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Ian Defty, insolvency practitioner at DDJ Insolvency and formerly of the Insolvency Service, provides his views on how effective the government's proposals in relation to transparency in company ownership might be from an insolvency perspective.

Original news

Consultation: Transparency and trust--Enhancing the transparency of UK company ownership and increasing trust in UK business--

 A new central registry of company beneficial ownership information will be created by primary legislation, according to the government response to a consultation on transparency and trust in UK company ownership. In responding to the consultation, the Department for Business, Innovation and Skills (BIS) has also confirmed the creation of new bearer shares will be prohibited and the duties of company directors will be emphasised in order to make the consequences of acting as a 'nominee' director as a front for another person clear.

 What are the main components of the proposals?

In his introduction to the response Vince Cable the minister for the Department for Business Innovation and Skills stated:

 'We need business, investors and society to have trust in a system which holds accountable the minority who transgress, protecting the interests and reputation of the majority who do not. A lack of accountability--even a perception of a lack of accountability--can undermine faith in the legal framework which should protect the innocent majority when things go wrong.'

 To support these aims the government have outlined what they intend to do and a brief overview of those proposals are detailed below.

 A central registry of company beneficial ownership information

It will become necessary for companies to maintain and provide to a central register, maintained by Companies House, a detailed register of their beneficial owners. That is those who own or control more than 25% of a company's shares or voting rights or who otherwise exercise control over a company or its management.

 Bearer shares and the opacity of company ownership

It is the intention to prohibit the creation of new bearer shares and those bearer shares already in existence will be required to be surrendered for conversion to registered shares.

 Opaque corporate control through corporate directors

The government intends to prohibit companies becoming the director of other companies. Although there will be limited but specific exemptions.

 Opaque corporate control through irresponsible 'front' directors

There will be a move with new legislation to improve the standard of information available in regard to directors' statutory duties to increase awareness by directors' of the duties that they have and the government will seek to ensure that the courts are required to take account of any statutory breaches.

 Updating the directors' disqualification regime

The government intends to change the legislation around directors' disqualification by updating the schedule of matters of unfitness with a 'new, broader and more generic' provision. This will set out the factors that the Insolvency Service and ultimately the courts will consider when determining whether an individual should be disqualified.

It is also proposed that legislation is changed to take into account overseas misconduct and to be able to take into account company criminal offences committed overseas. It is also intended to increase the time limit for instituting proceedings from two to three years.

 What impact will these changes have?

These changes, while not hugely dramatic, seek to tidy up legislation and to ensure that the UK company regime provides transparency to all stakeholders--such as investors, employees and consumers--and seeks to attract both UK and overseas businesses by providing an open book to corporate governance.

It seeks to continue the work of the National Crime Agency (NCA), including the ill-fated National Fraud Authority now subsumed into the NCA, and other regulatory departments to stop the misuse of companies by criminals. However, if that misuse takes place then, with an open corporate governance policy as detailed, at least any regulatory authorities will, arguably, be able to easily identify the perpetrators.

In the consultation period many stakeholders provided responses--some 300, including banks, lawyers and accountants as well as private individuals with the process continuing even after the period for receiving views formally closed.

 What is your view on the new bill and what effect might it have on insolvency and how companies will be run in future?

Certainly for most company stakeholders the proposals are a good thing. It is imperative that users of companies or those investigating the failure of companies are able to identify who is actually running a company in order to have a better understanding of the causes of failure. It is likely that much of the original ideas behind this paper came from government enforcement agencies such as the Insolvency Service, the Companies Investigation Branch and the NCA who are often frustrated in their investigations due to their inability to identify the actual 'puppet masters' behind companies.

It is a fact, however, that a lot of what is in the proposals will not have a huge effect on businesses as the vast majority of companies are compliant. In any event, when users such as banks or accountants utilise the services of companies, or otherwise, beneficial ownership information has to be obtained in the course of money laundering checks.

In a sense the new proposals are doing nothing more than formalising that information by legislating that a company has to keep details of beneficial ownership at its registered office and provide it to Companies House. This also has to go in tandem with the recent announcement that all online material held by Companies House will, next year, become free to users.

Arguably the issue of company ownership doesn't go far enough. It is still possible to incorporate a company without any checks on whether the directors or shareholders actually exist. Notwithstanding that business organisations have often raised this with Companies House, they have stated they are not a regulatory department--nor do they have the resources to check that those listed on, or added to their database actually exist. So while legislation will dictate that beneficial owners need to be registered, should someone choose to use a company as vehicle for fraud then it still remains possible to do so.

The updating of the disqualification regime raises one important issue-- the ability to consider overseas convictions obtained in the promotion, formation or running of a company. The rest of the changes are already, albeit not set in legislation, implemented by the Insolvency Service and the courts.

Business users want more disqualifications, not necessarily tighter legislation. While the Insolvency Service maintains its disqualification figures at 1,200 a year out of approximately 30,000 directors of failed companies is a laudable figure, it is less than it was 15 years ago (yet arguably easier since the bringing in of disqualification undertakings).

It is important also to consider that all insolvency officeholders have a statutory duty to report every director to the Insolvency Service, whether it is alleged that the director has been guilty of misconduct or not. Therefore the Insolvency Service receives reports on 30,000 directors a year but only disqualifies 4% of those.

 Assignment of insolvency actions

The proposals raise the additional issue of assigning insolvency actions such as wrongful or fraudulent trading claims. While insolvency office holders already have the ability to assign contractual issues it has not in practice been possible to assign insolvency actions--the majority of these actions have to be brought either in the name of the officeholder or the company as set out in statute.

Notwithstanding most insolvency experts raising concerns as to how this proposal could be taken forward, and the government's response accepting that there are concerns that third parties would not have access to an officeholders extensive statutory investigatory armoury of getting in papers and individuals before bringing claims, no remedy to these concerns has yet been suggested.

Interviewed by Eleanor Stephens.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.