Article / 1 Feb 2025
In this month’s update we:
The Economic Crime and Corporate Transparency Act 2023 (ECCTA) introduces a new corporate offence of “failure to prevent fraud”. The new offence will come into effect on 1 September 2025.
In-scope organisations will be criminally liable if an “associate” commits a specified fraud offence in order to benefit the organisation or its clients, and the organisation does not have reasonable fraud prevention procedures in place.
Businesses should take steps now to consider, adapt and update any existing prevention policies to ensure that they have reasonable procedures in place before September 2025.
Under the new offence, a relevant organisation will be criminally liable where:
The specified “fraud offences” are listed in Schedule 13 of ECCTA, and include offences under the Fraud Act 2006, the Theft Act 1968, and fraudulent trading (under the Companies Act 2006).
The new offence is modelled on the “failure to prevent” offences previously introduced in the UK, including failure to prevent bribery and the facilitation of tax evasion. In the same way as for these other offences, the new failure to prevent offence is, effectively, one of strict liability for the organisation as it will not be necessary to prove that its senior management knew about the fraud.
The Government has recently published Guidance on the new offence, outlining its key elements and offering practical advice on implementing fraud prevention procedures.
The new offence will apply to “large organisations” wherever formed or incorporated, provided that the fraud involves a link to the UK. This could be, for example, if one of the underlying fraud acts took place in the UK, or the gain or loss occurred in the UK. International companies could, therefore, be at risk of committing the offence, but the offence will not apply to UK organisations whose overseas employees or subsidiaries commit fraud abroad with no other link to the UK.
“Large organisations” are defined in ECCTA as incorporated bodies and partnerships (including Scottish partnerships and limited partnerships) that meet at least two of the following criteria in the financial year preceding the year in which the fraud is alleged to have taken place: (i) more than 250 employees; (ii) more than £36m turnover; and (iii) more than £18m in total assets.
The above criteria apply to the whole organisation, including subsidiaries, regardless of where the organisation is headquartered or where its subsidiaries are located.
It will be a defence for an organisation to prove that, at the time the fraud offence was committed, it had reasonable procedures in place to prevent fraud, or it was not reasonable in all the circumstances to expect the organisation to have any prevention procedures in place.
The Guidance sets out procedures, based on six flexible and outcome-focussed principles, that organisations should consider when implementing their own “reasonable procedures”.
If an organisation is found guilty of failure to prevent fraud it is punishable by an unlimited fine.
The offence does not impose individual liability on directors or other persons within the organisation who may have failed to prevent the fraudulent behaviour. However, the employee or agent who committed the base fraud may still be prosecuted individually for that offence, whilst the organisation may be prosecuted for failing to prevent it.
The new offence will make it easier to prosecute organisations for fraud as it will no longer be necessary to prove that a “directing mind and will” of the organisation was directly involved in the offence.
Businesses should use the time now to ensure that their fraud prevention policies and procedures are in place before September 2025. It is vital that each organisation assesses its own specific fraud risks, including having an understanding of who its associates are, and what might motivate them to commit fraud. Once relevant risks have been identified, tailored procedures should be put in place to address them. Communication of procedures to all levels of the organisation, and relevant training, should follow.
Although the new offence applies only to large organisations, the principles outlined in the Guidance should also be considered good practice for smaller organisations.
In the landmark judgment of Aabar Holdings Sarl v Glencore Plc and others [2024] EWHC 3046 (Comm), the High Court has held that the so-called “Shareholder Rule”, which prevents a company from asserting privilege against its own shareholders (except in very limited circumstances) does not exist in English law.
This decision represents a significant departure from a longstanding legal principle, and it will have significant ramifications for shareholder litigants and any company defending a shareholder claim.
If a document is “privileged”, it allows a party to withhold that document from production to a third party and, therefore, to protect the document’s confidentiality.
Under a legal principle known as the “Shareholder Rule”, a company cannot assert privilege against its own shareholder – and so prevent the shareholder from accessing the privileged document – except in relation to documents that came into existence for the purpose of hostile litigation against that shareholder.
Although recent cases have increasingly questioned the rationale and scope of the Shareholder Rule, the Aabar Holdings v Glencore case is the first to decide that the principle is unjustifiable and should no longer be applied.
Aabar Holdings (Aabar) was one of a group of claimants that had issued proceedings against Glencore Plc (Glencore) (and some former directors) for alleged misconduct by certain Glencore Group subsidiaries. Many of the claims against Glencore were brought under sections 90 and 90A of the Financial Services and Markets Act 2000, which give shareholders a statutory right to seek compensation from companies if they publish untrue or misleading market statements.
In the run up to the first case management conference, a dispute arose as to whether, and in what circumstances, Glencore would be entitled to assert privilege against the claimants in the proceedings. Aabar’s position was that the Shareholder Rule was a well-established principle of English law that had been approved by both the Court of Appeal and the Supreme Court. In contrast, Glencore argued that the Rule was anomalous, unprincipled and should no longer be applied.
A preliminary hearing was ordered to resolve these issues.
The Court agreed with Glencore and held that the Shareholder Rule was unjustifiable and should no longer be applied.
In his extensive judgment, the Judge analysed the foundations of the Shareholder Rule and the subsequent case law. He concluded that the original rationale for the Rule (based on a shareholder’s proprietary interest in a company’s assets) had not survived the nineteenth century ruling in Saloman v Salomon, which confirmed that a company has a separate legal personality distinct from its shareholders.
The Court also rejected Aabar’s submissions that the Shareholder Rule had “morphed” and could now be justified on the basis of “joint interest privilege” (where both parties have a joint interest in the subject matter of the privileged document). There was no binding authority that could justify the Shareholder Rule on this basis, and the Judge was doubtful that joint interest privilege even existed as a standalone species of privilege.
Interestingly, the Judge confirmed that if he was wrong and the Shareholder Rule did exist, it would not be confined to legal shareholders but would also extend to anyone holding a beneficial interest in shares (such as those holding securities in CREST). The Rule could also extend to a former shareholder (in relation to communications made when the person was still a shareholder) and to privileged documents held by a company’s subsidiaries.
Aabar has now applied for leave to appeal this decision and so we must wait and see what the ultimate ramifications of this landmark judgment will be.
In the meantime, the judgment will come as a blow to the increasing number of shareholder litigants seeking access to company documentation. Shareholder activism is on the rise and this decision (if not overturned on appeal) will strengthen the hand of companies that refuse to disclose confidential legal information to their shareholders.
The Supreme Court has considered the process for transferring the beneficial interest in shares in a UK company confirming that, in the circumstances, a written agreement was not necessary.
The case focused on the application of section 53(1)(c) Law of Property Act 1925. This provides that a disposition of an equitable interest must be in writing and signed by the person making the disposal.
The ownership of shares can be split between the legal title to those shares (that is, the person registered as the legal holder of the shares) and the beneficial interest in those shares (that is, the person entitled to the economic benefit of the shares). A beneficial interest in shares is an equitable interest of the type referred to in section 53(1)(c) above, so the transfer of such an interest would appear to require a written instrument.
But there is an exception to this requirement in relation to (amongst other things) constructive trusts (section 53(2) Law of Property Act 1925). A constructive trust arises by operation of law, rather than the express agreement of the parties. It is a legal construction used to stop a person who holds the legal title to an asset from denying the beneficial interest of another person in that asset. An example of a constructive trust is the “vendor-purchaser constructive trust”(VPCT) which typically arises where there is a contract for sale which requires some other step that has to take place before completion – for example, the payment of the purchase price, or the transfer of ownership of shares. The VPCT protects the buyer in the period between the contract and completion.
So, if the transfer of a beneficial interest in shares happens due to the creation or operation of a constructive trust, such as a VPCT, no written instrument is required.
The dispute in LA Micro Group Inc v LA Micro Group (UK) Ltd [2024] UKSC 42 arose out of a disagreement over shares in a computer hardware company, LA Micro Group (UK) Ltd (LA UK). That company was a joint venture between the founder, Mr Bell, and a US company, LA Micro Group Inc (LA Inc). The shareholders of LA Inc were Mr Lyampert and Mr Frenkel.
LA UK had two issued shares, one registered in the name of Mr Bell and one in the name of Mr Lyampert. The beneficial interest in both shares was originally held on trust as to 49% for Mr Bell and 51% for LA Inc. The company’s profits were split equally between Mr Bell and LA Inc.
Mr Lyampert and Mr Frenkel fell out, and Mr Frenkel said he wanted nothing more to do with LA UK. So Mr Bell, Mr Lyampert and LA Inc reached a new (oral) agreement under which the profits of LA UK would be split equally between Mr Bell and Mr Lyampert (as opposed to LA Inc). The legal title to the two shares remained registered in the names of Mr Bell and Mr Lyampert respectively.
Mr Frenkel claimed that he was entitled, via LA Inc, to a share in the profits of LA UK. So Mr Bell and LA UK applied to court for an order that Mr Bell and Mr Lyampert were each the sole legal and beneficial owner of the share registered in their respective name.
The High Court found that the transfer of the beneficial interest in the shares was ineffective as it was not in writing and signed by the transferors. But the Court of Appeal held that LA Inc had given up its beneficial interest in the shares via a VPCT and therefore a signed, written instrument was not required.
Mr Frenkel appealed to the Supreme Court arguing that there was no VPCT since the beneficial interest in the shares had not been transferred – a necessary requirement for a VPCT to exist – but rather it had been surrendered or released back to the legal owners of the shares. However, the Supreme Court disagreed. It found that the “quirk” in this case was that the VCPT not only provided interim protection to the buyers but was also the mechanism used to complete the transfer of the beneficial interest to them. But it was only after the beneficial interest had been transferred that it could be merged with the legal title. Although this meant that the VPCT only existed for a scintilla of time, it should still be recognised by the courts.
As a VPCT existed, this meant the matter fell within the exception to section 53(1)(c) and a signed, written instrument was not required.
Mr Bell and Mr Lyampert no doubt heaved a sigh of relief when the Court gave effect to their oral agreement. The decision is a reminder that although agreements can come into effect orally, there are some situations where a written agreement may be required to give effect to the underlying transaction. Had the agreement related to a transfer of the legal title to shares, a signed stock transfer would have been required in order to actually transfer the legal title. In this case, the unwritten transfer of an equitable interest in shares was saved by the creation of a constructive trust. Of course, the parties could have avoided the uncertainty by documenting their agreement in writing even if this was not technically required in order to give effect to the relevant transfer.
First published in Accountancy Daily.
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