Transparency and trust: seeing the way to reform
Good Company July 2014 edition
- Transparency and trust: seeing the way to reform
- Service of English legal proceedings on overseas directors
- Personal guarantees by directors
- Raising money under false pretences
- Holding company liability for health and safety
- Proper purpose test for access to register of members
- When not to be a de facto director
Proposals to increase transparency and trust in the UK business environment are taking shape following publication of the Government's response to its July 2013 consultation. A new, publicly accessible, central registry of beneficial ownership of companies and limited liability partnerships will be established, with individuals being required to disclose their interests and companies having to ascertain beneficial ownership of significant shareholdings. Bearer shares will be abolished. In addition, changes are proposed to tackle opaque corporate control resulting from the use of corporate and "front" directors and to update the directors' disqualification regime and provide redress for creditors.
Implementation will require primary legislation and relevant provisions have been included in the Small Business, Enterprise and Employment Bill which is now making its way through Parliament.
The principal proposal is the introduction of a central registry of beneficial ownership of UK companies. This will apply to all UK companies, other than quoted companies which comply with the significant shareholder regime under the Disclosure and Transparency Rules or equivalent disclosure requirements imposed by a regulated market. It will also apply to limited liability partnerships and the Government is considering its application to other corporate bodies such as Scottish limited partnerships.
Individuals holding a significant beneficial interest in a UK company will have to notify the company. In addition to passing the information on to Companies House for inclusion in the central registry, public companies will be required to maintain their own register of beneficial owners. Private companies need not keep their own register provided they update the information at Companies House as changes occur – this is in line with other Government proposals relating to private companies' registers of members, directors, directors' residential addresses and secretaries.
Where a company knows or has reasonable cause to believe that there are other individuals who have not reported their beneficial ownership, it will have to make enquiries of those individuals and powers currently only available to public companies to require information about interests in their shares will be extended to private companies. These powers include the ability to apply for a court order imposing restrictions on the relevant shares relating to transfer, voting rights and dividends.
An individual will be classed as a beneficial owner if he ultimately owns or controls more than 25% of a company’s shares or voting rights, or if he otherwise exercises control over the company or its management. If a beneficial interest is held through a trust, it is proposed that the individuals who control the activities of the trust should be recorded as beneficial owner. In most cases this will require only the trustees to be registered, but in some cases the beneficiary, settlor or protector of the trust might need to be registered.
A subsidiary whose parent company is a UK company, which itself complies with the new beneficial ownership regime (or a quoted company which is exempt from the requirements), need only record information about its parent company, not the beneficial owners of the parent.
Beneficial owners will be required to provide the following information:
- full name;
- date of birth;
- country or state of usual residence;
- residential and service address; and
- date on which the beneficial interest was acquired and details of the interest and how it is held.
Information on the central registry maintained by Companies House and information held on a company's own register of beneficial ownership will be publicly available, with the exception of residential addresses. Full dates of birth will also be withheld from the public register at Companies House unless the company is a private company and has opted not to maintain its own register.
It will be possible for an individual to apply to the Registrar of Companies to prevent information about their beneficial ownership of companies being made available to the public. Exemption may be granted in exceptional circumstances, where an individual may be put at risk either because of the nature of the company in which he invests or due to their own personal circumstances.
These proposals will impose significant new obligations on private and unquoted public companies and individuals who hold significant interests in them. In many cases the information revealed will be of limited interest (for example, where registered shareholders are also the beneficial owners of the shares they hold, or beneficial interests are held by passive investors) and it remains to be seen whether the costs and effort involved will be outweighed by the potential benefit to the UK business community of discouraging nefarious activity like tax evasion, money laundering and terrorist financing.
The Government considers bearer shares, where a share warrant is issued stating that the bearer is entitled to shares rather than the shareholder being entered in the company's register of members, to be incompatible with its ambitions for corporate transparency.
The creation of new bearer shares will be prohibited. Where a company already has bearer shares, the holders will be given a set period of time in which to surrender the bearer share warrant for conversion into registered shares. Thereafter, the company will be required to apply to court for cancellation of the shares.
Companies are currently permitted to appoint another company to be a director, provided that they have at least one director who is an individual. Limited liability partnerships can appoint corporate members without restriction.
For companies, this is set to change. Generally, the appointment of corporate directors will be prohibited with a limited number of specific exemptions for situations where the use of corporate directors provides particular business benefits, where that coincides with areas of low risk of financial crime, high standards of corporate governance or high levels of disclosure or regulatory oversight. Exemptions are likely to include:
- group structures including large listed companies or large private companies;
- open ended investment companies; and
- corporate trustees.
Companies would have one year from the introduction of the implementing legislation to deal with existing corporate directors.
The Government is seeking views on the inclusion of limited liability partnerships in this system.
Use of "front" directors
The Government has identified the potential for a lack of transparency and accountability when a director registered at Companies House acts as a front, obscuring those who really exercise control. It proposes to tackle this by updating the director disqualification regime, as discussed below, and improving information about the duties directors owe.
In relation to those who really exercise control, the proposal is to build on the current regime applicable to shadow directors to make it clear that having a single director act in place of the true "director" is no longer a way of avoiding accountability. The Government is also seeking views on whether the general statutory duties of directors should be explicitly applied to shadow directors and potentially even to those who control a single director.
The Government is not proceeding with its original proposal of a register of nominee directors.
Disqualification of directors
The Government is proposing a number of measures intended to ensure the directors' disqualification regime is efficient and effective.
The matters to be taken into account by the courts and the Insolvency Service in determining whether a director should be disqualified (and, if so, for how long) will be broadened. In particular, the following will be taken into account:
- the extent of the director’s responsibility for material breaches of domestic or overseas legislation or sectoral regulation by the company;
- the impact of the director's behaviour on those who have suffered from his misconduct, encompassing both a sense of the wider social impact and the effect on vulnerable creditors;
- any overseas misconduct by the director or any criminal conviction in connection with the promotion, formation or management of a company overseas (and possibly any disqualification from acting as a director overseas); and
- any previous positions as director of a company that has become insolvent and any relevant aspect of the director’s track record in running these companies, including previous disqualifications.
The Government is also planning to improve co-operation between the Insolvency Service and sectoral regulators and to allow the sharing of investigatory information and the use of investigative material in disqualification proceedings.
The time limit for bringing proceedings to disqualify a director when a company becomes insolvent is to be increased from two to three years.
Compensation for creditors
Creditors who suffer loss as a result of a director's misconduct do not generally benefit from the directors' disqualification regime and current measures allowing action to be taken to secure financial redress for creditors, such as for wrongful trading, are not often used.
Such action can, at present, only be taken by a liquidator or other insolvency office-holder. To increase the chances of action being taken against miscreant directors for the benefit of creditors, liquidators and other insolvency office holders will be permitted to assign causes of action arising on insolvency to a creditor or another party to pursue.
In addition, the court will be given power to make a compensation order against a director who has been disqualified where creditors have suffered identifiable losses from their misconduct.
Danielle Harris is a senior associate and professional support lawyer in the corporate group of Fieldfisher in London.
This article is based on an article written for Company Secretary's Review, published by LexisNexis.