negligence, even though it did not say so
• New legislation would make it easier to convict corporate bodies of offences by their senior managers, including on corporate transactions
• Companies House publishes guidance on how it will use its enforcement powers for the UK’s Register of Overseas Entities
• The FRC publishes a report on audit committee chairs’ views on ESG

Indemnity on business sale extended to negligence

The High Court has held that an indemnity given by a buyer on the sale of a business transferred the risk of historic negligence, even though it did not explicitly say so.

PA (GI) Ltd v Cigna Insurance Services (Europe) Ltd [2023] EWHC 1360 (Comm) concerned the sale of an insurance business by Royal and Sun Alliance as part of a management buy-out.

As part of the sale, the buyer agreed to indemnify the seller for historic liabilities relating to the marketing, underwriting and servicing of the insurance products it was acquiring.

A question arose over whether the indemnity covered historic negligence arising from the mis-selling of payment protection insurance (PPI) products by the seller’s agent. The indemnity did not specifically state whether it extended to liability for negligence.

The buyer argued that, in the absence of clear wording, based on previous case law, the court should assume that the buyer had not agreed to indemnify the seller against its own negligence and so the indemnity did not apply to liability arising from historic PPI mis-selling.

The court disagreed. Although it was entitled to adopt a starting assumption that the indemnity would not exonerate the seller from liability for historic negligence, fundamentally the judge had to embark on an exercise of contractual interpretation to understand what the parties had intended.

There was enough evidence, both in the sale agreement and from the surrounding circumstances, to show that the parties had intended risk for historic negligence to pass to the buyer.

The case shows the importance of careful drafting, particularly when including provisions that attempt to nullify a party’s liability for their own negligence.

You can read more about the case in our separate in-depth piece.

New legislation would make corporate bodies liable for offences by their managers

The Government has announced plans to make it easier to convict corporate bodies of certain offences committed by their senior managers.

Currently, under the so-called identification doctrine, a company or other corporate body can be convicted of a criminal offence only if the offence can be attributed to someone who, at the same, was the “directing mind and will” of the corporate body. This can be difficult to demonstrate.

A Government-sponsored amendment to the Economic Crime and Corporate Transparency Bill, which is currently making its way through Parliament, would introduce a reformed identification doctrine to make it easier to attribute certain offences to corporate bodies.

Under the amendment, it would no longer be necessary to show that someone was the “directing mind and will” of the corporate body. Instead, the corporate would be guilty of an offence if one of its senior managers commits the offence while “acting within the actual or apparent scope of their authority”.

The reformed identification doctrine would apply only to specific listed offences, although the Government would have the power to add and remove offences to and from that list.

At the time of writing, the proposed list includes principally economic offences, such as theft, false accounting, fraud, bribery, money laundering, terrorist financing and certain tax evasion offences.

However, it also includes certain offences connected with corporate transactions, including:

• offering securities to the public without an approved prospectus;
• making a financial promotion without approval, authorisation or an exemption; and
• making misleading statements or giving misleading impressions in relation to securities.

You can read more about the proposals in our separate in-depth piece.

New enforcement guidance for the Register of Overseas Entities

Companies House has published new guidance on how it will use its enforcement powers to secure compliance with the UK’s Register of Overseas Entities (ROE).

Non-UK legal entities (“overseas entities”) are required to register on the ROE if they hold or wish to acquire certain types of real estate in the UK. A registered overseas entity must provide details of its beneficial owners and, in some cases, its managing officers and trusts in its corporate structure.

The new guidance confirms the following:

• Companies House will select the type of enforcement power it uses based on several factors, including the nature and seriousness of the failure, the novelty and duration of the issue, public interest and the impact on stakeholders.
• It will focus on offences where there has been persistent, repeated and wilful non-compliance and consider alternatives to criminal prosecution to secure compliance.
• If Companies House is satisfied beyond reasonable doubt that an offence has been committed, it may levy a fine. This could be a fixed penalty, a daily rate penalty or a combination. Fines may range from £10,000 to £50,000 depending on the value of the overseas entity’s property portfolio.
• Companies House will issue a “warning notice” before imposing a fine, giving an overseas entity at least 28 days to register or provide an explanation for non-registration.
• Companies House may refer the most serious cases to law enforcement agencies to be considered for prosecution.

FRC publishes research on audit committee chairs’ views on ESG

The Financial Reporting Council (FRC) has published a report on the views of audit committee chairs (ACCs) on environmental, social and corporate governance (ESG).

The report follows a survey of 40 ACCs of public interest entities, comprising 11 FTSE 100 companies, 18 FTSE 250 companies, 9 other listed companies and 2 unlisted companies.

The majority of ACCs surveyed saw ESG as an important part of good business practice and feel it has increased in importance in the last few years, particularly following the Covid-19 pandemic.

However, some ACCs felt that there can be a tension between ESG priorities and profit-making responsibilities, with the success of ESG initiatives effectively resting on management buy-in and shareholder interest.

The survey suggests that the environmental and social aspects of ESG are viewed with the most cynicism. Some ACCs felt that environmental priorities were made more difficult by a complex network of constantly changing disclosure standards, which are in turn generating longer annual reports in which it is difficult to identify key information.

ACCs also felt that both the environmental and social components suffered from a lack of straightforward guidance, including on how to measure ESG activities, and would welcome more practical sector-specific guidance.