In July 2013 the UK government published a discussion paper entitled Transparency & Trust: enhancing the transparency of UK company ownership and increasing trust in UK business. The paper contains some far-reaching proposals which, if implemented, would have some profound effects on the way in which UK companies are governed, managed and controlled and to some extent, on the landscape of directors’ duties and liabilities. The three stated aims behind the proposals are:
- To prevent illegal activity
- To better enable companies to be held to account
- To provide businesses, investors, employees and consumers with confidence that companies are acting fairly
Whilst no-one would argue with these ambitions and whilst in his introduction to the paper, Vince Cable, Secretary of State for Business, Innovation and Skills is careful to say that he remains firmly committed to reducing regulation and the burdens on business, the proposed changes beg almost as many questions as they seek to answer. In particular it is hard to see how they would lead to a reduction of regulation.
Some of the Most Eye-Catching Proposals
1) Disclose Ownership Interests
The UK Share Register contains the names of the legal owners of the shares in all UK companies but quite often the beneficial ownership of the shares is held elsewhere either through the use of nominee shareholders or by other means of controlling or managing the way in which a company operates. The proposal is that UK companies be put under an obligation to disclose not just legal but also ultimate beneficial ownership interests.In many cases the beneficial owners of a company will be those individuals who, whether alone or in combination, own or control more than 25% of the company’s shares or voting rights.
The idea is that companies will be required to obtain and hold information on beneficial ownership and make it available to law enforcement and tax authorities through a central registry maintained by a registrar of companies. Real questions arise as to the way in which accurate information will be obtained and kept up to date and as to whether any sanctions will be imposed on directors of companies which fail to keep such information accurate or up to date.
2) No New Bearer Shares
The government proposes the prohibition of the creation of new bearer shares and a grace period for current holders of such shares to convert them to ordinary registered shares. Bearer shares are legally owned by those individuals who literally hold (or “bear” them). I recently blogged on an interesting case in which a Court upheld a negligence claim against a firm of accountants on the basis of its failure to recommend the use of a tax avoidance scheme involving bearer shares. It is not hard to see why the government might wish to phase these out.
3) Reduce Corporate and Nominee Directors
A proposal is made to reduce the number of corporate and nominee directors by “enhancing transparency around their use”. If implemented, this option would require any director who has entered into a legal arrangement which permanently hands over all responsibility for the management of the company to another individual to disclose that fact to Companies House.
An alternative proposal would make it an offence for directors to divest themselves of their duties as a director by signing any such legal documents. Indeed, the paper goes so far as to suggest that the UK should follow the example of various other jurisdictions which have opted to completely prohibit corporate directors. What is not clear is how the government intends to separate what it regards as legitimate and necessary use of nominee directorships from the opaque practices to which it objects.
4) Reckless Conduct Offences
The discussion paper implements an earlier recommendation made by the Parliamentary Commission on Banking Standards to the effect that directors’ statutory duties should be strengthened in the banking sector by creating a new offence of reckless conduct and by going so far as to change the statutory duties of directors of large banks so that they are required to prioritise “safety and stability” for the firm over the interests of shareholders. The discussion paper goes further still and asks whether changes of this kind of duty should extend to other “key sectors”. (Link to PCBS statement and may be to bit of Paper which talks about “key sectors.”)
5) More Powers for Sectorial Regulatory
By way of alternative to the quite radical changes in 4 above, the paper also floats the idea of granting additional powers to certain sectorial regulators to enable them to ban people from acting as a director in any sector. Thus, for example, a ban by the Pensions Regulatory Authority or the Financial Conduct Authority could be extended more widely.
The suggestion is also made that the scale of loss suffered by creditors and the impact on wider society should be explicitly taken into account when determining whether to disqualify directors and if so for how long.
6) More Powers for Liquidators
Finally, one change which could have a considerable practical impact on directors of insolvent companies (and their insurers) relates to a liquidator’s ability to sell or assign a right of action against former directors. As things stand, a liquidator may bring a civil claim for wrongful trading against directors of an insolvent company only where there are sufficient assets to do so. The government proposes that the statutory right be granted to liquidators to sell or assign fraudulent or wrongful trading causes of action. In effect, this would enable liquidators to sell a claim onto individual creditors or possibly even to third parties.
Indeed, a last sting in the tail proposal goes so far as to suggest that courts be given a new power to make compensatory awards at the time of a directors’ disqualification order. That would indeed mark a very radical shift from the current regime. Presumably judges would be given discretion to award what would in effect be damages to creditors and others consequent on a disqualification order.
The Government is inviting submissions in response to its Discussion Paper. There are undoubtedly some proposals here which would attract popular support. Indeed, I wouldn’t like to bet against some of them appearing in the next Queen’s Speech. Nevertheless, a lot of questions as to how they would work in practice would need to be answered before they become law.