Is it the engines, the wings or the Administrator that will keep the airlines flying?

Earlier this week the European Transport Commissioner relaxed strict rules banning state subsidies for airlines. This follows reports that the cancellation of approximately 100,000 flights earlier this month due to the volcano in Iceland was going to cost the industry in the region of £2 billion.

Inconvenient as the closedown of European airspace was for travellers, the interruption of cash flow could potentially be ruinous for a lot of airlines.  Sadly, this probably means that we could see some seeking administration orders, with a view to helping them trade through the short-term cash flow problems that they are encountering.

But, what exactly is an administrative order?

An administration order under the UK legislation is similar to US Chapter 11 protection, though different in certain key ways.

An administration order is generally sought by directors of a company, who can otherwise be at risk of personal liability if they keep trading without a realistic expectation of being able to pay the creditors.

An Administrator is appointed to oversee the company’s position and to take over management of the business.  As a result:

•    Creditors cannot commence a winding up of the company.

•    The powers of the directors to manage the business are transferred to the administrator.  At the end of the administration, the administrator has the option to reappoint the directors.

•    The directors must produce a statement of affairs for the administrator which will be the starting point for a revised business plan.

•    The administration order is publicised.

The effect is to give the company a chance to stabilise itself, save jobs, minimise losses to creditors and minimise disruption to stakeholders generally.  It’s a very useful device that has saved lots of companies from avoidable bankruptcy.  Hopefully though we won’t see too many administration orders in the coming months.

You’ll end up inside if you undertake insider dealing…

Imagine the situation. You’re a partner in one of the most prestigious investment banks in the world, you’re well known in the investment world and are no doubt on a great remuneration package. You suddenly obtain access to some price sensitive information which the public is not aware of.

What do you do?

Well, if you are Malcolm Calvert and you were a partner in the investment bank Cazenove, then the answer was to undertake some insider dealing activities which resulted in a significant illegal profit.

Calvert obtained some confidential information concerning some upcoming takeovers and told his friend Bertie Hatcher to buy some shares in the companies. As soon as the takeovers were announced to the public the share price shot up and Hatcher sold them and made a profit of over £100,000. In the spirit of the “shadiness” of this whole saga Calvert’s share of the money was given to him in cash in an envelope that had been left with a bookmaker at a racecourse.

The conclusion of all of this was a successful prosecution by the Financial Services Authority (FSA) which yesterday ended with Calvert being jailed for 21 months (there was a maximum sentence of seven years for his offences).

As every good ACCA F4 student will know insider dealing is the illegal activity of using non-public (ie privileged) information to make a personal gain or avoid a personal loss and as Calvert now knows very clearly can result in jail sentences.

Interestingly though, until the 1950s similar “insider trading” activities were considered legitimate. However, we are not in the 1950s but in 2010 and as a result the act of using price sensitive information to trade in shares and profit out of it is illegal.

Calvert would have known this had he studied for paper F4. I guess though that for the next 21 months he’ll have plenty of time on his hands. Whether or not he’ll use that time to study insider dealing laws though is another matter altogether!

Do you know your cucumbers from your mussels?

Students studying law topics often worry about the need to quote cases in their exam answers, but their can be little doubt that the ability to do so can only enhance the quality of your answers and the impression that you create with the marker.

UN Case 48

In this case, a German buyer of cucumbers (from a Turkish seller) sought to obtain a price reduction on the grounds that the cucumbers supplied were not of the specified quality under the terms of the contract.

The buyer’s application was dismissed on the grounds that they had waited too long in notifying the seller as to the non-conformity of the goods. This was because they were inspected by the buyer’s representative in Turkey, but the notification was not given until the cucumbers actually physically arrived in Germany seven days later.

UN Case 84

This was a truly international contract for sale of goods, in that it involved the sale of New Zealand mussels, by a Swiss seller to a German buyer.

On delivery to Germany, the Mussels were impounded by the German authorities, as they did not comply with German regulations in that they had too high a cadmium content, and so the buyer refused to pay for the goods.

It was held that the buyer had to pay for the mussels, as they would have been classed as fit for human consumption under Swiss law and there was no way in which the Swiss seller could have been aware of the stricter German regulations, in the absence of notification of this to them by the buyer.

Companies Act 2006 Provisions now in force

A number of provisions from the Companies Act 2006 finally came into force with the final implementation of the Act on 1 October 2009.

However, the Act has been examinable in the F4 Paper for some time, albeit the examiner has expressed some concern about candidates still answering questions with reference to the old legislation.

It is very important therefore to ensure that your study materials are up to date.

As an example, one of the provisions which has just come become effective in practice is the changed allowable uses of the Share Premium Account.

Use of share premium is now restricted, so that only the premium arising on a specific issue of shares is available to write off any expenses or commission associated with that issue.

It is no longer possible to use an existing balance on share premium to write off the costs of a new issue of shares. Neither is it possible to use the share premium account to write off any formation expenses nor to write off costs/provide for premium associated with the issue/redemption of debentures.

Organic, Natural and Ethical or fraudulent trading?

‘Organic, Natural and Ethical’ is what the One stood for in the name of a company called Onefood.

Reported recently in the UK media, I think this case could well become my new lecturing example for the criminal offence of fraudulent trading.

Ostensibly the company was supplying the famous London food store Fortnum & Mason (as well as others) with organic produce. In reality, the company was buying cheap non-organic foods in supermarkets such as Waitrose and Tescos, removing the original packaging and then replacing with the company’s own packaging.

Neil Stansfield the CEO of the company, who also traded under the name of Swaddles Organic was quoted in a local newspaper as saying “Fortnum & Mason searched for the finest British classic pie throughout the UK and after arduous searching they came upon Onefood and Swaddle, sampled the product and found it to be the best in the UK. We’re impassioned by supplying natural, ethical and unadulterated food and we’re here to educate consumers about the well-being that comes from choosing British-grown organic meat.”

In truth the pork pies being referred to were bought from a local butcher for £1.30 and sold to Fortnum & Mason for £2.50. In another example given in court, a salmon purchased from Waitrose for £20 was sold on for £51.

Stansfield, his wife Kate (who acted as Company Secretary) and Russell Hudson (the company operations manager) all pleaded guilty to fraudulent trading. Neil Stansfield was sent to prison for 27 months and disqualified from working as a company director for 6 years. Kate Stansfield was sent to prison for 50 weeks, ordered to do 150 hours community service and banned from being a company director for 3 years. Russell Hudson received a 40 week prison sentence, suspended for 2 years and was ordered to do 150 hours community service.

Now where’s that organic chicken I was going to roast for supper tonight?

Nice car, shame about the usage…

As promised, the blog will be used to build up your database of decided cases for ACCA F4 purposes and increase your CLOUT in the F4 exam room.

Case 190 1997

The defendant, an Austrian seller of imported Italian cars, sold a Lamborghini Countach to the plaintiff, a Swiss buyer. The seller, however, was not able to make delivery of the car to the buyer.

The court held that as the car was purchased for personal use (if I had one I wouldn’t let anybody else drive it!), in accordance with Article 2(a), the CISG did not apply to the case.

However, the court indicated that the CISG could have been applied to the case if the fact that the seller ‘neither knew nor ought to have known that the goods were bought for any such use’ had been proved by the buyer.

Do you have the CLOUT?

If you look up the word ‘clout’ in a dictionary you will find a variety of meanings.

A blow especially with the hand.

A white cloth on a stake or frame used as a target in archery.

A piece of cloth or leather.

If you are wondering what this has to do with your paper F4 studies, you would be right, absolutely nothing!!

However, what is relevant to your studies, is that based on a decision by the United Nations Commission on International Trade Law (UNCITRAL) at its twenty-first session in 1988, the Secretariat established a system for collecting and disseminating information on, court decisions and arbitral awards relating to Conventions and Model Laws that have emanated from the work of the Commission.

The acronym for the system is CLOUT (Case law on UNCITRAL texts).

This would be an obvious source of application questions for the examiner. Some of the CLOUT decisions are referred to already in your study materials.

In future blogs we shall look at some of the more recent cases, the facts of which, which might well feature in examination questions.

That reminded me.

Question 10 in the June ACCA paper F4 (GLO) exam was a 2-parter dealing with the two criminal offences of ‘money laundering’ and ‘insider dealing’. It would appear that the examiner was fairly pleased with the standard of answers on the former, but not the latter.

He commented as follows:

“However, there was some concern as to the insider dealing part of the problem, which raised some concerns and suggests that a full question on that area would have met with much less success (could this be a hint for the future??!!). The essential problem was that candidates seemed to think that insider dealing was just using or revealing information gained from inside a company. That, of course, is completely incorrect and it is not insider dealing unless the purchase or sale of securities is involved.”

Earlier this year the UK financial regulator, the Financial Services Authority brought a successful criminal prosecution against solicitor Christopher McQuoid and his father-in-law James William Melbourne. The facts of the case were that McQuoid discovered that his employer, TTP Communications was about to be taken over by Motorola. Just 2 days before the announcement of the takeover, Melbourne purchased over 150,000 shares in the company.

After the takeover had gone through, Melbourne sold the shares making a profit of around £50,000, half of which he then paid over to McQuoid.

Since this topic was first brought into the syllabus, it has prompted a number of questions in the exam. Will you be well prepared for the next one?