Register of Persons with Significant Control

Hello and welcome to this week's blog.

This week we look at the new requirement introduced by Companies House since the end of June 2016 to improve the transparency of the control over a Company.

Changes

On the 26 March 2015 the Small Business, Enterprise and Employment Act 2015 ("SBEE") came into force.  The Government has advised that the purpose of the SBEE is  to make the UK a more attractive place to start, finance and grow a business and reduce the barriers that many small businesses face when growing.

A key element of the SBEE was to improve corporate transparency by requiring companies registered in the UK to keep a register of people with significant control over any company from the 6 April 2016.  Companies will be required to file this register at Companies House, which essentially replaces the current Annual Return.

So Who is a Person with Significant Control ("PSC")?

An individual qualifies as a PSC if they meet any of the following conditions:

•           Holding directly or indirectly more than 25% of the shares;
•           Holding directly or indirectly more than 25% of the voting rights;
•           Holding the right, directly or indirectly, to appoint or remove a majority of directors.

There are also two tests around the right to exercise significant influence or control:

•           An individual who has the right to exercise or actually exercises significant influence or control;
•           Trustees of a trust that is not a legal person who meet one or more of the specified conditions in their capacity as such and the individual exercises or has the right to exercise significant influence or control of the activities of that trust.

The register must contain details of “registerable PSCs”, who are individuals meeting any of the above conditions unless their interest is “non-registrable”. A non-registrable PSC is defined to be an interest held via another company.

However, a company could be a PSC if it meets one of the above conditions and would then be referred to as a Relevant Legal Entity ("RLE").  If this RLE is another UK company or is a registrable RLE under the SBEE, then the PSC only has to provide the details of that company.  If the entity is not a registrable RLE, for example it is an off shore company which did not meet the requirements to be a registrable RLE, then the register must provide details of the individuals in that RLE who have significant control of it, thus increasing transparency.

So What Information does the Register have to contain?

The information required in respect of each PSC is as follows:

•           Name
•           Residential and service address
•           Country of Residence/Incorporation
•           Nationality
•           Date of birth
•           The date they became a PSC
•           Details as to which of the above conditions they meet

Under the SBEE it is the duty of the company to identify and obtain information on PSCs and any failure to take reasonable steps to identify and maintain the register will be a criminal offence.

With effect from the 30 June 2016, the requirement to submit an Annual Return to Companies House will be replaced by the requirement to file an Annual Confirmation Statement which will include:

•           Changes to the registered office;
•           Details of company registers relating to directors and PSCs (see above);
•           Details of any Single Alternative Inspection Location (SAIL).
•           Changes to principle business activities
•           Changes in its capital

So how will these changes affect Companies from an Insolvency Point of View?

The Companies Act 2006 places certain duties on directors, one of which is to keep the company's statutory books and records up to date, which has always included the duty to keep and maintain a register of shareholders and to file an Annual Return with Companies House.

From a practical point of view there will be very little change going forward for the vast majority of companies, particularly small to medium size owner managed companies.

However if there are more complicated shareholding structures, the directors of any company will have to take reasonable steps to investigate the ownership of those shareholders to identify and record the people who are exerting significant control.

The issue of course is the use of the word "reasonable" as there is no legal definition as to what constitutes reasonable behaviour.  Accordingly this will be open to interpretation and will no doubt depend on the individual directors, knowledge, qualifications, experience and expertise.

It also raises the issue of Shadow Directors.  Under Section 251 of the Companies Act 2006 a shadow director is defined to be a person, "in accordance with whose directions and instructions the directors of the company are accustomed to act."

It is therefore clear that any Shadow Director would fall within the definition of a PSC and will therefore have to be recorded in the register. Given that by their very nature, a Shadow Director, directs the company "from the shadows",  this will no longer be possible.

On any formal insolvency appointment a report must be prepared to The Insolvency Service on the conduct of the directors.  Failure to maintain an accurate register and take reasonable steps to indentify and record PSCs will clearly be taken into account when considering whether a director is fit to continue to have the privilege of being a director of a limited company.

Given that this is new legislation there is no case law to refer to as to what would be considered reasonable steps to identify PSCs and also we do not know how much significance The Insolvency Service and Courts will place upon the duty to adequately maintain a PSC register.

However if there has been little or no loss to the creditors it is likely that very little weight will be given to any breach of conduct as it will not be in the public interest to seek to disqualify directors on this basis.  In contrast, if there has been a loss to creditors no doubt The Insolvency Service and Courts will place a very high emphasis on the duty to keep a PSC Register, particularly so in respect of Shadow Directors.

As always, Should you wish to discuss the register of persons with significant persons or any other insolvency matter in more detail, please do not hesitate to get in contact. Telephone: 01326 340 579, Email: ale@purnells.co.uk