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Significant Changes To English Company Law – Putting Company Affairs In Order

The combined effect of The Small Business, Enterprise and Employment Act 2015 and The Modern Slavery Act 2015 is to bring about changes to English Company Law driven by the quest for increasing transparency and trust in business, the Government's Red Tape Challenge, and a quest for solidifying ethical standards in business. The first of these is part of a global drive to address crime, notably tax evasion, money laundering and financing of terrorism. The second reflects the Government’s initiative to cut regulation. The third focuses on the standards which business applies to itself and its dealing with others.

The effects on business are potentially wide-ranging, requiring companies not only to consider their own governance structures and administrative procedures, but also their relationships with employees, suppliers and other parties. In this article we headline these changes, urging the reader to take the opportunity to review and, where appropriate, update their processes and procedures.

Transparency & Trust:

Shadow Directors

Shadow directors (i.e. those who effectively make the decisions on behalf of the company’s directors) need to be aware that since 26 May 2015 the general duties of directors will effectively apply to them in all but limited circumstances. Such general duties include: (i) acting in accordance with the company’s constitution; (ii) promoting the company’s success; (iii) exercising independent judgment; (iv) acting with reasonable care, skill and diligence; (v) not accepting benefits from third parties; and (vi) avoiding conflicts of interest and declaring where the individual has a personal interest in a particular transaction.

Bearer shares abolished

A bearer share is a share where no one is registered as the holder in the company’s share register. No new bearer shares can be issued from 26 May 2015. Existing bearer shares must be surrendered to the company for conversion into registered shares before 25 February 2016. Companies will be required to apply to court to cancel any un-surrendered bearer shares after that date. Companies should seek the surrender of any bearer shares in the run-up to February 2016.

New Beneficial Interest Disclosure & Persons With Significant Control

A company will be required to identify individuals and other legal entities who have significant control over it. The reader is encouraged to read the following article to see how he may be affected by these changes:  “Anything to Declare? – New Beneficial Interest Disclosure Requirements for UK Companies And Persons With Significant Control “.

Company response to Companies House– striking companies off the register

Timescales for responding to certain communications from Companies House are being reduced. This means Companies House will be able to strike unresponsive companies off the register more quickly. Changes will also be made to reduce the period of time for completing voluntary striking off of companies. These changes are expected to take effect from October 2015. Companies should seek to respond promptly to correspondence received from Companies House.

Directors: filing and registration requirements

A new duty is imposed upon the Registrar of Companies to issue a notice to each newly appointed director as soon as reasonably practicable after his appointment either explaining the roles and duties of a director or directing him to where such information can be found. If the person did not consent to become a director, he may apply to have his appointment removed from the register. The Registrar of Companies will effect that removal if such an application is made and the company is informed but fails to respond. These provisions are expected to become effective in December 2015. Companies should simply inform new directors, prior to their appointment, to expect to receive such a communication form Companies House.

Registered office dispute

Where Companies House received a complaint that a company is not authorised to use a particular address as its registered office, Companies House will be able to investigate and change the company’s registered office. This new provision is expected to be implemented in December 2015. Companies should, where planning to change registered office, ensure that the owners of that premises will not object.

Changes to Director Disqualification

Where a director of a company commits certain offences outside the UK this will enable the Secretary of State to seek his disqualification as a director of the company. The offences in question relate to the formation and management of a company, including receipt of company property or acting in the capacity of an administrative receiver (or similar capacity).

In addition, the court will be able to take account of a wider range of matters when considering whether a director should be disqualified in any circumstances. These shall include consideration of his track record, the impact of his behaviour upon others, and overseas convictions and/or misconduct.

Procedural changes will extend the duration for bringing director disqualifications from two to three years and enhance the co-operation between different regulators in such processes.

These changes are expected to be implemented during April 2016.

Corporate Directorships Largely Abolished

New provisions will require all directors, unless covered by an exemption under regulations, to be individuals. In other words so called corporate directors, where one company serves as a director for another company, will largely be prohibited. The Government is currently considering the scope of the exemption, having originally considered allowing it to apply to public companies, certain charitable companies, corporate trustees of pension funds, and a few other categories. However, following consultation, the Government appears to be favouring a general exemption, possibly meaning that only a company registered in the UK will be permitted to serve as a corporate director.

As matters stand the new provisions are expected to take effect in October 2016 with companies having a year from that effective date to replace all corporate directors not covered by the exemption. Any corporate directors not covered by the exemption one year after the effective date will automatically be removed from office.

Readers should keep this pending change in mind, not only identifying any existing corporate director within a company (or their wider group), but also being mindful of this issue when replacing directors (including as part of corporate restructuring).

The Red Tape Challenge:

Annual Returns to be replaced by Confirmation Statements

The requirement to file annual returns will be replaced with a requirement for companies to check and confirm each year to Companies House that they have delivered all required information. This confirmation will include PSC information - see link to New Beneficial Interest Disclosure article above. The expected implementation date for Confirmation Statements is April 2016.

Option to centralise company registers

It is expected that from April 2016 private companies will have the option to keep company registers (including the register of members, registers of directors and their residential addresses and the new PSC register) centrally at Companies House rather than at their registered office or other place for inspection.

Statement of capital

Rather than declaring amounts paid or unpaid on each share under certain statement of capital requirements, the process will be simplified with a requirement to disclose the aggregate amount unpaid on the company's share capital. This is expected to take effect from April 2016.

Streamlining company registration

By the end of May 2017 the Secretary of State is required to put in place a streamlined electronic system for filing appropriate information and registering a company with Companies House and registering for taxes with HM Revenue & Customs. While no action is required by the reader, this does serve as a warning that further changes to company law are on the horizon.

Solidifying ethical standards in business:

Anti-slavery measures: target large business but impact upon all!

Recently the Prime Minster confirmed only larger businesses with a turnover of £36 million or more will be required under The Modern Slavery Act 2015 to produce an annual statement signed by a director. The statement, which must be accessible via their website, will either confirm: (a) the steps taken by the company to ensure that slavery and human trafficking are not taking place in either its business or any part of its supply chain; or (b) no such steps have been taken. The idea is that larger businesses will fear damage to their reputation and feel pressured to give the former statement. However, to comment on any part of their supply chain, larger businesses will inevitably seek reassurance from their suppliers, whatever their size. This could, for example, take the form of requiring representations, warranties and indemnities to be given to those larger businesses when entering into supply contracts. Therefore, in practice all will need to consider the implication of this new requirement, expected to come into force from October 2015.

Publishing Gender Pay Gap Information

The Secretary of State is required no later than 26 March 2016 to make regulations under the Equal Pay Act 2010 requiring companies with 250 employees or more to publish information about their gender pay gaps and practices. In the interim companies should prepare themselves, not only by reviewing their existing pay gaps and practices, but also being mindful of this issue when taking on new recruits or carrying out pay reviews. This may help companies avoid potentially embarrassing public information disclosure in the near future as well as causing potential ill feeling amongst employees.

Conclusions and Next Steps

Company law is changing and, given the driving factors behind that change, this is unlikely to be the end of this matter. With this in mind, we suggest companies review their corporate governance and processes, keeping these under review. Be mindful that just because a particular change does not affect your company directly, it may do so indirectly.

This article is intended to provide general information about recent and pending changes to English Law, which may be of interest to the reader. It is not intended to constitute legal advice or to provide a comprehensive analysis of the recent and pending changes to the Law. The reader is advised to seek independent legal advice in respect of their particular circumstances before taking any action.