A simple guide to the Quincecare duty in banking claims – What is it and how to bring a claim?

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The Quincecare duty of care was established in the case of Barclays Bank Plc v Quincecare back in 1992, but the authority has only recently received renewed headline attention following the Supreme Court decision in Singularis v Daiwa Capital in 2019. 

What is the Quincecare duty of care? 

The Quincecare duty of care is an implied negative duty imposed on the bank to refrain from making or executing a customer payment when the bank is “put on inquiry” when there are reasonable grounds to believe that instructions may be an attempt to misappropriate funds. 

When a bank is put on inquiry, it has a positive duty to take action and investigate the instruction and any other suspicious/unusual circumstances surrounding the account. 

If the bank fails to make these inquiries then it will be liable for a breach of the Quincecare duty and, as a consequence, this cause of action gives the customer the right to a claim in negligence against the bank. 

There are certain pre-emptive conditions for the Quincecare duty to exist: 

  • The duty is currently only owed to the bank’s business customers, which have a separate legal entity. Consequently, the duty exists to protect a company from the misappropriation of funds by its trusted agent, such as a company director who is normally authorised to withdraw the company’s money; 
  • The existence of fraud is also a precondition for a Quincecare duty claim, and so it provides a helpful and an alternative remedy to recover the misappropriated funds. 

What sort of activity should put a bank on inquiry? 

The objective test is of a reasonable banker and it is fact dependent. A bank will be expected to have sophisticated systems in place to detect the fraud, which might take many forms and can be disguised by some unusual transaction patterns or simply take an obvious form of some questionable payment details.  

These transactional triggers, as well as other obvious signs, should put the bank on inquiry and drive further internal investigations while delaying the payment or ensuring that a receiving bank withholds the payment pending the outcome of these enquiries. 

What about a sole director/owner who controls the company? 

These types of companies are particularly vulnerable to being defrauded by its directors and therefore, banks must monitor these entities and their transactions much more carefully.  

In the particular case of Singularis Holdings Ltd (In Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC, the sole shareholder, chairman and president of the company instructed the bank to transfer $200m to unconnected third parties, which turned out to be unauthorised by the company. The fraud perpetrated by the company director stripped the company of its assets and deprived the creditors of a legitimate claim against the company. 

The Supreme Court decided that despite the fact that the perpetrator of the fraud was the beneficial owner of the company, there was no principle of law to prevent the company from suing a third party, such as a bank for breach of a duty owed to the company. Consequently, the liquidators’ claim succeeded and the company was able to claim its misappropriated funds from Daiwa Capital.  

Can the company’s creditors bring a claim against a bank? 

The short answer is – no. However, administrators and liquidators can bring a claim on behalf of the company, which provides an alternative remedy for the company’s creditors. 

Are there any defences to a Quincecare duty claim? 

Yes, although they are limited. The Quincecare duty can be expressly excluded by a contractual agreement, albeit we are not aware of any successful exclusion defences that have succeeded in the courts so far. 

Alternatively, if it was impossible for a bank to detect the fraud, and the operation of the bank account did not raise any suspicions that would require the bank to perform further investigations/enquiries, that is likely to be a sufficient defence for the bank.   

How realistic is it to expect the banks to be liable when there are millions of banking transactions performed every day?   

It is a matter of public policy and banks are expected to play an active role in reducing and uncovering financial crime. They are expected to have sophisticated systems in place to monitor suspicious transactions and to train their staff to challenge their customers when there are reasonable grounds to do so. If banks fail to investigate suspicious activities, which later lead to the financial losses for the companies, then banks will be held liable for their breach of the duty of care that they owe to their customers. 

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Catherine advises on all aspects of commercial litigation and alternative dispute resolution. She acts for a diverse range of clients in high value and complex cases ranging from contractual disputes, fraud and investigations, financial services disputes, negligence claims and insolvency-related litigation.

Litigation & Dispute Resolution Solicitors | Shakespeare Martineau

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Administrators and redundancy – is it about to get messy?

