How (not) to cut red tape

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Wholesale changes to UK Companies legislation

Despite its cryptic title,

The Small Business, Enterprise, and Employment Act 2015

(SBEEA 2015), impacts extensively on all Companies: large, small and everywhere in between. Directors, company secretaries, shareholders (trustees and beneficial) and all stakeholders should be aware. The Act was brought in to effect on 26 May 2015 –  the timetable for change is robust.

The intention as ever is to make the UK more efficient and hospitable to business and to cut red tape. It seeks to achieve this laudable aim by amending, and adding extensively to the Companies Act 2006, (CA 2006) which at some 1300 sections, 16 schedules and seemingly endless guidance and over 70 statutory instruments was itself already reputedly the longest ever Act of Parliament, introduced under the then Government’s ‘Think Small First’ mantra.

 SBEEA 2015 joins the Deregulation Act 2015, squeezed through in the last weeks of Parliament, in pursuit of the Government’s Red Tape Agenda, so that the further ‘simplified’ company law regime is now governed amongst other provisions by:

  • The Companies Act 1985
  • The Companies Act 1989
  • The Companies (Audit), Investigations and Community Enterprise Act 2004
  • The Companies Act 2006
  • (SBEEA 2015)

That legislation only deals with companies that are going concerns. Regarding insolvent companies, applicable legislation includes:

  • The Insolvency Act 1986
  • The Company Directors Disqualification Act 1986
  • The two Insolvency Acts of 1994
  • The Insolvency Act 2000
  • The Enterprise Act 2002
  • Deregulation Act 2015
  • Extensive delegated legislation, regulations and statutory instruments

A company registered before the CA 2006 applied is an ‘existing company’. A ‘company’ is one that is registered under that Act.   There remains therefore two parallel universes for directors, shareholders, other stakeholders and practitioners to grapple with. Describing the further legislation as ‘simplification’ is paradoxical.

SBEEA could helpfully have been named “The Companies Act (Amendment) Act 2015. It introduces a series of major changes. Here we examine some of the key changes and the implications for businesses.

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  1. Business-to-Business contracts

The transparency of payment practices will be increased through a new reporting obligation on the UK’s largest companies. Notwithstanding the Act’s title, directed at “Small Business”, this provision exclusively affects “large” companies (including large LLPs) as defined by CA 2006; s.3 of SBEEA introduces a new power for the Secretary of State to require companies to publish information about their “payment practices and policies” regarding business-to-business contracts. These will apply to contracts for goods, services or intangible assets and may include information about standard and non-standard payment terms, processing and payment of invoices, applicable codes of conduct or standards, disputes relating to payment of invoices and about payments owed or paid by the company due to late payment of invoices, whether in respect of interest or otherwise.

The objective is to ameliorate the imbalance of power between large and small companies in negotiating fairer deals. Abuse of power will also be highlighted by large companies.

 

  1. Bearer Shares Abolished

Already effective 26 May 2015: Section 84 of SBEEA inserts a new section 779(4) of the CA 2006, prohibiting the creation of bearer shares, and irrespective of whether the company’s articles permit this. Schedule 4 of the Act sets out transitional arrangements for the mandatory cancellation or conversion of existing bearer shares.

  1. Changes to filing requirements and registers

Due to come into force in April 2016: SBEEA removes the requirement to file an Annual Return with Companies House. Instead, a company must provide Companies House with a confirmation statement that it has provided all of the information it was required to provide during the period covered by the statement. his statement must be provided every 12 months, within 14 days of expiry of the previous 12 month period. For new companies, the first statement should be provided 12 months from the date of incorporation of the company.

The Act also introduces the option for companies to elect to keep information on a central public register, rather than keeping and maintaining their own separate registers (such as the Register of Directors, Register of Members etc.) The aim of this is to reduce the administrative burden on companies by only requiring one register to be updated and maintained rather than several.

  1. New obligation to register persons with ‘significant control’ (“PSC”): This requirement is due to come into force from 1 January 2016

Details of all entities or persons with ‘significant control’ over a company must be identified and kept on a public register. It is vital to carefully consider how the rules will impact on your company, and it is important to note that PSCs may not appear on the register of members as, depending also on changing circumstances, they may include creditors, funders, commercial counterparties and investors etc.

A company will need to review various aspects when deciding its PSCs:

  • existing registers;
  • articles of association;
  • shareholders’ agreements;
  • financing agreements; and
  • other commercial agreements

Specified conditions of significant control:

a. shares – more than 25% shareholding (directly or indirectly)

b. voting rights– more than 25% of voting rights (directly or indirectly

c. board control  – to appoint or remove a majority of the board of directors (directly or indirectly)

d. significant influence or control over the company – (the meaning of this is currently unclear and is to be set out in statutory guidance)

e. trusts and partnerships – influence or control being exercised over a trust or partnership (T or P) where T or P itself satisfies any one of condition 1-4 in relation to a company

Details to be included for individuals include:

  • Name
  • Address
  • Date of birth
  • Nationality
  • Date of registration of the interest, and
  • Nature of the interest

Small Business, Enterprise and Employment Act 2015

Although details are awaited, this is likely to prevent someone holding the beneficial interest in shares ‘hiding behind’ a nominee shareholder.

