Corporate Legal Executive,
Historically one of the government’s objectives has been to address the issue of corporate transparency among businesses.
Aiming to make information such as ownership, who the directors are and the nature of the businesses activity, open and easily accessible to all and ultimately prevent fraudulent activity.
In an attempt to increase corporate transparency within businesses the Small Business Enterprise and Employment Act 2015 (SBEEA 2015) was introduced and brought many changes to areas of company law, including:
- Persons with Significant Control (PSC) regime – ensuring businesses clearly identify who holds more than 25% of shares or voting rights in a company, has the right to appoint or remove the majority of the board of directors or has the right to exercise or actually exercise, significant influence or control over the company;
- Abolition of Bearer shares – these were unregistered shares where evidence of ownership was possession of the relevant share warrant;
- Statutory duties apply to Shadow directors –meaning those individuals (with the exception of professional advisors) who are not appointed as directors but whose direction the majority of the board usually follows can be held liable for breach of these duties; and
- Prohibition of Corporate directors.
All of the above – except the prohibition of corporate directors – are currently in force
What does the Prohibition of Corporate Directors include, and why is it not currently enforced?
The prohibition of corporate directors (prohibition) found in section 156A of the Companies Act 2006 (CA 06) provides that only a natural person can be appointed as a director. Therefore, once the section is implemented, it will be an offence to appoint a corporate body as a director – and all of those who are responsible for the appointment will be liable to a fine.
The expected implementation of this section was October 2016, and in anticipation of this, many professional advisors and business owners took action and removed corporate directors and replaced them with individuals.
However, four years on and the prohibition is still not law. The reason for this long delay is due to a number of consultations.
What changes were proposed in the latest Government consultation?
The most recent Government consultation in September 2020 proposes many significant changes to Companies House (CH); which includes changes to the incorporation of companies.
Currently, CH readily accepts applications for incorporations and is unable to remove or amend information that is on the Register of Companies (Register). For example, most applications for incorporations are completed electronically, and often, manual input results in human error. Typically, a court order is required to correct some of these errors, which can be a costly and time-consuming process. However, the government proposes to give CH the power to amend certain inaccurancies that are submitted to the Register during the incorporation process.
Another proposed change is the introduction of a new Identification Verification (IV) procedure. This IV procedure is intended to be part and parcel of the incorporation and filing process, and CH will require the procedure to be carried out by company directors, PSCs and third-party agents filing on behalf of companies (no requirement from shareholders). As a result, Companies will not be incorporated and documents will not be accepted for filing until the IV has taken place. In addition, if a failure to verify appears to be suspicious, CH will have the authority to notify the necessary bodies and organisations.
These welcome proposals aim to give CH more control to correct errors inputted on the Register and remove the court process currently required to correct them, as well as ensuring CH can verify the relevant individuals, reducing the risk of fraudulent activity.
What are the exceptions to the prohibition?
In addition to above proposals, the consultation proposes to implement the long overdue prohibition. The proposed exception to the prohibition is that a Corporate can be appointed as a director if:
- All its directors are natural persons; and
- Those natural persons have gone through the IV procedure at CH.
This exception will also apply where a company appoints an Overseas Corporate as a director. Therefore, all directors of the Overseas Corporate will have to go through the IV procedure.
The deadline for responses to these proposals is February 2021 – and there are equivalent proposals for Limited Liability Partnerships, Limited Partnerships and other bodies that have to comply with the CA 06. It is unlikely that any of these proposals will be implemented with immediate effect as the government will have to review all the responses received and establish the required funding. Also, CH will have to undertake the necessary technical system preparations for the IV procedure. The aim is to have a system design finalised by 2020/2021 financial year. In addition, arrangements will have to be put in place for all existing active companies on the Register.
What do businesses need to do to prepare for these incoming changes?
For the time being companies can proceed with incorporations and filings in the usual way. We will continue to keep a watching brief on the results of the consultation and will notify our clients when there is an announcement on any changes to the incorporation process and requirement for companies to take action.
The information above is not and should not be taken to be legal advice. You should not take action or omit to take action based on this information.
If you require any help on the issues raised above, our colleagues would be delighted to help you with any queries: