Accountability - June 2014

23 minute read
04 June 2014

Accountability highlights the legal and industry news affecting accountants and other professionals on a range of liability risk management issues.

Industry news

The Supreme Court decides that LLP Members are 'workers' after all

Last week saw the long awaited decision in Clyde & Co v Barnes van Winkelhof. The Supreme Court overturned the earlier decision of the Court of Appeal and decided that partners who are members of LLPs are 'workers' for employment law purposes.

The consequences of this decision are far reaching for LLPs, particularly where pension and employment rights are concerned. Many professional services firms are constituted as LLPs and will be affected.

LLP members may be considered workers under the Pensions Act 2008 and subject to automatic enrolment as a result. This may well cause issues where fixed pension protection is concerned. If an LLP member with fixed pension protection is automatically enrolled in a firm pension scheme and fails to opt out within the first month, they will accrue pension benefits and lose their protection.

As workers LLP members will also qualify for protection under applicable employment legislation, such as protection for whistleblowers and working time regulations. See our employment alert on this issue for more information.

Exclusion clauses - they will work if they are clearly drafted

The Technology and Construction Court (TCC) has reaffirmed the approach to be taken to the construction of exclusion and limitation of liability clauses, in the case of Fujitsu Services Ltd v IBM United Kingdom Ltd [2014].

The dispute related to a contract for the provision of information technology services to the DVLA. IBM was responsible for providing these services, under an agreement which IBM had acquired from PwC when it purchased PwC's consultancy business. IBM subcontracted aspects of the services to Fujitsu. Fujitsu claimed that IBM had committed various breaches of the sub-contract, for which it claimed damages for loss of profits in the region of £36 million. IBM defended the claim on various bases, including by reference to exclusion and limitation of liability clauses in the sub-contract.

The sub-contract included a limitation of liability clause which confirmed that IBM's aggregate liability was to be limited to £5 million each 'Contract Year', with an overall aggregate liability for "all claims or losses arising under this sub-contract" to be limited to £10 million (clause 20.4). There was an exclusion of liability at clause 20.7 of the sub-contract, which provided as follows:

"Neither Party shall be liable to the other under this Sub-Contract for loss of profits, revenue, business, goodwill, indirect or consequential loss or damage..."

The validity of these clauses was dealt with as a preliminary issue in advance of the full trial.

The court confirmed that such clauses would be construed no differently from any other term in a contract: the aim was to ascertain what the reasonable person would have understood the parties to have meant, having regard to all the relevant surrounding circumstances. One started with the presumption that neither party intended to abandon any of its remedies for breaches by the other, and clear express words would be needed to rebut that presumption.

In this case, the court found that the language of the exclusion was clear and unambiguous in excluding liability for loss of profits. The words of the exclusion also had to be read in the context of the whole clause, the contract as a whole, and the material background and circumstances when the contract was entered into. None of these things militated against giving the language its clear meaning. Indeed, several factors supported it:

  • the sub-contract was a lengthy commercial agreement negotiated by the parties, with the benefit of legal advice;
  • the exclusion clause was a 'tailor-made' one; and it applied equally to both parties; and.
  • Fujitsu, in arguing that the clause was not effective, could not identify any other commercially sensible formulation as to what the parties intended.

The court also rejected Fujitsu's contention that the exclusion clause was so wide that giving effect to it would deprive IBM's obligations of all contractual force, leaving Fujitsu with no effective remedy and reducing the contractual obligations to mere 'statements of intent'. The court held that any such 'statement of intent' rule was of little assistance where the wording of the clause was plain and it was mutually beneficial, as here; but in any event this clause did not 'empty the contract of content'. It would not prevent, for example, claims for debt (as distinct from a 'loss'), declaratory relief or injunctive relief.

In short, the clause was "an exercise of risk allocation between the parties", and the court upheld it.

All was not lost for Fujitsu, however. Its claim for an account of profits was not excluded. This was not simply the 'mirror image' of a claim for loss: it related to alleged wrongful gain by IBM, not to losses suffered by Fujitsu. An account of profits was a claim for a different remedy with a different financial value, and was not caught by the reference to 'loss' in the exclusion clause.

The account of profits claim was, however, caught by the limitation of liability clause (which the court also upheld, applying similar reasoning to the above), because the wording of that clause was wider: it covered "any claim, demand, proceedings or liability".


Every exclusion and limitation of liability clause will of course be interpreted on its own terms, and by reference to its own particular wording. This decision does provide a useful reminder of the principles of interpretation that the courts will adopt and that if an exclusion clause is clear and unambiguous the court is likely to apply it. It is, however, an illustration of how even seemingly broad exclusion clauses may contain cracks through which more esoteric claims may fall.

The importance of ensuring service...

In the case of T&L Sugars Ltd v Tate & Lyle Industries Ltd [2014], the Commercial Court considered the meaning of 'service' in the context of warranty claims in a share and business sale agreement. While the court's decision was obviously specific to the particular contract being considered, many agreements will have similar wording.