  1. Ban on Corporate directors

Effective 26 May 2015; s. 87 of the Act inserts a new section 156A in CA 2006, requiring all directors to be natural persons and prohibits the appointment of corporate directors.

Any appointment made in contravention of this section will be void and it will be a criminal offence to breach this section. Until now, the rule has been that at least one Director of a Company has to be a human being, but the others or some of them can be Companies.

A new section 156B gives the Secretary of State the power to make regulations setting out the exceptions to the general requirement that directors must be individuals, but the details are yet to be revealed. If this power is exercised it must include the compliance process, including registration requirements, and must require that the company has least one individual who is a director.

The transition period for companies with corporate directors is dealt with in a new section 156C of CA 2006. This provides that after one year of section 156A coming into force, any remaining corporate directors will cease to be directors (subject to any exceptions set out in regulations made under section 156B).

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  1. Shadow directors

Effective 26 May 2015: Section 89 of the Act amends section 170(5) of CA 2006 to provide that the general duties of directors (as set out in sections 170 to 177 of the CA 2006) apply to shadow directors where and to the extent they are capable of applying. The Secretary of State also has the power to make regulations concerning the application of general duties of directors to shadow directors (section 89 (2)).

Section 90 of the Act also amends the definition of shadow director in section 251 of the CA 2006. Section 251(2) currently provides that a person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity. Section 90 expands this provision to make it clear that directions or instructions given in exercise of a function conferred by or under legislation is not sufficient to meet the definition, nor is any advice or guidance issued by a Minister of the Crown.

Similar amendments are made in respect of the definitions of shadow directors contained in the Insolvency Act 1986 and in the Company Directors Disqualification Act 1986.

  1. Disqualification of directors

A new approach for liquidators, administrators and administrative receivers will be introduced on reporting misconduct by directors. There will also be two new grounds for disqualifying a director in the UK:

  • where they have been convicted of a company-related offence overseas; and
  • where they have instructed a disqualified director.

The range of matters a court must consider when disqualifying a director is expanded to include:

a. the nature and extent of harm the misconduct has had; and

b. the director’s track record in running failed companies.

The Secretary of State can seek compensation from a disqualified director where misconduct resulting in their disqualification has caused identifiable loss to creditors.

The time limit to apply to court for disqualification of an unfit director of an insolvent company is increased to 3 years from the date the company becomes insolvent (previously 2 years).

  1. Registration of directors

The Act removes the requirement to provide Companies House with a ‘consent to act’ from the person appointed as director (either in the form of a signature or, where the appointment is made online, the provision of certain personal identification information). This is replaced by an obligation on the company to provide a statement that the appointee has consented to act. This applies to both appointments on incorporation and further appointments after incorporation.

There is also a new application process to remove names from the register of directors where consent was not provided.

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  1. Access to finance

The Act includes a range of measures that are intended to improve the ability of small and medium businesses (SMEs) to access finance and seek loans away from their banks. For example, banks will, if requested, pass on details of SMEs they turn down for a loan to online platforms to match them with alternative finance options.

10. Red tape

Regulations affecting business will be reviewed frequently to ensure they remain effective. A target for the removal of regulatory burdens will be published in each Parliament.

An independent ‘Small Business Appeals Champion’ will be appointed for non-economic regulators. This role is designed to ensure  theat business needs are taken into account through a straightforward complaints and appeals process.

11. Employment

Zero hours contracts will not have exclusivity clauses stopping individuals from working for another employer. However, it has been suggested that this is relatively cosmetic, as no machinery for dealing with offenders or penalty is introduced.

12. Conclusion

The main corporate aspects of the Act are aimed at:

  • Increasing transparency of who controls UK companies
  • Deterring and sanctioning those who hide their interests
  • Simplifying company filing requirements to reduce duplication and improve flexibility in companies’ dealings with the Registrar
  • Amending the directors’ disqualification regime to strengthen the rules that prevent an individual from acting as a director where that individual has committed misconduct

Whilst these objectives are laudable, it appears that numerous provisions do not have essential specific details of the rules or exceptions yet decided, often where there is a criminal sanction for any breach.

The cost to business of familiarisation, implementation and compliance with these provisions, including where they are incomplete or based on shifting sands, is likely to have been substantially underestimated. Estimating direct savings is notoriously difficult and the costs of familiarisation are frequently higher than anticipated.

Further analysis of the Act and its application to Directors will follow. Meantime, manufacturers of red tape are unlikely to appear on the endangered species list any time soon.

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