Blog | Corporate Restructuring & Insolvency

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The long running case of R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court [2021] EWHC 3013 has sent ripples of concern through the insolvency industry, when it confirmed that (in theory at least) administrators can be prosecuted for a failure to follow redundancy procedures prescribed by sec. 194 Trade Union and Labour Relation (Consolidation) Act 199 (TULCRA). Insolvency practitioners across the country are now anxiously awaiting the outcome of the court proceedings which could place them in an insidious conflict between their duty to act in the best interests of creditors and ensuring they do not put themselves at risk of criminal prosecution.

The background to the case

West Coast Capital (USC) Limited (USC) was placed into administration by its director on 13 January 2015, when Mr Palmer was appointed as one of the administrators (two others were also appointed, but the division of responsibilities meant that only Mr Palmer was subject to proceedings).

On the same date, a pre-pack sale of the business occurred, which expressly excluded a warehouse. The following day, the employees of the warehouse (84) were notified by Mr Palmer that they were at risk of redundancy and that a consultation meeting would be held later that day. Around a quarter of an hour later, they were handed a letter advising them that following the consultation USC could not identify any alternative to redundancy and they were dismissed.

On 30 January 2015, the Redundancy Payments Service asked the administrators whether a form HR1 had been lodged. The form HR1 was lodged by the administrators on 4 February 2015, who explained that it was filed late due to an oversight. In July 2015, the Secretary of State (SoS) issued proceedings against Mr Palmer (and the director) for failure to follow redundancy procedures under sec. 194 TULRCA and, specifically failure to lodge form HR1 with the Redundancy Payments Service in the required timeframe.

Under sec. 193(2) of TULRCA an employer proposing to make 20 or more employees at one establishment redundant within a period of 90 days or less must notify the SoS of their proposal before giving notice to terminate a relevant employee’s contract of employment, and do so at least 30 days before the first of those dismissals takes effect.

Sec. 194 of TULRCA states that an employer who fails to do so commits an offence and is liable on summary conviction to a fine. Where such an offence is committed by a corporate body and is proved to have been committed with the consent or connivance of, or to be attributable to neglect on the part of, any director, manager, secretary or another similar officer of the body corporate, or any person purporting to act in any such capacity, they as well as the body corporate is guilty of the offence and liable.

The outcome

The Magistrates’ Court found that Mr Palmer (as administrator) could be prosecuted for offences under sec. 194 TULRCA. Mr Palmer sought a judicial review of that decision to ascertain whether it was in theory possible to prosecute an administrator under sec. 194, and this case is the outcome of that judicial review.

Mr Palmer argued that:

  • He was not a “director, manager, secretary or another similar officer” of the company and therefore fell outside the remit of sec. 194

  • An obligation on an administrator to give 30 days’ notice of the proposed redundancies could have serious ramifications for the administration process and place the administrator in an untenable position of conflict. It would mean they have an obligation to retain employees for a minimum of 30 days to avoid criminal prosecution whilst also being under a duty to act in the best interests of the creditors - which may require the immediate termination of employment.

  • Waiting more than 14 days before terminating the employment contracts would mean that the company adopts the contracts and elevates employee claims to preferential status.

What now for administrators?

The court on judicial review held that administrators are capable of being prosecuted under sec. 194. From the date they are appointed, only they are in a position to notify the Redundancy Payment Service as they are carrying out a managerial function in place of the directors. The issue of whether this makes administrations untenable is a matter for Parliament. The case will now proceed in the Magistrates’ Court to determine whether Mr Palmer committed a criminal offence.

The decision places administrators in an insidious conflict between their duty to act in the best interests of the creditors and ensuring they do not put themselves at risk of criminal prosecution. To date, there have been no successful prosecutions of administrators under sec. 194. The Magistrate decision is now anxiously awaited.

