Annex B - Economic assessment and regulatory impact of temporary measures
The Bill consists of two sets of measures:
1) Measures to support businesses in challenging financial situation. While these measures are of particular relevance during the ongoing emergency, they are not intended to be temporary. This set of measures includes:
1.1) Widening of the "ipso facto" suspension provisions
1.2) Introduction of a moratorium
1.3) Creation of a new restructuring plan
2) Temporary measures to support all businesses during the Coronavirus pandemic. These include:
2.1) Flexibility on holding AGMs and other meetings
2.2) Extending filing deadlines at Companies House
2.3) Temporary suspension of wrongful trading
2.4) Temporary suspension of statutory demand provisions and a restriction on winding-up petitions
1) Impact of permanent measures
In accordance with Better Regulation guidance, detailed analysis for these measures in the accompanying impact assessment have been published. It sets out clearly the rationale for intervention as well as the likely (de)regulatory and economic effects. Overall, it is estimated that the proposals will provide substantial net benefits to business and society as a whole. Over a ten-year appraisal period, it is estimated net benefits to total over £1.9billion in today’s prices (£1,918.5million net present value) with an ‘Equivalent Annual Net Direct Cost to Business’ (EANDCB) of -£222.9million per annum. By far the largest proportion of benefits derives from the suspension of Ipso Facto (termination) clauses, which will result in significant benefits to creditors due to an increase in company rescue efforts and accompanying improved returns. Please refer to the impact assessment for further detail.
2) Impact of temporary measures
Due to the restricted time-frame available, the need to act with urgency, and the temporary nature of the measures, a full impact assessment has not been carried out, and it is not required by the Better Regulation Framework. However, the Government has considered and will continue to assess and monitor the possible and likely impacts of these deregulatory measures, their scope as well as potential risks.
2.1) Flexibility on holding AGMs and other meetings
The Department proposes to temporarily introduce greater flexibility for companies and other bodies with respect to the manner in which AGMs and other meetings are held, and to temporarily extend the deadline within which AGMs must be held.
For a temporary period, the measures will provide additional flexibility to companies and other bodies that need to hold AGMs and other meetings in a way that is consistent with both the need to limit the spread of pandemic and their legislative or constitutional arrangements. Affected companies and other bodies are either: a) required under the Companies Act 2006 or other legislation to hold an AGM or other meeting; b) required to hold an AGM or other meeting by their constitution or rules; or c) required to hold an AGM or other meeting to take certain decisions, for example to approve emergency capital raising.
As well as companies, these measures will apply to mutual societies (including building societies, co-operatives, community benefit societies, credit unions and friendly societies) and charitable incorporated organisations. Like companies, mutual societies and charitable incorporated organisations may be required to hold AGMs either by legislation or their own rules, or may need to hold a meeting of members for practical business purposes, such as approving an amalgamation with another mutual society.
a) Companies required to hold AGMs or other meetings by legislation
Certain companies are required by legislation to hold an AGM. Public companies are required to hold an AGM within six months of their accounting reference data, and private traded companies are required to hold an AGM within nine months of their accounting reference date.
There are currently around 6,300 public companies on the UK company register (ca 5,500 on the ‘effective’ register 1 ) directly benefitting from the proposals. Our analysis using information from the FAME database, the FCA’s official list and the London Stock Exchange (LSE) shows that, of these 6,300 public companies, the majority are unlisted public companies, with ‘just’ around 2,000 companies being listed on the LSE; 1,440 of which being UK incorporated companies. Of these companies, 650 are listed on AIM with ca. 790 being listed on the Main Market. Factoring in UK companies that are listed on regulated foreign exchanges, there are around 900 UK ‘quoted’ companies (around 600 of which are ‘commercial’ companies, with the rest being investment trusts or funds). Almost all ‘traded’ companies are also ‘quoted’ companies apart from around 15 specialist investment firms on the Specialist Fund Segment. In summary, it is estimated that there are around 6,300 UK public companies, with 1,440 of them being listed on the LSE and just over 900 being ‘traded’ companies.
b) Companies required to hold AGMs or other meetings via their constitution or rules
There are currently around 4.3million private companies registered at Companies House (ca. 4.0million on the ‘effective’ register). There is no data available that would enable us to provide a robust estimate of how many of these companies have a relevant provision within their articles of association. It is likely that the perceived need to hold an AGM, and thus the likelihood of a company having a relevant provision within its articles, is related to business size and complexity. Analysis using the FAME database, relying on information from company accounts, has shown that over 99% of companies are ‘small’ or ‘medium’ (as per the Companies Act 2006 definition), with around 15,600 companies being identified as ‘large’.
c) Companies which might need to hold an AGM or GM to take certain decisions
Due to lack of available data, one cannot provide a robust estimate of the companies and other bodies that might fall into this category, though the logic and analysis provided in b) above applies to some extent to this group as well.