The court was asked to decide, as a preliminary issue, whether or not a claim had been "issued and served" in time within the meaning of a share and business sale agreement. Clause 11.2 of the agreement required that warranty claims be notified in writing within 18 months; and clause 11.3 provided that such claims would be deemed irrevocably withdrawn unless, within 12 months thereafter, "legal proceedings in respect of the relevant claim have been commenced by being both issued and served".

The claimant gave the defendant notice of warranty claims on 30 March 2012, the last day of the 18 month period stated in clause 11.2. The claimant's solicitors issued the claim form on 27 March 2013, and delivered it the same day, by hand, to the offices of the defendant's solicitors.

The defendant argued that this was out of time. Rule 6.14 of the Civil Procedure Rules (CPR) provides that a claim form is "deemed to be served on the second business day after completion of the relevant step under rule 7.5(1)" - in this case, the second business day after delivery of the claim form to the defendant's solicitors.

27 March 2013 was the Wednesday before Easter; as a result the second business day thereafter was not until the following Tuesday, 2 April 2013. This was more than 12 months after notice of the warranty claims had been given, and therefore, the defendant argued, too late under clause 11.3.

The court rejected this argument. The judge agreed that "service" in this context meant service in accordance with the CPR (contrary, it should be noted, to the reasoning of Green J in Ageas (UK) Limited v Kwik-Fit (GB) Ltd [2013]). Since the agreement provided for disputes to be determined in the English courts, reference in the clause to 'legal proceedings' meant that the natural meaning of the word 'served' in the clause was 'served in accordance with the procedural rules in force in England at the relevant time': i.e., the CPR.

However, the court said that CPR 7.5 and CPR 6.14 drew a clear distinction between when service is actually effected, and when it is deemed to take place for the purpose of calculating the time for subsequent steps in the proceedings.

  • CPR 7.5 sets out the available methods of service, and states that the claimant must complete the 'relevant step' (in this case, 'delivering to or leaving the document at the relevant place') within four months after issue of the claim form. This is when service is actually effected: when the 'relevant step' is completed.
  • CPR 6.14, in contrast, "is looking at when service will be deemed to have taken place for the purpose of other steps in the proceedings thereafter".

The court therefore concluded that the claimant had 'served' the proceedings in time for the purposes of clause 11.3 of the agreement: the 'relevant step' - delivering the claim form to the offices of the defendant's solicitors - had been taken before the expiry of the 12-month deadline.


This is useful guidance, but bear in mind that the judge in Ageas came to a different conclusion on a similar clause (that the word 'service' in that agreement did not mean 'in accordance with the CPR'); and the precise wording of the relevant clause will obviously be critical in each case. In this instance, it was significant that the reference to 'service' came in the same clause as a reference to 'legal proceedings', and in the context of an English jurisdiction provision.

To avoid any uncertainty, when agreeing time limits for the service of claims parties should specify expressly whether they mean 'service' as defined in Rule 7.5 of the CPR; and if not, precisely how service is to be accomplished.

Accountants required to produce documents to assist Liquidators

In the High Court decision of Jackson v Baker Tilly (unreported, 10 April 2014), the liquidators of an insolvent company successfully applied for the company's accountants to produce documents detailing their dealings with the company.

The accountants had audited the company's accounts in the period before it became insolvent. During the liquidation process, the liquidators became concerned about several tax issues and concluded that the accountants may hold relevant information that could assist them. They requested information concerning the company and its promotion, formation, business, dealings, affairs or property, pursuant to s.235 and s.236 of the Insolvency Act 1986.

The accountants refused to provide the documents, claiming that although they had audited the company's accounts, they had not advised on any tax matters. They also objected to the scope of the search and claimed that the relevant files contained legally privileged and confidential information. The liquidators therefore applied to the court for production of these documents and the court had to determine:

  1. whether the liquidators reasonably required the information sought; and
  2. whether the accountants' disclosure obligations were unreasonable, unnecessary or onerous.

The court granted the application, stating that the liquidators had limited information about the company's financial procedures and they should be entitled to search for further documentation. The court emphasised that they were experienced liquidators performing a statutory function and had provided sworn testimony outlining their reasons for the application.

The disclosure obligations were not considered unreasonable, unnecessary or onerous because the firm of accountants had the professional capability to search for the documents. The court held that the request was reasonable because it was primarily aimed at obtaining accounting details and potential tax advice.


Although an unreported decision this case does illustrate that an accountant can be ordered to hand over copies of its files to the liquidator of an insolvent company, if the liquidator reasonably requires the files in question to carry out their statutory duties and the disclosure sought is not unreasonable, unnecessary or oppressive.

Civil Procedure Rules are amended to provide for 'buffer' orders

You may recall that in our February edition of Accountability we highlighted the strict approach being taken by the courts when time limits and deadlines set by court orders, rules and practice directions were not met and when applications for relief from sanctions were being made as a result.

Parties have been understandably concerned about their ability to agree extensions of time with an opponent, where an automatic sanction applies to a failure to comply with the court order or rule in question. As a consequence the courts have, in recent months, been inundated with urgent applications seeking extensions of time, even when the extension being sought would have no impact on the timetable to trial, it was agreed between the parties and was embodied in a signed consent order.

