Small Business, Enterprise and Employment Bill

Written evidence submitted by the Law Society (SB 23)

1. The Law Society of England and Wales ("the Society") is the professional body for the solicitors' profession in England and Wales, representing over 160,000 registered legal practitioners. The Society represents the profession to Parliament, government and regulatory bodies and has a public interest in the reform of the law.

2. This evidence has been prepared by the Society's Company Law Committee. The Committee is a specialist body of practitioners and experts in company law matters, whose purpose is to review, and promote improvements in, company law.

Overview

3. The Society welcomes this opportunity to present evidence to the Small Business, Enterprise and Employment Bill (SBEEB) Committee. The Society has taken great interest in the issues raised at Parts 7-9 of the Bill, which were the subject of last year's Transparency and Trust consultation. The Department of Business, Innovation and Skills (BIS) has maintained an open and productive dialogue with the Society throughout the process, which has been very effective.

4. The Society appreciates that during the evidence session, the Committee may wish to ask us about any aspect of Parts 7-9 of the Bill. In this submission, however, the Society makes certain comments on the following five parts of the Bill:

· People with Significant Control - Part 7, Clauses 70-71; Schedule 3;

· Corporate Directors - Part 7, Clauses 76-77;

· Abolition of Share Warrants to bearer - Part 7, Clauses 73-75 and Schedule 4;

· Shadow Directors - Part 7, Clause 78.

· Directors' Disqualification - Part 9, Clauses 92-104;

People with Significant Control Register

5. Schedule 3 of the Bill creates a new obligation on, subject to certain specified exceptions, every company incorporated in the UK to maintain a register of People with Significant Control (PSC) over the company. It also sets out criminal sanctions and other enforcement mechanisms to ensure compliance.

6. The Society accepts that it is important for the UK to take the lead on this initiative so as to serve as an example for other jurisdictions. The Society notes, however, that by implementing the proposed legislation in the UK before it is more generally implemented in other jurisdictions, including in other EU member states, there would be a real risk of an adverse effect on UK business. This risk would arise through people preferring, given the potential additional liabilities imposed by the PSC regime, to incorporate companies in other jurisdictions.

7. It is appreciated also that there will be a compliance cost for existing UK companies, even for the huge number of them where there is not a "transparency" issue. These factors reinforce the point that it is important that companies and individuals who want to be law-abiding are able to work out easily which steps to take in order to be compliant.

8. In the light of these realities, it is imperative that the regulatory regime that accompanies these changes is as clear and intelligible as it can possibly be. Whilst the Society appreciates that this is a difficult and complex task, the Society is confident that it can be done, and the Society is prepared to work with BIS and this Committee to assist in achieving this objective.

New Criminal Sanctions for Non-Compliance

9. Schedule 3 creates new offences for failing to comply with requests for information or maintain an accurate register. These are set out in paras. 13-14 of what is proposed as new Schedule 1B to the Companies Act. The offences apply to both individuals and companies.

10. The Society is concerned that the Schedule contains no defences to these strict liability crimes, meaning that the mental state of the accused is irrelevant to a finding of guilt. This means for example that even if a person takes reasonable care in completing the notice, that person is exposed to the risk of criminal sanctions if the information he or she provides is incorrect.

11. The Society wishes to stress that criminal sanctions are a very serious matter, and that strict liability crimes should only be created where they are truly warranted. These new offences were not the subject of prior consultation: had they been, the Society would have used the opportunity to voice its disagreement with this approach.

12. The Society does not think the foreseeable harm from unintentional failure to comply is so serious as to warrant strict liability. The Society therefore proposes that the Bill is amended to include defences to take it out of the realm of strict liability. In any event the Society thinks that it ought to be a defence that a person took "reasonable care," in establishing the relevant facts and coming to his or her decision, especially where that decision seems consistent with any government guidance that may have been issued.

13. Also, the ownership or control structure of a company might be extremely complex. It could involve consideration, not just of share ownership and share rights and of the effect of any security given over shares, but also an assessment of the effect of other factors. These could include shareholder agreements and contractual arrangements relating to the company’s management and financing. This is another factor which leads us to believe that the strict liability approach would be inappropriate.

