Summary and implications
The business secretary, Vince Cable, has announced that the Government will proceed with its proposals to introduce a new Companies House register of company beneficial ownership, together with obligations on companies and individuals to identify and disclose information on beneficial interests. The Department for Business, Innovation & Skills (BIS) has also announced an overhaul of the company director disqualification regime, which will broaden the matters to be taken into account when determining whether a director is unfit, allow the courts to take overseas misconduct into account, and give power to disqualify someone from being a UK director if he or she has been convicted of an overseas criminal offence in connection with company management. BIS also proposes to abolish bearer shares entirely and to abolish corporate directors subject to certain very limited exemptions.
The proposals are set out in a Government response document, published in April 2014, which is available here. This follows the BIS discussion paper, Transparency & Trust: enhancing the transparency of UK company ownership and increasing trust in UK business, which was launched in July 2013 with the intention of increasing corporate transparency and accountability. BIS has now also published a Government response document in connection with its October 2013 consultation on Company Filing Requirements, which is available here. Both sets of proposals should be considered in parallel.
Central registry of company beneficial ownership information
The Government's view is that all UK corporate entities which currently register information on their members at Companies House should be subject to the new requirement to obtain and hold beneficial ownership information and provide it to a central registry. This will include companies limited by guarantee and LLPs, and will apply to existing as well as new corporate entities. However, companies which are subject to the Disclosure and Transparency Rules, or have securities listed on a regulated market subject to equivalent disclosure requirements, will be exempt from the new requirements regarding beneficial ownership.
The new proposals will use the definition of beneficial ownership which is found in the anti-money laundering legislation. Information on individuals who ultimately own or control more than 25 per cent of a company's shares or its voting rights, or who otherwise exercise control over a company or its management, will need to be obtained and held by the company and provided to Companies House. Where a qualifying beneficial interest is held through a trust, in most cases this will require only the trustee(s) to be registered.
Companies will be required to maintain a register of beneficial owners, including their residential addresses, although residential addresses need not be made public. All of the information held must be notified to Companies House. Companies must update the register of beneficial owners if they know, or might reasonably be expected to know, that a change in beneficial ownership has occurred. Beneficial owners will also be under an obligation to inform the company of any changes. The provisions of Part 22 of the Companies Act 2006, which give a public company powers to require information about interests in its shares, will be extended to private companies.
Companies will be required to provide an initial statement of beneficial ownership on incorporation and to update their beneficial ownership information at least once a year. As part of this, companies will be required to list all changes that have occurred during the period in question. Private companies may opt out of holding their own register and instead maintain and update their beneficial ownership register at Companies House directly. Beneficial owners may provide a service address for the public register, as directors currently do. There is more detail on how companies should update the information in the Government response on Company Filing Requirements, which proposes to amend the annual return process. The requirement to complete an annual return will be amended to a requirement to "check, notify changes if necessary and confirm" information at least once in a 12-month period. The Government intends that beneficial ownership information should form part of this "check and confirm" system.
A key issue is the extent to which the beneficial ownership register at Companies House should be publicly accessible. The Government has taken the view that the public register should contain the following information:
Companies House will also hold a residential address and a full date of birth for the beneficial owner but this information will only be accessible to specified authorities. BIS is considering which UK and overseas authorities should have access to the protected information.
However, it should be noted that under the Company Filing Requirements proposals, a private company will have the option of not keeping any, or all, of the following registers: register of directors; directors' residential addresses; secretaries; members; and the proposed register of beneficial ownership. Instead, the company would be required to keep the information available for inspection on the public register at Companies House. This would include the full date of birth of beneficial owners (as well as of directors).
Bearer shares and corporate directors
The Government proposes to prohibit companies from issuing new bearer shares. Existing bearer shares will also be abolished. There will be a period during which bearer shareholders can surrender their existing bearer share warrants and convert them to registered shares. After that period expires, companies with bearer shares outstanding would be required to apply to court to have those shares cancelled.
The Government has also decided to prohibit corporate directors, whilst providing for some limited exemptions to the prohibition. Views are welcomed on whether this should also extend to LLPs. The exemptions will apply where the use of corporate directors is regarded as both higher value and lower risk, such as in group structures including large listed companies, group structures including large private companies, and charities. Depending on the availability of the exemptions, this may be a significant change for many groups of companies, although the Companies Act 2006 did introduce a requirement that all companies should have at least one director who is a natural person.
In its Transparency & Trust discussion paper, the Government indicated that it had concerns about nominee directors acting irresponsibly as a "front" for wrongdoers. It suggested proposals to require the registration of front directors and those who control them, and making it a criminal offence for a director to take formal legal steps to divest their powers.
