Companies Act 2006: Radical Overhaul by SBEEA 2015

‘The Small Business, Enterprise, and Employment Act 2015’, (SBEEA 2015), heralds major changes to all UK Companies of whatever size. All stakeholders should be aware of the overhaul, including shareholders, directors and company secretaries. There is a rolling implementation programme underway through to April 2016, by which time all stages of the Act will be fully in force.

With the objective of making “the U.K. the best place in the world to start and grow a business”, the legislation seeks to improve the environment for small U.K. businesses by cutting red tape, providing greater access to finance, and making it easier to export goods and services made in Britain. This is coupled with targeting companies that abuse their position, whether by failing to pay the minimum wage, or misusing zero-hours contracts.

Cutting red tape is an ambitious objective, but the route taken is by amending, and adding widely to the Companies Act 2006, (CA 2006). This already constituted some 1300 sections, 16 schedules, never ending guidance and 70 plus statutory instruments, making it reputedly the longest ever Act of Parliament. Paradoxically, it was introduced under the then Government’s ‘Think Small First’ mantra.

SBEEA 2015 was passed in the closing days of the last administration, along with the Deregulation Act 2015, both grappling with the Coalition’s “Red Tape Challenge”. Now, ‘simplified’ company law is regulated amongst other provisions by:

1. The Companies Act 1985
2. The Companies Act 1989
3. The Companies (Audit), Investigations and Community Enterprise Act 2004
4. The Companies Act 2006
5. The Small Business, Enterprise, and Employment Act 2015

The above Acts only cover companies that are trading – for insolvent companies, relevant legislation includes:

1. The Insolvency Act 1986
2. The Company Directors Disqualification Act 1986
3. Two Insolvency Acts of 1994
4. The Insolvency Act 2000
5. The Enterprise Act 2002
6. Deregulation Act 2015
7. Extensive delegated legislation, regulations and statutory instruments

There remain therefore two parallel universes for directors, shareholders, other stakeholders and practitioners to contend with:

A company registered before the CA 2006 applied is an ‘existing company’, but a ‘company’ is one that is registered under that Act. For the latest legislation to be described as ‘simplification’ or ‘cutting red tape’ seems perverse. SBEEA 2015 might more accurately have been entitled “The Companies Act (Amendment) Act 2015”. It sets out wholesale changes of considerable reach. Major changes to UK Company law highlighted below include:

1. Abolition of bearer shares

2. Business to business contracts

3. Prohibition of corporate directors

4. Directors must be individuals

5. Shadow directors

6. Altered filing requirements and registers

7. Directors registration

8. Persons with ‘significant control’

9. Director’s disqualification

10. Compensation from a disqualified director

11. Access to finance

12. Red tape

13. Employment

1. Abolition of bearer shares (26 May 2015)

Section 84 of SBEEA 2015 inserts a new section 779(4) of CA 2006, prohibiting the creation of bearer shares. This is regardless of the company’s articles otherwise permitting this. Schedule 4 of the Act gives transitional arrangements for the mandatory cancellation or conversion of existing bearer shares.

2. B2B contracts

Payment practices will be more transparent due to new reporting obligations on the UK’s biggest companies. Despite 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 2015 introduces a new power for the Secretary of State to oblige companies to publish information about their “payment practices and policies” regarding business to business contracts. These may apply to:

• contracts for goods, services or intangible assets
• 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
• 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.

3. Prohibition of corporate directors (26 May 2015)

Section 87 of SBEEA 2015 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 breach of this provision will be void and a criminal offence. 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.

4. Directors must be individuals

A new section 156B of SBEEA 2015 gives the Secretary of State the power to make regulations setting out the exceptions to the general requirement that directors must be individuals, however the details are yet to be announced. 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).

5. Shadow directors (26 May 2015)

Section 89 of SBEEA 2015 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.

6. Altered filing requirements and registers (April 2016)

SBEEA 2015 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.

7. Directors registration

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.

8. Requirement to register persons with ‘significant control’ (1 January 2016)

Details of all entities or persons with ‘significant control’ (“PSC”) 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 because, depending also on changing circumstances, they may include creditors, funders, commercial counterparties and investors.

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

1. existing registers
2. articles of association
3. shareholders’ agreements
4. financing agreements
5. other commercial agreements

“Significant Control”

• shares – more than 25% shareholding (directly or indirectly)
• voting rights– more than 25% of voting rights (directly or indirectly)
• board control -right to appoint or remove a majority of the board of directors (directly or indirectly)
• significant influence or control over the company – (the meaning of this is currently unclear and is to be set out in statutory guidance)
• 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

Individual’s Details include:

1. Name
2. Address
3. Date of birth
4. Nationality
5. Date of registration of the interest
6. Nature of the interest
7. Employment Act 2015

Further details are awaited, but it is likely to prevent the identity of someone holding the beneficial interest in shares being concealed behind a nominee shareholder.

9. Director’s disqualification

Misconduct by directors will be subject to new reporting provisions by Liquidators, administrators and administrative receivers. There will also be two new grounds for disqualifying a director in the

UK:

a. where they have been convicted of a company-related offence overseas; and

b. where they have instructed a disqualified director.

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

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

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

10. Compensation from a disqualified director

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).

11. 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. E.g, banks will, if requested, pass on details of SMEs they refuse a loan to online platforms to link with alternative finance options.

Small Enterprise and Employment Act 2015

12. 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 guarantee the needs of business are taken into account through a straightforward complaints and appeals process.

13. Employment

As referred to in our employment blog, zero hours contracts will not have exclusivity clauses preventing staff from working for another employer. However, it has been suggested that this is relatively toothless, because there is no machinery for dealing with offenders or introducing any sanction.

14. Conclusion

The main changes to U.K. company law under SBEEA 2015 aim to

• Increase transparency of who controls UK companies
• Deter and sanction those who hide their interests to facilitate illegal activities
• Simplify company filing requirements to reduce duplication and improve flexibility in companies’ dealings with the Registrar
• Amend the directors’ disqualification regime to strengthen the rules that prevent an individual from acting as a director where that individual has committed misconduct.

U.K. companies may welcome these changes and the flexibility provided, including making it easier to match corporate filing obligations with preparation of annual accounts.

However, the cost to business of familiarisation, compliance and implementation of the new laws may have been substantially underestimated, adding to the already wildly proliferating statute book. Projecting direct savings is notoriously difficult. That is exacerbated where the specifics of the provisions and penalties are incomplete or based on guesstimates.

Whilst the objectives of SBEEA 2015 seem laudable, numerous areas are still without basic provisions providing any essential details of the regulations, the specifics, or exceptions which are still to be worked out. That seems unfortunate, especially where so frequently there is a criminal sanction for any breach. That too seems at odds with the latest socio-political trend towards “Nudge” influencing public behaviours, rather than “Push”, sanctions and criminalization.

Paul Sykes is a Director in Dispute Management. This article should not be relied upon as legal advice and you should contact us for advice on your specific circumstances. For further information on directors’ and shareholders’ duties and responsibilities, shadow directors and company disputes, please contact paul.sykes@lf-dt.com