Mutual organisations have varied statutory requirements to hold AGMs, depending on the legislation governing their incorporation.
The Building Societies Act 1986 determines that a building society must hold an AGM in the first four months of each financial year. There are 43 building societies in the UK. HMT estimates that for approximately two thirds of these, the financial year ends in December. Therefore, the majority of building societies must hold their AGMs by the end of April of this year.
A friendly society registered under the Friendly Societies Act 1992 must hold an AGM each year and no more than 15 months may elapse between the date of one AGM and the next. There are 27 friendly societies registered under the 1992 Act.
Friendly societies registered under the Friendly Societies Act 1974, co-operatives, community benefit societies, and credit unions, do not have a statutory requirement to hold an AGM. However, the rules of these organisations may make provision for the holding of meetings including AGMs. These rules are binding on these organisations and their members. There are approximately 9000 such societies.
e) Charitable Incorporated Organisations
Charitable Incorporated Organisations, and Scottish Charitable Incorporated Organisations have varied requirements to hold General Meetings, usually set out in their constitutions, which are binding on the organisations and their members. The constitutions of some charitable incorporated organisations do not currently permit members’ meetings to be held other than face to face. There are approximately 22,000 charitable incorporated organisations in England and Wales, and 4,500 Scottish charitable incorporated organisations.
(De)regulatory and economic impacts
In the absence of this legislative change, companies and other bodies that are required to hold an AGM or other meeting either through legislation, or due to their constitution or rules, may not be able to fulfil those requirements without being in breach of social distancing rules. This proposal will enable companies to comply with existing law, resolving a potential clash between their company law duties and measures introduced to manage and contain the ongoing pandemic. While this might not apply to group c) above, these companies and other bodies would find it difficult or impossible to make urgent business decisions and changes, potentially resulting in worse operational outcomes. This applies equally to mutual organisations and to charitable incorporated organisations. While holding an AGM or meeting via different methods than usual might require some companies and bodies to investigate and buy in software and solutions, ‘normal’ AGMs and other meetings for large companies or other bodies are likely to be a large and expensive undertaking. If anything, it is likely that the pure financial costs of holding an AGM or other meeting via alternative means is lower than in the ‘normal’ scenario. Additionally, the correct counterfactual to this proposal is not the situation in which companies or other bodies hold ‘normal’ AGMs. Instead, the correct counterfactual is a situation in which many companies or other bodies would struggle to hold the required meeting altogether. The proposal assessed here clearly is beneficial to companies or other bodies compared to that counterfactual. The same is true for mutual societies and charitable incorporated organisations.
Finally, the extent of benefit to individual companies or other bodies will largely depend on two factors: firstly, how much need there is to make legally binding and important business decisions at the AGM or other meeting; and secondly, whether their required meeting is likely to fall within the peak period of the pandemic.
· The size of the body concerned and, in the case of a company, its listing status, will determine complexity and the actions that legally need to be actioned at an AGM. The most immediate impact will fall onto the approximately 6,300 UK public and traded companies with an actual legal requirement to hold an AGM in company law. However, within this group ‘only’ around 1,440 companies are listed on the LSE (with a small number being listed overseas). ‘Listed’ companies must comply with additional requirements under the Listing Rules and are on average much larger than public unlisted companies, which are often small in size. Finally, the around 900 ‘quoted’ companies are subject to further regulatory requirements that are carried out at an AGM, such as voting on annual director remuneration reports. It is likely that these companies and especially the largest FTSE companies, which are currently experiencing the highest pressure with regards to AGMs, will benefit most from this proposal.