Pending the outcome of the Magistrates case, our advice to administrators where there is even a possibility of more than 20 redundancies taking is to carefully consider (pre-appointment) whether retention of employees is tenable or not and, if it is, determine whether the purpose of the administration can be achieved if employees must be retained for 30 days post-administration, and/or if redundancies are likely, review the steps taken by the directors to ascertain if the correct documents have been lodged within the required timescales. Subsequent to an appointment we’d suggest you assess the employee position and immediately file the relevant form HR1 with the Redundancy Payment Service if 20 or more redundancies are likely.

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Director liable for fraudulent trading for not investigating VAT fraud - ignore HMRC at your peril

Blog | Banking & Financial Services

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A recent High Court decision (JD Group Ltd [2022] EWHC 202 (Ch)) has found a director liable for fraudulent trading when he was aware that the company was participating in VAT fraud and deliberately failed to investigate.   This decision has ramifications for directors and companies.

Background to the case

The company started trading in baby clothes, and later in mobile phones. When HMRC assessed its 2005/2006 tax return it declined its claim for tax relief in respect of a series of related import and export transactions, the effect of which was VAT fraud. HMRC suggested that the company undertake various steps to avoid this, such as investigating counterparties.

The liquidator subsequently brought a claim against the director for fraudulent trading (sec. 213 Insolvency Act 1986). The liquidator relied on HMRC’s analysis of the VAT fraud.

The court confirmed that the liquidator had to satisfy a two-stage test. First, to demonstrate the director's subjective state of knowledge; and then to show that the director's conduct was dishonest based on the objective standards of ordinary decent people (Bilta (UK) Ltd (In Liquidation) v Natwest Markets Plc [2020] EWHC 546 (Ch)).

The director argued that he did not know the company was participating in a VAT fraud. He claimed the company had robust pre-transaction due diligence processes and, as a result, he believed the transactions were genuine.

The outcome

The court held that the director's defence was not credible. There was no evidence that due diligence was being carried out, the transactions were back-to-back and often entered into before payment was received. The evidence showed that the transactions were uncommercial.

The court concluded that the director was, therefore, aware that the company was participating in a fraud, and that the director deliberately decided not to carry out due diligence and other steps suggested by HMRC. The director's conduct was dishonest by the objective standards of ordinary decent people and he was, therefore, liable for fraudulent trading.

The court ordered the director to contribute an amount equal to HMRC's claims in the liquidation for unpaid VAT to the company’s assets, plus a misdirection penalty (for misdeclaration in the company's 2005/2006 tax return). This was on the basis that, had the VAT fraud not occurred, the company would not have been liable to HMRC.

Our advice?

Our advice to directors facing a similar situation would be to implement (and never ignore) measures suggested by HMRC to mitigate the risks of companies being implicated in tax fraud, and consequently mitigate a director's risk of finding themselves subject to a similar claim.

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FCA Considering Regulatory Changes to Consumer Investment Landscape

Guides & Advice

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The need for regulation

The FCA has announced that a large part of its 2021/2022 commercial strategy is to help consumers with their investment decisions and in particular, what safeguards and controls should influence consumers in their choice of funds and investment schemes they invest their money in. They are concerned that many consumers invest in products that are high risk, unsuitable in terms of risk, or are just plain scams.

While a consumer may complain about such an investment, many of the promoters of these investment schemes would be out of business at the point the complaint is made.  The FCA has noted that the Financial Services Compensation Scheme has recently paid £833 million to successful complainants. That, in turn, leads to complaints from those well-respected providers and advisors, as their businesses are facing ever-increasing levies. Ahead of the strategy’s full publication in 2022, the FCA has already given details as to how this support will be provided and how the process will work.

Fund valuation issues

But why the need for this element of the FCA’s strategy? For some time it has been concerned about how fund values are promoted by investment companies to consumers and whether investors are being given a true representation of what it is they are investing in.

Call for input

In September 2020, the FCA called for input on the consumer investment market, in a bid to gain further understanding on how certain issues could be resolved.

