People with Significant Control - Are We Really Going to Find Out Who They Are?

In my last post I looked at some ways in which the Small Business, Enterprise and Employment Bill attempted to remove some of the red tape involved in running a company.  In this post I look at some new red tape it will introduce when and if enacted in its present form.

Clause 81 and Schedule 3 of the Bill insert new provisions in the Companies Act 2006 aimed at making companies disclose their beneficial owners, which the Bill calls "people with significant control" or (as they will no doubt become known) "PSCs".  A PSC is essentially anyone with a shareholding of over 25% in the company, the right to appoint or remove a majority of its directors, or who "has the right to exercise, or actually exercises, significant influence or control over" the company (to be determined with the help of guidance to be published by the Secretary of State - but this sounds a lot like a "shadow director").

These are essentially the classes of people required to be identified for anti-money laundering compliance purposes, so it should make my job a lot easier filling in customer due diligence forms if I can just look up a new client company's PSCs on the public register accessible via Companies House Direct.  Banks will no doubt make a meal of it and introduce additional compliance procedures before companies can open an account with them, rather than this simplifying the process.

From the company's point of view, it creates a new statutory register of PSCs they will need to create and keep in their statutory books, or they can elect to keep it online at Companies House as one of the registers that can be kept in this way (as mentioned in my last post).  If they keep their own register, they will still need to file particulars at Companies House and confirm them annually in their confirmation statement (aka annual return), in much the same way as if the PSCs were directors.

Some companies may not know who their PSCs actually are, particularly if their shareholdings are held indirectly through nominees.  The Bill therefore gives them power to require disclosure, as public companies have at present, the sanction for non-compliance being service of a "restrictions notice", the effect of which is to suspend voting rights, dividends and the ability to transfer the shares.

Failure to comply with any of this by the company, its officers or the shareholders or PSCs affected is a criminal offence.

On the current timetable, companies will have to start keeping their own PSC registers from January 2016, but will not need to file it until April 2016.  This I suppose is to give them time to serve disclosure notices and receive and collate the replies.  Companies House will also need some time to get the online register up and running.

I wonder, however, how seriously this will be taken by companies under "significant control", which are presumably under the effective control of beneficial owners who wish to remain secret.  If they just register the nominees as PSCs, how will we be able to tell?  Most beneficial owners willingly identify themselves to professional advisers on a confidential basis for anti-money laundering compliance purposes, but may not be so happy to disclose their particulars on a public register - which may cause us some professional difficulties.  In any case, I doubt that real money launderers will register themselves as PSCs.

At least I don't need to worry about our company secretarial service not being needed any more, as whilst a little red tape is removed by one hand, a lot more is tied up by the other hand.

The Challenge of Removing Red Tape

The Small Business, Enterprise and Employment Bill currently going through Parliament contains a number of provisions which are intended to simplify the statutory filing requirements for companies at Companies House.  These result from a Government consultation as part of the "Red Tape Challenge".  But do they really remove red tape for small businesses?

You would think that to remove red tape the Bill would simply delete burdensome provisions from the statute book.  The Companies Act 2006 was the longest Act of Parliament enacted, so it could do with some pruning.  But that's not how Governments go about these things.  What they do is "reform" the law by detailed amendments, intended to make it simpler.

For example, to strike an unwanted company off the register the procedure used to be simple.  I wrote a nice letter to the Registrar of Companies saying I acted for the company, my clients didn't need it any more and would he please strike it off.  He published the usual notices to the company, the Directors and to creditors in the London Gazette, and in 3 to 6 months it was struck off.  The Deregulation and Contracting Out Act 1994 "simplified" this by a new statutory procedure involving a list of preconditions to the effect the company couldn't have done anything for 3 months, a form that has to be signed by all the directors and a £10 fee.  Maybe the new procedure was more accessible, but it was hardly removing red tape.

So what does the latest bill do to remove red tape re company filing requirements?

Clause 92 will replace the annual return with a duty to deliver a "confirmation statement".  The duty is essentially to check the company's particulars registered at Companies House, notify any changes and confirm the particulars once a year.  But this is essentially what you do already if you've signed the company up for Web Filing with Companies House.  I assume you'll still have to pay a fee (which is only £13 if you use Web Filing, as opposed to £40 for filing a paper annual return).  This looks more like a rebranding exercise than a removal of red tape.  Maybe Companies House will streamline their Web Filing screens to reflect the new process, but they could have done that already so long as it still output a pdf annual return form for the public record (which those of us making company searches find quite useful).