· The company’s account referencing date (‘ARD’) determines when an AGM must be held. Public companies are required to hold their AGMs within six months following their ‘ARD’. Companies with a reference date of 31 December therefore need to hold an AGM by end June, while companies with an ‘ARD’ of 31 March need to hold their AGM by end September. This means, for example, that companies with ‘ARDs’ between July and March currently have a less urgent need for the changes proposed here as they already held their most recent AGMs between January and March. Based on this, it is judged that those companies with ‘ARDs’ between 31 October and 31 March, and thus AGM deadlines between end April until end September, have the most urgent need for clarification, and are thus the predominant beneficiaries. Analysis using the FAME database showed that 31 December is by far the most common ‘ARD’ for public companies; around 40% of companies use this date. The second most common date is 31 March, which accounts for a further 19% of public companies. Overall, 72% of public companies were identified as having ‘ARDs’ between (including) 31 October and 31 March; the group of companies that was identified as in most need for the additional flexibility provided by these changes. 2
There is a risk that the provisions in the Bill do not come into force in time for affected bodies to be able to benefit from these provisions. To mitigate against this to a degree, the Department proposes to apply the provisions to AGMs and other meetings before the Bill comes into force, which would in effect allow AGMs and other meetings which have been held in accordance with the new measures to be treated as if they had been validly convened.
Some stakeholders have raised concerns with regards to security and the practicability for example of AGMs held by electronic or other means. It is partially due to this that the Bill does not prescribe the alternative means by which an AGM or other meeting must be held. It is up to companies and shareholders to develop a solution most suitable to their needs. And the measures allow bodies to temporarily postpone their AGM if necessary. The same is true for mutual societies and charitable incorporated organisations.
There is some concern especially from smaller retail investors that alternative means of holding an AGM could restrict the ability for investors to put questions to company boards in real time, thus reducing shareholder scrutiny. The Government is keen to ensure that retail investors in particular are not overlooked and will thus work with them to provide guidance to companies about how they should accommodate investors’ expectations if they meetings which cannot be attended in person.
2.2) Extending filing deadlines at Companies House
Currently, the registrar at Companies House has a discretion to extend the deadline for filing accounts by companies and certain other entities when they submit an application. During the period affected by COVID-19, demand for this has substantially increased, with over 40,000 applications for extended accounts filing deadlines submitted in March and the first half of April 2020 compared to an average of 19 per day in March 2019. These proposals move from an applications-based system of granting extensions to a system where the registrar, on behalf of the Secretary of State can grant extensions for all relevant companies and other entities.
The Bill provides the Secretary of State with a discretionary power to extend deadlines for three types of filing: accounts, confirmation statements (including event driven filings that are required to be submitted in advance of the confirmation statement) and registration of charges. The extensions will apply to all relevant companies or other entities, with certain limited exceptions, where they are required to submit the relevant filings. There are currently around 4.3million companies registered at Companies House (ca. 4.0million on the ‘effective’ register). In addition, the around 51,400 Limited Liability Partnerships, just under 51,800 Limited Partnerships (as of March 2019) 3 and approximately 11,800 overseas companies registered at Companies House are also subject, to a varying degree, to filing requirements and are thus also affected to a degree.
The Secretary of State can choose which filing deadlines to extend from within a list of deadlines that are subject to the power; how much to extend each deadline by (subject to maximum increases set out in the Bill for each deadline); and the window of time in which deadlines will fall that are the subject of the extension.
(De)regulatory and economic impacts
Currently, many businesses are finding it difficult to keep up with their filing requirements. This is evidenced by the large number of applications for extensions which Companies House has already received. The problem is accentuated by the time of year, because many companies have an ‘ARD’ between October and March, with a specifically large number using the end of the calendar year as their ‘ARD’, 4 which means that many companies are currently in the process of preparing their accounts.
While the Government has already taken action within existing powers to allow companies to apply for an extension to the filing of company accounts, and while Companies House has already declared that those citing issues around COVID-19 will be automatically and immediately granted an extension, 5 the proposals assessed here go further by: a) giving extensions automatically rather than upon application; and b) increasing the scope of extensions from just company accounts to confirmation statements, relevant events and charges.
Primarily, the proposals thus have two main benefits and beneficiaries. They relieve the burden on businesses (including lenders registering a charge) if they are unable to meet existing filing deadlines because of the ongoing pandemic, but also on Companies House which will not need to process a large volume of applications for extensions for the filing of company accounts.
The decrease in regulatory burden will though be largely temporary in nature, meaning that the burden will be shifted to some extent to a later point in time, because companies will still have to file the necessary information, though to different deadlines. However, the shifting of burden from a period during which companies are already under pressure to a later period will provide companies with additional breathing space at a time in which it is most necessary.