In July 2021 the FCA looked at 18 unnamed investment firms and expressed concerns as to how such fund values were arrived at. The FCA was also troubled as to the role of Non-Executive Directors (NEDs). The view was that many were inexperienced in this sector and did not give sufficient challenge to the main board. Equally, it was noted that administration expenses were often monitored very carefully in what was thought to be delivering the best value to investors. The FCA took the opposite view and thought greater expense should be spent on analysing value and investor communications throughout the investment life cycle.

What is the FCA’s Plan?

The FCA will take a multi-pronged approach to helping consumers with their investment portfolios. Sections of the plan include:

  • Creating a better environment for investments

  • Considering how the investment market looks today

  • Considering what the current threats are to the investment market

  • Considering what the current risks are that the investment market faces

  • A deeper dive into scam culture and the harm it causes to consumers

  • A strategic road map for delivery of long-term and short-term actions

What else does the FCA propose?

The FCA is mindful of the fact that many investors are now administering their own investment portfolios that can consist of either ISA’s or SIPPS. These same investors will target the funds that meet their personal requirements, be that growth or environmental and at present as we are seeing a huge rise in ESGs. In light of this investor freedom and the variety of products available, the FCA proposes;

  • £11m “Investment Harm” campaign to bolster the impact of its strategic road map

  • Reviewing FSCS compensation framework

  • Providing a new level of assistance to consumers, giving them transparency and clarity

Self-discipline versus imposed regulation

The FCA is urging the investment sector to improve best practices. Those with good management and effective systems have nothing to fear, others may wish to embark on a process of self-improvement, failing which, increased regulation will become the constant narrative within the sector.

For further information on the FCA and its proposed regulatory changes, contact Edward Flanagan.

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Eddie and his team advise clients on a wide range of issues concerning leasing, hire, consumer credit, the FCA source book and the regulatory landscape affecting the UK finance and leasing sector.

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Guides & Advice

Fund managers: playing a vital role in the UK’s recovery

2020 has been a challenging year for all areas of the economy, but businesses and individuals in the investment industry shouldn’t lose hope, with transactions still going ahead even in these difficult times.

However, that isn’t to say there isn’t a level of uncertainty to contend with. Going forward, fund managers have a host of new considerations to make when it comes to investments.

Managing risk with investments

A balance between understanding and managing risk is always required to succeed in the investment industry. Caution is key, and this has become even more true during the pandemic.

To adapt to this unstable environment, strategies have had to be altered, with institutional investors favouring debt over equity, and individual investors turning to capital protection, ESG and markets perceived to be more stable.

Deals must continue, and investment professionals need to do what they can to ensure this.

The impacts of recession on investment

A sustained recession may be on the cards, which will affect investment behaviour further. Now is the time to apply the lessons learned from the 2008 recession, including diversifying portfolios and giving more thought to long-term rather than short-term decisions.

Longevity is the goal and fund managers will have to change their behaviours to achieve this.

Which sectors are safe bets?

Depending on the geopolitical climate, which sectors are most popular to invest in can change. At present, and largely as a result of the coronavirus pandemic and the continued focus by governments around the world on the environment, investors seem to be favouring the following:

  • Technology
  • Medtech and life sciences
  • Renewables, energy efficiency and sustainability
  • Social impact and infrastructure
  • Logistics and consumables

Although consumables are usually seen as ‘recession-proof’, now that PPE has become part of daily life, businesses that operate in this area have become a more solid prospect for investors.

What will 2021 look like?

Now that the first batch of COVID-19 vaccines have started being rolled out, and Brexit (with or without a deal!) is set for 1 January, a level of certainty is being regained. As such, financially holding back further could create more problems. Particularly after the widespread financial relief offered by the Government in recent months, there will be an expectation for the investment industry to pull its weight in driving the country’s economic revival.

Many investors have funds ready to be deployed and with cash drag starting to take effect, it’s time for them to put their feet back on the accelerator, especially with change on the horizon in the form of capital gains tax changes, for example.