Clause 94 is more radical.  This gives companies the option to keep certain of their statutory registers at Companies House rather than in their own paper or electronic registers.  As a lot of small companies fail to keep statutory registers and in practice the only records of shareholders and directors are the filings at Companies House, this makes a lot of sense and should remove duplication of records.  However, the Bill doesn't just say if you don't keep your own company books, the records at Companies House will apply instead.  The company has to elect to keep the registers at Companies House, and for existing companies all shareholders must assent to the election.  Plus you'll need to register additional optional information at Companies House, like shareholder addresses and details of transfers as they happen, which aren't registered at present.  Not all registers are covered either.

There are some sensible changes to existing filing requirements.  The statement of capital on share allotments and annual returns has been simplified so you just need to state the aggregate amounts paid up on each class of shares.  At present you are supposed to itemise it by individual tranches of shares issued at different premiums, which was a problem for companies that have issued shares to successive investors and not kept detailed records.  The requirement for a new director to provide a "consent to act" on his appointment has been replaced by Companies House contacting him and giving him an opportunity to object.  Exact dates of birth will be removed form the public register, which should help combat identity fraud.

Overall these are some useful changes, but there still seems to be a lot of red tape involved in removing red tape.

Innocent or Not?

As a fan of Innocent smoothies, I was interested to read the recently reported case of Fresh Trading Limited v Deepend Fresh Recovery Limited and Andrew Thomas Robert Chappell [2015] EWHC 52 (Ch), reported on by the IPKat here.

Fresh, the present holding company of the Innocent smoothie company, sought a declaration from the High Court that it owned the copyright in the “Dude” logo (the sketch of a face with a halo on the labels of its drinks), after OHIM had invalidated its Community Trade Marks on the basis that it didn’t own the copyright in the logo.  The logo had been designed by an employee of the Deepend design agency in 1999 when Innocent was a start up.  The deal was that:

• “Fresh Trading Ltd receive full intellectual copyright of any work, creative ideas or otherwise, presented by the agency and then subsequently approved by Fresh. Work not approved by Fresh remains under the ownership of Deep End”
• Deep End would be remunerated by shares in Innocent’s then company, to vest in 3 stages.

The receipt of the copyright was not made conditional on Deep End being paid (which are the normal terms on which design agencies agree to assign copyright).  A written agreement to this effect had been reached by email, but was marked “subject to contract” and nobody could find a signed copy.

The judge decided that the parties had acted as if it had been signed, but there was not enough evidence for him to conclude that it had actually been signed, but lost.  So there was a binding contract, but the requirement of the Copyright Designs and Patents Act 1988 that an assignment of copyright be in writing and signed by or on behalf of the assignor was not satisfied.

If there was no legal assignment of copyright, there could still be an equitable assignment of copyright, or a licence to Fresh to use the logo could be implied.  But as Deep End had never been issued the shares, it might be able to terminate the licence for non payment.

The further twist here was that Deep End had gone into liquidation in 2001 as a result of the dot com bubble bursting.  The defendant to these proceedings, Deepend Fresh Recovery Limited, had been formed by the second defendant, Mr Chappell (a corporate financier and friend of the original designer) to acquire the copyright from the liquidator (or, no doubt, such rights as Deep End might have in it) for £3,000.

The decision of the Court was that the unsigned agreement took effect as an equitable assignment of the copyright.  Richard Kempner (the defendant’s solicitor), writing for the IPKat, criticises this on the basis of the old legal maxim “he who comes to equity should do equity” and, essentially, Fresh weren’t innocent because they hadn’t issued the shares to Deep End.  But on reading the full judgment on BAILII, I have to say I respectfully agree with the judge.  He found as facts that discussions about issuing the shares continued in a desultory fashion at a time when the parties saw no great value in them and that Innocent’s founder never intended not to issue the shares.  It seems it all got overtaken by events.  Deep End’s liquidator was interested in a cash recovery rather than shares, and eventually took the £3k from Mr Chappell before finally winding up the company.  Mr Chappell and his company now had no right to call for an issue of the shares under the original contract, which was with a different company to the present Fresh as a result of a corporate reorganisation.  So, whilst Mr Chappell appears to have been helping a personal friend get some recompense for his original work rather than being some sort of corporate vulture, Fresh were nevertheless innocent and so came to equity with clean hands (to use another old maxim).

The lesson is of course to get your contracts for the creation of IP signed, and to be clear in them about who will own the copyright and (if you’re a designer) that assignment is conditional on your being paid.