Finally, the degree to which individual companies will benefit largely depends on the degree of complexity of their filings as well as the specific filing requirements that they are legally subject to. This will largely differ by company size, complexity and type of the incorporated vehicle. For example, Limited Partnerships face more limited filing requirements than private or public companies, and smaller companies are likely experiencing less frequent changes to their directors or beneficial owners than larger companies. Overall, around 76% of companies did not make any changes using the CS01 (confirmation statement) during last year, meaning that a significant proportion of largely smaller private companies will not benefit much from an extension in the filing deadline for confirmation statements.
Research commissioned by BEIS and Companies House recently demonstrated the large value of data provided by Companies House. It estimated that the data provides economic value of between £1bn and £3bn per year to users 6 . The usefulness of the data and company register maintained by Companies House to its users (such as, amongst others, creditors, customers or supplier businesses), as well as its ability to support law enforcement in identifying and taking action against unlawful behaviour and bad business practice, depends to some extent on the timeliness and accuracy of data. There is some risk that extending filing deadlines will negatively impact the accuracy and timeliness of the data contained on the company register.
However, this risk is assed to be limited and temporary in nature. This Bill provides the Secretary of State with a power to extend deadlines. When assessing the degree of extension, the Secretary of State will balance the impact on the integrity of the companies register against the benefits to business from extending the deadline given the practical difficulties of meeting it during the period affected by COVID-19. The Secretary of State can choose which filing deadline to extend from within a list of deadlines that are subject to the power; how much to extend it by (subject to maximum increases set out in the Bill for each deadline); and the window of time in which deadlines will fall that are the subject of the extension. And, as assessed above, a large proportion of companies has limited information to file and should thus be able to file in a timely fashion, meaning that a large proportion of the company register will be as up to date as possible.
2.3) Temporary suspension of wrongful trading
The period during which a company’s directors could incur liability for an action by a liquidator or an administrator for wrongful trading will be suspended with effect from 1st March to 30th June, or one month after the provision comes into force, whichever is later, with a power to extend the end date by order. This will mean that the court will be unable to declare the directors liable to contribute to the company’s assets as a result of losses caused to creditors during this period and subsequent to the point at which insolvency proceedings could not be avoided.
Changes within the Small Business, Enterprise and Employment Act 2015 extended wrongful trading; while claims against directors could previously only been made by liquidators, the Act extended this right to an administrator. Analysis at the time showed that not many claims of wrongful trading had been taken forward. It assessed that "responses to the Transparency and Trust discussion paper suggested that there have only been 29 reported cases under s214 of the Insolvency Act 1986 (IA86), (wrongful trading claims) between 1986 and 2013 with liability being imposed in only 11 of those cases". 7 We are not aware of any data that suggests that claims of wrongful trading have become more frequent since.
(De)regulatory and economic impacts
Removing the threat of personal liability arising from wrongful trading for directors when they are making the decision as to whether to allow struggling companies to continue to trade means that companies which would be viable but for the uncertainty caused by the pandemic will be more likely to continue trading using their best efforts even if the company ultimately becomes insolvent. These companies are the main beneficiaries of this temporary measure, and they can continue to provide employment and create economic activity that they might otherwise not have created.
The temporary suspension of wrongful trading will though, at least in theory, shift some economic risk and cost onto creditors (it transfers it from affected businesses to creditors), especially where companies whose problems are not caused by the ongoing pandemic, and which should not continue to trade, now feel like there is less risk to them of doing so. Why this risk and associated costs are deemed to be relatively minor is explained below.
This measure will temporarily remove the deterrent of personal liability. It will allow directors more flexibility and enable them to use their best efforts to make decisions on going concern trading and future viability in an uncertain trading environment. In isolation, such a change, increases the risk of reckless behaviour that can cause economic harm to others (in particular creditors). However, as evidenced, wrongful trading claims are currently already rarely taken forward. While one cannot rule out that wrongful trading is not widespread precisely because of the threat of legal action, the risks caused by the suspension are largely mitigated because other protections still exist in company law, insolvency and enforcement regimes. These include the more serious liability for "fraudulent trading" (Section 213 of The Insolvency Act 1986) and the fact that general director duties set out in company law and the director disqualification regime continue to apply as normal. Thus any increase in risk to creditors is judged to be very small compared to the support provided to many businesses and directors who cannot realistically make a sound judgment about the state of solvency of their business during these times, and who might thus otherwise close businesses and stop creating economic activity due to fear for personal liability.