The Government does not currently plan to proceed with either of those proposals. However, it does plan to develop a simple system, linked to a streamlined process of director registration, to increase awareness of directors' duties and of directors' liabilities. The Registrar of Companies will contact newly appointed directors to inform them of their responsibilities and legal obligations, and that they might want to consider their position if they are unwilling or feel unable to meet them. This will be supported by more widespread improvements in the availability and content of information about directors' duties in the UK. There will not, however, be a more onerous requirement for compulsory directors' education, training or qualifications.
The streamlined process for appointing a director is outlined in the Company Filing Requirements response. The Government considers that the current requirement for companies to file a "consent to act" for all newly appointed directors and company secretaries is outdated and should be replaced by a system where when a company notifies Companies House of a new appointment, it makes a "statement of truth" to confirm that the appointee has consented to his or her appointment. Companies House will then write to the new director to notify them that their appointment has been recorded on the public register and direct them to information on their legal duties and responsibilities. The new director will be able to apply for the appointment to be removed from the public register if he or she did not, in fact, consent to act.
The Government is also considering new means of increasing the accountability of those who control a director. This may involve explicitly applying the directors' statutory duties to shadow directors, and potentially to those who control a single director (at present, the definition of a shadow director is restricted to those who control all or a majority of the directors on a company board). The Government states that it welcomes views on this. It is to be hoped that the Government will accept that the use of nominee director arrangements in UK companies is widespread and accepted business practice and does not of itself imply wrongdoing.
The response document indicates that the Government will seek to reform various aspects of the law on disqualification of company directors. When sufficient Parliamentary time is available, it will replace Schedule 1 of the Company Directors Disqualification Act 1986 (which sets out the matters which a court must take into account in determining whether or not a director is unfit). There will be a new, broader and more generic provision setting out the factors which will be considered and providing for consideration of the materiality of a director's conduct, culpability and track record, and the impact of the director's behaviour. The court or the Insolvency Service will have to take all of this into account in determining whether an individual should be disqualified and if so, for how long.
It will also seek to amend the current law to require the courts to take any overseas misconduct into account when deciding whether or not to disqualify, and to provide the Secretary of State with the power to disqualify an individual from acting as a director in the UK when convicted of a criminal offence in connection with the promotion, formation or management of a company overseas.
There are also proposals to better integrate sectoral regulation and the director disqualification regime, and to increase the time limit for instituting disqualification proceedings from two to three years from the earliest insolvency event. The courts will also be permitted to make a compensation order against a disqualified director where creditors have suffered identifiable losses from the director's misconduct. Liquidators and administrators will also be permitted to assign causes of action which at present only they have the right to pursue, to increase the chances of action being taken against disqualified directors for the benefit of creditors.
Other aspects of the Company Filing Requirements response
There are some welcome proposals which will lighten the administrative burden on company secretaries and others involved in the running of companies. In addition to the proposals on moving away from the annual return to a "check and confirm" approach, on allowing private companies to opt out of the requirement to keep their own registers and just update the public registers, and the streamlined director/company secretary appointment process, there will also be changes to simplify the statement of capital requirements, to allow Companies House to widen its use of electronic communication, to allow the Registrar of Companies to change a company's registered office address where the Registrar decides the company is not authorised to use the address it has supplied, and to introduce a faster strike-off process for both voluntary and compulsory strike-off.
Many of the changes outlined will require primary legislation, so change will not be immediate as legislation can only be passed when Parliamentary time allows. There will also need to be transitional periods for existing companies to implement the changes proposed. However, company secretaries and others involved in the running of companies should start to consider how the changes will impact on them.
For private companies, a key decision will be whether to opt out of the requirement to keep and maintain their own registers of members, directors, directors' residential addresses, secretaries and the proposed new requiement to hold a register of beneficial owners. This may reduce the administrative burden on the company in that, whilst it must still notify the registrar of all information for the public registers, it will no longer have to separately update its own registers.
Companies that will not be exempt from the new requirement to maintain a register of beneficial ownership should start to think about how they will obtain information about beneficial ownership. Groups that currently utilise corporate directors will need to keep an eye on whether they will be able to take advantage of the limited exemptions to the prohibition on corporate directors, and otherwise begin to consider how they will replace corporate directors with individuals. Corporate shareholders who appoint nominee directors to the boards of investee companies or joint venture companies will need to consider the impact of any changes to the "shadow director" regime, and make sure their point of view is adequately conveyed to the Government.