In what has been a difficult year for many, the investment market has battled through valiantly, emerging much better than it would have done 20 years ago. There are a number of reasons to be optimistic about the future, and fund managers will undoubtedly be a core part of the UK’s recovery.

Helping you find an investment funds strategy in an ever-changing market

No matter whether you’re a fund manager, family office, investor or company looking to raise capital, our investment funds team can help – contact Kavita Patel for guidance and support.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.  

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Blog

Meet the team behind £1 billion worth of deals

Our banking and finance team has seen a surge in transactions since the start of summer 2020, across a variety of sectors; including, education, healthcare, manufacturing, business services, leisure, transport and logistics, property development, and telecoms.

In total the team have supported more than £1 billion worth of transactions - find out more about our specialists and how they could support your next project.

Naomi Tudor

Specialisms: Banking and financial services, corporate banking, real estate finance

Latest transaction:

“We acted for one of the main clearing banks on a £4.5m CBIL advance to an existing customer, secured by a charge over their main premises, which had to the dealt with in a very short space of time.

“The borrower is a large scale supplier into the hospitality sector which has been materially affected by COVID.”

Contact: naomi.tudor@shma.co.uk

Specialisms: Banking and financial services, corporate recovery and insolvency, healthcare

Latest transaction:

We acted for a clearing bank in connection with the restructuring and subsequent disposal of the leading firm of global expansion advisors, who offer HR tax and financial compliance services to overseas companies setting up in the UK.”

Chris Gayle

Specialisms: Banking and financial services, corporate banking, corporate finance, real estate finance

Latest transaction:

“Agreed on a security structure which safeguarded the bank’s position in relation to various loan facilities to the bank’s customer. Timing was critical to meet existing loan maturity dates. Total facilities exceeded £40 million.”

Contact: christopher.gayle@shma.co.uk

Specialisms: Banking and financial services, Islamic finance and inward investment, mergers and acquisitions, real estate finance

Latest transaction:

“Recently acted for a large corporate client based in North America and a number of other jurisdictions on a $35m dollar credit facility.”

For more information contact our banking and finance team. For support with deals contact our corporate team.

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Your guide to recovery and resilience

Financial considerations

Your guide to recovery & resilience | Financial considerations

Screenshot 2020-05-27 at 11.17.17

Whether you are a large corporate with a highly structured board, an SME or an owner managed business, the financial viability and success of your business is key to your own future, your family’s future and that of your employees. No business has experienced, or traded through a crisis such as this before, which is being played out on a local, national and international stage.

However, as thoughts turn to the future and what that may look like, businesses that have got through the immediate situation should start making plans and consider a range of measures to enable them to cope with what is likely be a deep recession for some industry sectors of the UK. Prudent business owners will be well aware of the predictions and while there will be a bounce back it is likely to take some time for confidence and stability to return from customers and suppliers.

The main talking point before the coronavirus pandemic was Brexit. This has not gone away and may present further challenges for UK businesses later in the year once the current pandemic is under better management.

Government assistance

If you haven’t done so already, assess your eligibility for government support – you may be eligible for coronavirus financial assistance – in the form of a one of a number of business interruption loans (several different types available), business rates holiday or VAT deferral for example. The package of measures continues to evolve so we recommend reviewing what is available on a regular basis. Some parts of the package of support will be available for longer than others so it’s sensible to keep an eye on closing dates for the various schemes that are available.

Keep up to date

Continue to monitor and review all applicable government grants and economic incentives that may be introduced later this year. Review R&D claims to make sure all eligible costs are identified.

Income tax

On a personal level consider taking advantage of the deferral of the income tax instalment due on 31 July to assist with personal cashflow.

Talk to your lenders

Keep the communication lines open. A lender cannot help with financial support if they are unaware of your situation and do this sooner rather than later while there is still some flexibility in the business.

Review your banking covenants

If you are likely to breach these, be prepared to have an early conversation with a proposed plan.

Business planning should ideally be a continuous process

Now is the time to review your plans, revise your forecasts and draw up new plans and be in a position to implement changes quickly. Adapt your management information in line with this.