2.4) Statutory demands and winding-up petitions
This measure contains two elements:
a. Statutory demands served between 1 March 2020 and 30 June 2020 (date of end temporarily extendable by order) are void, if a petition has not yet been issued.
b. Petitions for winding up under S122(1(f)) can only be made by a creditor with permission of the court where it is satisfied that the inability to pay debts is not as a result of COVID-19. To be in force until 30 June 2020 (temporarily extendable).
This resolves the problem of statutory demands being served and includes a retrospective provision to catch those demands issued in the context of the COVID-19 emergency before this legislation was brought forward. It prevents their use by creditors to put pressure on businesses to pay debts immediately. The changes will also, for the immediate future, stop winding-up petitions that are COVID-19 related.
The Department has been made aware that businesses, particularly in the retail and hospitality sectors, are receiving statutory demands for payments of outstanding debts (primarily rents). While many landlords are working closely with tenants to find an approach that works for both parties, including rent deferrals or new payment schedules, some commercial landlords appear to be using statutory demands as a heavy-handed tactic to force tenants to pay rent and other debts despite the Government’s call for forbearance.
(De)regulatory and economic impacts
The COVID-19 lockdown and the Government’s decision to order all non-essential retail and leisure establishments to close has significantly affected those business’ ability to generate income and thus pay their ongoing debts, including rent due to their commercial landlords. Government’s priority has been to protect productive firms through a package of fiscal support measures followed by the regulatory easements included in this Bill. In order to protect businesses from eviction by landlords, government implemented a moratorium through the Coronavirus Act 2020 on forfeiture lasting until the end of June.
Some landlords are pursuing aggressive tactics to seek rental income, albeit potentially motivated by business vulnerability. These actions are within the letter but not the spirit of the forbearance the Government has legislated and called for from commercial landlords, and risks creating a significant and unnecessary risk of insolvency for otherwise viable companies at an already challenging time. In the absence of government action, it is likely that some viable companies that create economic activity and employment will be unnecessarily forced down the route into insolvency.
While it is not thought that all commercial landlords would follow through with a petition to wind up a company if a statutory demand is not paid, for many businesses the filing of a petition alone can cause significant practical issues that may prevent them from continuing to trade. For example, the effect of section 127 of the Insolvency Act means that when banks learn that a petition has been filed, they will usually freeze bank accounts. This is to prevent any untoward disposal of the company’s property; but it also means that a company with a winding-up petition against it must make an application to court for each payment it needs to make from a frozen account. This can severely affect its ability to trade. For many companies the reputational damage is high when a petition becomes public knowledge, usually seven days after being filed.
It is recognised that supporting tenants in the ways outlined above will put more of the burden on creditors, many of whom will themselves be under financial pressure from their own creditors. In addition, one must not dismiss the importance of supporting creditors in turn, or that doing so can benefit all parties. Landlords that are confident in their underlying financial position, for example, are more likely to agree further rent deferrals or lower rents, and many are already doing so. In these challenging times, however, the proposals will to some extent help to re-balance the economic risk faced by companies and their creditors by removing the possibility of aggressive and inappropriate debt-recovery actions.
While the measures will provide an element of relief to business tenants in particular, they will further increase pressures in the commercial property market. The longer social distancing and lock down policies are necessary, effectively preventing whole sectors from trading, the deeper the second-order impact on commercial landlords is likely to be.
It is clear that many landlords are working closely with tenants to find an approach that works for both parties, including rent deferrals or new payment schedules. Recognising the challenges facing all those investing in property, the Government welcomes this approach and are grateful to those being so flexible. The Government will continue to work with landlords and their representatives on support for the sector.
Government has announced a significant package of business support, include grants and government-backed loans. Part of this challenge is that commercial landlords have their own obligations to meet, which is why the Government has asked lenders and investors to offer equal understanding. The expectation here is equally clear: lenders and investors should consider how debt obligations can be met in a way that does not put unnecessary pressure on retail and hospitality tenants.
Overall, while the Government acknowledges that the measure will to some extent increase risks to commercial landlords, some of which might be under pressure themselves, it assesses that the re-balancing of risks described above is an appropriate temporary intervention, especially considering the Government’s wider business support measures.
1 The ‘effective register’ removes companies that are currently in liquidation or in the process of removal from the register.
2 The numbers are even slightly higher among the largest listed companies with around half of FTSE350 companies using 31 December as their ‘ARD’.
3 Approximately 33,600 of which were ‘Scottish’ Limited Partnerships.
4 Please refer to the data provided in the assessment of 2.1) for further detail.