Alternative Enforcement Mechanisms

14. The Society understands that the SBEEB would impose an obligation on persons to comply with the information regime regardless of where in the world they are. The Society has doubts about how this will work in practice.

15. The Society submits that other mechanisms, such as the freezing of shares, may be more effective in compelling compliance with this regime than UK criminal sanctions. The Society notes that this would be the effect of restriction notices set out in Schedule 3, New Schedule 1B to the Companies Act, at para. 3. However, it appears that these measures are intended only as a complimentary measure and not as an alternative to criminal sanctions, as they are discretionary measures, which are available only to companies, and not law enforcement agencies.

16. The Society thinks that the enforcement regime should be redrawn so that it is clear that criminal sanctions are only pursued as a last resort.

Maintaining the Register

17. Schedule 3, in what would be Part 21A of the Companies Act, Chapter 4, para 790V, allows for an alternative method of record keeping, according to which information on the register would be kept by the Registrar of Companies instead of companies themselves entering the information on their PSC register.

18. The Society observes that this method of record keeping may complicate the matter. Whereas a company can take action against a person who fails to provide information for the register, no action can be taken against the Registrar for entering the wrong information. This method therefore requires companies to assume risks that simply would not exist were they to maintain their own PSC register in-house. It is important that those affected by the legislation appreciate this point.

Exceptions

19. Schedule 3, 790ZF provides that the Secretary of State may require the Registrar and companies to refrain from using or disclosing PSC particulars of a prescribed kind where an application is made requesting them to refrain from doing so.

20. The Society does have views on this aspect and looks forward to considering BIS’s proposed Consultation on protecting people at risk from public disclosure of personal information on the PSC.

Directors' Disqualification

21. Part 9, Clause 93, para. 8ZA of the Bill provides that a person (P) may be disqualified if they exerted influence over a director who has been disqualified and is understood to be the "main transgressor" with respect to the impugned conduct.

22. The Society thinks that it is fundamentally unacceptable that, under the Bill as it stands, P may be disqualified without having been shown to have engaged in misconduct. The Society maintains that the direction or instruction that leads to P’s disqualification must be such that the court would have disqualified P if P had been the director. It cannot be sufficient to show that P has given a direction or instruction that was part of the main transgressor's conduct: it must be established that the direction or instruction amounted to misconduct, which could in and of itself lead to disqualification.

Corporate Directors

23. Part 7, Clause 76 requires that each director of a company must be a natural person, save that the Secretary of State may make provision by regulations for cases in which a person who is not a natural person may be appointed a director of a company.

24. The Society accepts that the use of corporate directors may pose additional difficulties for those wishing to know more about the control of a company, as their use is capable of obscuring the identity of the individuals involved.

25. Corporate directors can, however, be used to serve a number of legitimate business purposes. For instance, there is a clear administrative advantage to having a number of authorised individuals available to act on behalf of the corporate directorship for the purposes of attending meetings and signing documents. This is particularly important to ensure continuity in the event that an authorised individual leaves the company.

26. It is important to appreciate also that some regulators actually require the use of corporate directors. A notable example is the FCA, which requires their use in respect of OEIC UCITS fund structures.

27. As the Government itself acknowledges, there will be situations where corporate directors ought to be retained, either because their benefits outweigh any risks posed, or due to pre-existing legal obligations. The Society looks forward to considering the proposed public consultation on the ban and exceptions to it.

Share warrants to bearer

28. Part 7, Clauses 73-75 and Schedule 4 make provisions for the abolition of share warrants to bearers.  Schedule 4, paras. 9 and 10 specifically provide that where such a share warrant is cancelled by cancellation order or suspended cancellation order, the company must or can be required to make a payment into court, equal to the aggregate of the share's nominal value as specified in the relevant share warrant, any share premium and what is described as "the suspension period amount".   

29. The Society considers that if this payment would make the company insolvent then the company should be entitled to seek a court order releasing it from the obligation to make the payment, on such terms as the court thinks fit.

Shadow directors

30. Part 7, Clause 78 provides that the general duties of a director apply to a shadow director, to the extent that they are capable of applying.

31. The Society considers that this approach is appropriate, and appreciates that it is intended that there will be regulations on this aspect, as stated in Clause 78(2).

October 2014