Manage all change carefully

Ensure any changes you make now are essential for the future of the business. Introduce internal spending reviews to see where you can make immediate savings, cut costs, and move spending away from non-crucial areas. Now is the time to take stock of savings that can be made as a result of new working practices enforced on businesses by the coronavirus. Some of these may be beneficial and save costs.

Credit terms

These should be revisited and recommunicated to all customers. Strict payment terms should be encouraged as cash is king and will ensure cash flow and working capital for the future.

Check your insurance

Most policies do not cover coronavirus but the government has stated that policies for both pandemics and governmentordered closures should be covered. If unsure talk to your insurer.

Look at the detail

Review your financial control measures and look to make them more robust if required. Review expenses policies, review sign off limits, ensure audit trails are in place.

Communication

Keep talking
Communicate with your key customers and keep them informed of the measures you are taking for your business. If they are in difficulty, be supportive where you can and agree action plans with them.

Be on the front foot
Have upfront conversations with your suppliers. Consider changes to credit terms – being more flexible to support suppliers if possible.

Contact suppliers
Where you may have difficulties in paying, approach with a prepared action plan and be prepared to negotiate. If you have longer term contracts consider whether there is any room for renegotiation of any of the key terms whether immediately or in the coming months.

Internal communication
It’s often appreciated by employees if they are taken along on the journey rather than being kept in the dark. There may well be measures required, such as shorter hours and potential pay cuts in the future, that will become necessary, so having a workforce who understand and appreciate the challenges and the reasons behind any decisions helps any action required.

Opportunities

Bigger picture
Stay abreast of all opportunities that may assist your business – e.g. online activities and be alert to acquisition opportunities and possible investments.

Consider new possibilities
In these difficult times be alert to the possibility of working in new or different/flexible ways to make yourself stand out from the crowd. Consider new avenues to develop new products or services that meet the changing needs of your customers or new areas of demand that have opened up because of the crisis.

Contact us
In response to the pandemic we created our coronavirus hub which includes advice, guidance and insight to help you navigate through these uncertain times. As we all begin to adapt and prepare for the future, our hub will evolve to provide you with further help and resources for surviving, reviving and beginning to thrive in life and business, throughout the challenging times ahead.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

For legal support in relation to the coronavirus or any other matter, get in touch with your team today.

From inspirational SHMA Talks to informative webinars, we have lots of educational and entertaining content for life and business visit SHMA® ON DEMAND.

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The Bounce Back Loan is a 100% government backed loan scheme for small businesses, designed to offer up to £50,000 of fast access finance for those affected by coronavirus.

Details of the scheme

The loan is a welcome addition of assistance for small businesses which make up the backbone of the UK’s economy and is an option for businesses that do not qualify for the CBILS – Coronavirus Business Interruption Scheme, to get access to finance quickly to help them through.
Applications to the loan scheme will be available from Monday 4 May and as with the other loans already announced, will be delivered through a network of approved lenders.

Speed seems to be key watch word with this new scheme, as delivery so far has been slower than businesses have needed through other schemes. The CBILS scheme in particular has been criticised for having a slow start, although the pace of these loans now reaching businesses does appear to be improving.
On paper this scheme does seem to meet a need for simple fast access to money to businesses but the proof will be in how the banks respond to what is likely to be huge demand.

Is this scheme right for you?
There is a package of measures available to businesses to help them through this current crisis, some new and some already in existence. Each scheme has its advantages and key differences but what is the same is the need to repay the money. Before you take the step it’s key you understand what you are signing up to.

Contact us

For any information regarding the BBL, CBILS or any other funding issue you have for your business contact Lisa Botterill or another member of the corporate team in your local office

If you would like advice or guidance on any legal or commercial matter, a member of our team can walk you through everything. Click here to discuss.

For more general business advice in relation to coronavirus visit our dedicated resource hub.

All the latest views and insights on coronavirus.

Taking place in the Azerbaijani capital this week, the Summit will bring together international leaders and high-level representatives from politics, business, government and academia to discuss the ideas that are shaping the world.

