The Companies Act 2006 (Amendment of Part 25) Regulations 2013 (the "Amendment Regulations"), which were approved by Parliament on 11 March 2013, represent a significant change in the regime for the registration of company charges in the United Kingdom. While the expansion of the categories of charge requiring registration is, of itself, an important development, the aspect that is most likely to be of interest among security providers, secured parties and third parties alike will be the requirement for the charging instrument to be available on the public register. This alerter considers the implications for market participants of this particular aspect of the Amendment Regulations. It does not consider other aspects, such as the practical implications of the new electronic filing mechanism. The Amendment Regulations are scheduled to come into force on 6 April 2013. A copy of the draft Amendment Regulations can be obtained here.
The primary effect of the Amendment Regulations will be to replace the current piecemeal approach to the registration of company charges with a single registration system (excluding the separate regimes applicable to charges over particular types of property, such as intellectual property and real estate). As such, subject to certain limited exceptions, all charges created by UK-registered companies (it is thought that this deliberately avoids referring to UK branches of overseas companies, although the drafting is not as clear as the previous rules) or by limited liability partnerships registered under the Limited Liability Partnerships Act 2000 will require registration. This can be contrasted with the current rules requiring the registration only of prescribed categories of charge, such as floating charges and charges over book debts. This obligation will, of course, remain subject to the Financial Collateral Arrangements (No. 2) Regulations 2003 (the "FCA Regulations") which provide that the registration provisions do not apply to a security financial collateral arrangement falling within the scope of the FCA Regulations. The Amendment Regulations will therefore simplify the registration regime by expanding the types of charge that require registration under the Companies Act.
One of the policy changes surrounding the Amendment Regulations is to increase transparency, by making the charging instrument available on the public register. Currently, only particulars of the charge (i.e. those required to be included on the Form MG01, or previously the Form 395, submitted to Companies House) are available on the public register. The Amendment Regulations will introduce section 859I of the Companies Act 2006, which requires the Registrar of Companies to include in the register any documents delivered under the registration provisions (i.e. the certified copy of the charging instrument itself). The register will be available for public inspection in the ordinary way. Redaction of information on the certified copy will be extremely limited, with redaction only permitted to personal information relating to an individual (other than the name of the individual), the number or other identifier of a bank or securities account, and a signature (draft section 859G).
Aside from the potential for a greater number of charges to be registrable, one of the principal policy concerns for parties to a security arrangement will therefore be the extent to which commercially sensitive information may become readily available in the public domain. The sensitivity of information will depend on the context, although it is expected that security providers, secured parties and third parties such as custodians will wish to consider the extent to which information might validly be moved to a document other than the charging instrument itself. The relative ease of searching for security interests created by an English company makes the issue particularly pronounced where the sensitive information relates to the chargor itself. However, the issue will equally be important for a secured party or custodian, either because it is known to have a relationship with the chargor (as is the case with prime brokers) or because it does not wish for its documents to become widely available in the context of related negotiations with the chargor.
As noted above, registration will be required only where the arrangement does not constitute a financial collateral arrangement. As such, many security agreements will not require registration. However, often the secured party may not have the required degree of possession or control to render the arrangement a financial collateral arrangement (see, for example, the analysis relating to certain standard form custody agreements in Re Lehman Brothers International (Europe) (in administration) EWHC 2997 (Ch), in which we acted for Lehman Brothers Finance). Alternatively, there may be sufficient uncertainty that one of the parties registers the security as a precautionary matter. As such, market participants should consider the implications of the Amendment Regulations for security arrangements to which they are party.
In the context of security arrangements relating to OTC derivatives, repos and securities lending, sensitive information might include the amount of collateral, the type of eligible collateral and the manner in which exposure and value of collateral are calculated. Where account control arrangements have been put in place (as is increasingly the case in the context of haircut segregation), the chargor, secured party and custodian are also likely to consider as commercially sensitive the circumstances in which the secured party or the chargor have unilateral access to the collateral and the terms on which the custodian is willing to act. In the context of prime brokerage, which typically includes a lien and other charges, a much greater portion of the prime brokerage agreement is likely to be considered commercially sensitive.
In certain circumstances, it may also be prudent to obtain a representation from the other relevant parties that they will not present the charge for registration (which will only be feasible in practice if they have sufficient comfort that the arrangement constitutes a financial collateral arrangement or is otherwise exempt from registration).
Finally, the Amendment Regulations might result in parties changing the way in which the security arrangements are structured, perhaps avoiding where possible UK companies being chargor and reversing the roles of the parties (for example, replacing a charge with a title transfer and charge-back arrangement so that the chargor is not a UK company). This will obviously require an analysis as to the relative benefits of keeping information out of the public domain against the disadvantage of being the party required to enforce security.
For more information about the potential consequences of the Amendment Regulations for you and your business, please speak to your usual contact in the Finance Department, or contact any of Daniel Franks, Guy Usher, Edward Miller or Ronit Grant.