The Civil Procedure Rules Committee recognised that the position needed clarity and they have now approved an amendment to CPR 3.8, which will have effect from 5 June 2014. The amendment will enable parties to agree an extension to any time limit by prior written agreement, up to a maximum of 28 days, provided always that any such extension does not put at risk any hearing date.


The key provisos are that (i) the agreement is reached in advance of the deadline, so if the deadline has already passed an application for relief from sanctions will still need to be made, and (ii) that no hearing date is put at risk - any hearing date, not just the trial date.

You may be able to hear the collective sigh of relief from the legal profession...

Industry News

FRC consulting on changes to the Corporate Governance Code

The Financial Reporting Council (FRC) is consulting on changes to the UK Corporate Governance Code (the Code), which sets out good practice for UK listed companies. This consultation forms part of the FRC's regular two-yearly review of the Code (used to identify and implement any necessary changes) and follows on from the consultations held in October and November last year.

The consultation covers director's remuneration, risk management and going concern, audit committees and audit tendering, and location of the corporate governance disclosures.

Some of the main changes proposed in relation to 'risk management and going concern' include requiring companies to state:

  • in their financial statements whether they consider it appropriate to adopt the going concern basis of accounting and to identify any material uncertainties in their ability to continue to do so;
  • whether they believe they will be able to continue in operation and meet their liabilities, taking account of their current position and principal risks. As part of this, companies should specify the period covered by the statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months.

On directors' remuneration the changes include companies:

  • placing greater emphasis on ensuring remuneration policies are designed with the long-term success of the company in mind, and understanding that the lead responsibility for doing so rests with the remuneration committee;
  • putting in place 'claw back arrangements' - arrangements enabling a company to recover sums paid or to withhold variable pay when it was considered appropriate to do so;
  • explaining, when publishing AGM results, how they intend to engage with shareholders when a significant percentage of them have voted against any resolution.

Other proposed changes include that companies should monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report.

The consultation closes on Friday 27 June 2014. If the proposed changes are implemented they will apply to financial years beginning on or after 1 October 2014.

FRC publishes amendments to FRSSE

On 29 April 2014 the Financial Reporting Council (FRC) published amendments to the Financial Reporting Standard for Smaller Entities (FRSSE) to take account of the recently implemented Small Companies (Micro-Entities' Accounts) Regulations 2013 (SI 2013/3008) (Regulations).

The Regulations permit micro-entities (the UK's smallest companies) to prepare 'abridged' financial statements with limited accompanying notes. Qualifying companies can therefore use simplified formats for their balance sheet and profit and loss account. The Regulations also introduce a presumption that the accounts give a true and fair view of the company's financial position if they comply with the minimum requirements.

The principal amendments to the FRSSE relate to the presentation and disclosure requirements for financial statements of micro-entities. The FRC took the view that without amendments to the FRSSE, micro-entities would not be able to benefit from the exemptions under the Regulations while complying with the FRSSE reporting requirements. The amendments therefore bring the FRSSE into line with the Regulations and allow micro-entities to take advantage of the new legal provisions while being FRSSE compliant.

Following the amendments, the information that must be disclosed in the notes to the financial statements is limited to that concerning guarantees and other commitments and certain transactions with directors. In addition, the FRSSE states that micro-entities may no longer revalue any fixed assets or measure any current asset investments at current cost, which is a result of the Regulations having simplified the measurement bases available for fixed assets and certain current assets.

To benefit from the legal exemption, a micro-entity must not fall within one of the excluded categories (e.g. charities) and must meet two of the following criteria:

  1. turnover must not exceed £632,000;
  2. the balance sheet total must not exceed £316,000; and
  3. the average number of employees must not be more than 10.

The FRC anticipates a more comprehensive review of the FRSSE once the remainder of the EU Accounting Directive has been implemented into UK law, and accordingly notes that these amendments represent an "interim solution."

The amended version of the FRSSE is effective for companies with financial years ending on or after 30 September 2013 and which file their accounts on or after 1 December 2013.

New draft Partnership Tax Manual

HMRC published a new draft Partnership Manual on 29 April 2014 following the recommendations of the Office of Tax Simplification for a consolidated version of the guidance on partnerships. The purpose of this manual is to make the guidance more easily accessible.

The manual provides a general overview on partnerships and amalgamates HMRC's guidance on tax applicable to partnerships and limited liability partnerships. The manual is stated as being designed to provide:

  • a basic understanding of partnerships and how they are taxed in the UK;
  • information about how the Self-Assessment regime applies to partnerships, including registration and filing requirements, as well as compliance procedures;
  • an overview of how the partnership profits are determined, including more detailed advice on commonly occurring issues;
  • guidance on some of the more complex issues affecting partnerships, such as special rules that may apply to certain types of partnerships or to those with mixed membership or international aspects; and
  • details of where you can find further guidance.

The guidance highlights key pieces of information to be aware of and makes it clear that other guidance produced by HMRC on partnerships will not be replicated in the manual but the manual will signpost where that guidance can be found. For those with a detailed understanding of partnerships and the taxation rules the guide may not be relevant, however, it provides a good overview that small partnerships (and others) may well find useful.

Comments on the draft manual can be sent to

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