The theme of this year’s event, ‘Building a Shared Future’, is an issue of global importance and pivotal to the economic growth, productivity and resilience of global economies.

During the two-day conference, speakers will reflect on many of today’s major global challenges, ranging from transportation and connectivity to energy security.

Mohammed said: “Having the opportunity to speak alongside some of the most distinguished experts from across the EU is a huge privilege. The purpose of this conference is to provide a platform from which industry leaders and business representatives alike can learn how shared creativity, experience and ingenuity can help to build a shared future. Our economies all share major challenges and I look forward to discussing how building better connections can benefit everyone.”

In this article we explore the detail of the ruling and what it means to companies which have listed bonds and other instruments which are subject to MAR.

The back story

Tejoori had two major investments, one of which (Bekon Holding AG) was the subject to a drag-along mechanism. This would have effectively required Tejoori to sell its shares to the bidding company, in a squeeze out by share purchase agreement for no initial payment. There was the possibility that the deferred payment would be significantly less than Tejoori’s valuation of $3.35 million. Tejoori had a mistaken understanding of the effect of the sale and purchase agreement and when it would be paid.

The FCA penalised Tejoori because it failed to release an announcement as soon as possible after being notified that the drag-along would occur. Tejoori’s misapprehension was highlighted by the fact that, once the takeover had been announced, there was a lot of speculation, mostly on bulletin boards, as to how much Tejoori would have received for its holding, with the Tejoori share price rising by 38% in two days. When it finally announced the details of the sale, however, its share price closed down 13%.

Details of the case

The BEKON shareholders’ agreement contained a drag-along provision that could be used by majority shareholders to require other shareholders to sell their BEKON Holding AG shares in the event of a takeover. In July 2016, Tejoori was notified that several major shareholders of BEKON had indicated that they would issue a drag-along notice to the other shareholders that would require them to sell their shares in BEKON as part of a takeover by Eggersmann Gruppe GmbH & Co. KG (Eggersmann). The drag-along notice would require Tejoori to sign a share purchase agreement (SPA) with Eggersmann.

Under the SPA, Tejoori would sell its BEKON shares to Eggersmann for no initial consideration with the possibility of receiving deferred consideration that was significantly less than Tejoori’s then known valuation of its investment in BEKON. Tejoori received the signed drag-along notice in July and its shares in BEKON were transferred to Eggersmann in August. Both BEKON and Eggersman issued press releases regarding Eggersmann’s acquisition of BEKON. The press releases did not refer to Tejoori and Tejoori did not release an announcement at that time.

Under MAR, companies are required to release information which is likely to affect the price of their shares or bonds or other tradeable instruments as soon as possible. The online bulletin boards contained clear evidence of speculation that the news would be good for Tejoori’s investment. Tejoori’s share price then rose by 38% over just two days after investors heard of the Eggersman buy-out of BEKON, not realising Tejoori had already had sold its shares. The failure came to light after the London Stock Exchange queried the quick rise in share price with Tejoori in August, however, the FCA found there had been “a misunderstanding of the legal effect of the SPA”, which meant Tejoori did not understand it had in fact sold its entire holding in BEKON. Tejoori, which first listed on AIM in March 2006, did not inform shareholders or the public about the sale despite it being classed as inside information.

Tejoori cancelled its admission to trading on AIM in December and co-operated fully with the FCA investigation, settling at an early stage in order to secure a 30% discount on the fine which would have otherwise been £100,000.

How does this affect businesses?

This is the first ruling since MAR came into force in 2016. It is very likely that the FCA will continue to impose further fines on companies in breach of MAR regardless of whether they act, or don’t act, recklessly or deliberately but, as with Tejoori, mistakenly. In addition to any financial penalty the reputational damage potentially caused by a breach could impact your business.

It is imperative that all companies with publicly traded shares, bonds or other instruments should have the appropriate processes in place to identify inside information and make such disclosures as are necessary.