Essential Corporate News : Week ending December 11, 2020

BEIS: Consultation on implementing the ban on corporate directors

On December 9, 2020 the Department for Business, Energy and Industrial Strategy (BEIS) published, as part of its consultations on reforms to the UK’s register of company information, a consultation seeking views on the Government’s proposed approach to restricting the use of corporate (i.e. non-natural person) directors in pursuit of its objective of enhancing corporate transparency.  

While provision to prohibit the use of corporate directors was taken in section 87 of the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015), that provision has not come into force and the purpose of this consultation is to determine how to define exceptions such that corporate directors can still be used in certain situations. Of relevance to this is the announcement in September 2020 of a new mandatory identity verification process for company directors.

Following consultations on this topic in 2014 and 2015, the Government has decided that defining exceptions by reference to a “principle” is a more efficient means of achieving the aims of transparency so it intends to bring forward regulations that create a “principles” based exception alongside the commencement of the prohibition on corporate directors. The principles the Government envisages as a starting point are that a company can be appointed as a director if: 

• all of its directors are, in turn, natural persons, and
• those natural person directors are, prior to the corporate director appointment, subject to the Companies House identity verification process.

In terms of scope, it is proposed that there should be no differentiation between corporate directors by reference to their place of origin, so UK and overseas entities will be subject to the same treatment. As a result, where a company is seeking to appoint an overseas entity to the role of director, evidence would need to be provided to Companies House that that entity has only natural persons as its own directors, and those directors would need to have their IDs verified. 

In terms of compliance and reporting, the regulations would be structured to effectively safeguard the integrity of the natural person principle from the perspective of both the potential appointor company and the appointee, at least in so far as both are UK registered companies. The consultation paper provides this illustration; if UK company C appoints a UK company D as director, any attempt by D to appoint a corporate director would be unlawful and, therefore, ineffective. This would work both “up” and “down” the chain of directorships: C cannot validly be appointed as another UK company’s director while it has D as its director. As a further safeguard, and to cater for relationships involving non-UK companies, Company C would be required to take all reasonable steps to assure itself that D has (and continues to have) no corporate directors. In its annual confirmation statement to Companies House, C will have to confirm that it believes this to be the position. 

The consultation paper also seeks views on applying the proposed corporate director principles more broadly to Limited Liability Partnerships (LLPs) and Limited Partnerships (LPs), and how the ID verification would operate in those contexts.

Responses to the consultation are requested by February 3, 2021. The consultation paper notes that the proposals are likely to further primary legislation, as well as being dependent on funding for the associated operational changes at Companies House.

(BEIS, Consultation on implementing the ban on corporate directors, 09.12.2020)

(BEIS, Government launches consultations to crack down on company fraud and improve corporate transparency, 09.12.2020)

BEIS: Consultation on improving the quality and value of financial information on the UK companies register

On December 9, 2020 the Department for Business, Energy and Industrial Strategy (BEIS) published, as part of its consultations on reforms to the UK’s register of company information, a consultation seeking views on the Government’s proposed reforms to the filing of financial information at Companies House. 

The Government believes there are opportunities to improve the way financial information is filed with, and published by, Companies House and the proposals in the consultation paper seek to: 

• Deliver efficiencies for filers, users and Companies House by requiring digital submission of accounts in a machine-readable format, bringing the UK into line with global best practice – The Government proposes to require all accounts to be filed digitally. 
• Expand the use of tagging standards to make comparison and bulk analysis of accounts simpler for investors and assist businesses seeking investment – The Government intends to require full i-XBRL tagging of financial information. 
• Simplify the multiple processes for filing financial information across Companies House and HMRC systems - Options could include enabling companies to file their accounts in one central place and for all government bodies to extract the information they need from that central source, or developing technology that would send the relevant information to each government organisation at the relevant time.  
• Tackle fraud and error by closing known loopholes in filing requirements and address problems of companies filing the wrong set of accounts - The Government proposes implementing a requirement for accounts to include a declaration of eligibility signed by the director(s). This will require all three threshold conditions set out in Part 15 Companies Act 2006 (CA 2006) (turnover, balance sheet and number of employees) to be disclosed by all companies. The director(s) will confirm that the company meets the threshold conditions to file under the regime being used. In the case of dormant accounts being filed, the declaration will confirm that the company is not trading and meets the criteria for filing dormant accounts. It also proposes reviewing the filing options available for small companies with the aim of reducing the number of options and making the filing process easier whilst also increasing the value of the register and amending the CA 2006 to specify that the accounts filed with the Registrar must be the most detailed set of accounts that has been prepared for the company’s members.
• Improve the quality and value of information on the register by reviewing the timescales for delivering accounts and exploring options to improve how information is displayed – The Government does not suggest what reduced filing timescales could be but seeks views on its proposal that they be reduced. It also suggests that the most valuable company information could be displayed more clearly on the register so when a company search is done, this information will be immediately visible without having to search through a PDF image of a company’s accounts. Potential information could include key metrics such as, profit or number of employees, where provided in the accounts.
• Require additional information to be submitted with accounts to improve their statistical and analytical value.

Responses to the consultation are requested by February 3, 2021. The Government states that it will consider responses to this consultation in parallel with the other aspects of register reform it is consulting on  and will confirm its plans in 2021. These measures will require primary legislation.

(BEIS, Consultation on improving the quality and value of financial information on the UK companies register, 09.12.2020)

(BEIS, Government launches consultations to crack down on company fraud and improve corporate transparency, 09.12.2020)

BEIS: Consultation on powers of the Registrar

On December 9, 2020 the Department for Business, Energy and Industrial Strategy (BEIS) published, as part of its consultations on reforms to the UK’s register of company information, a consultation seeking views on the Government’s proposed approach to the Registrar’s power to query information and changes to the Registrar’s existing powers, as well as the widening or reframing of the Registrar’s current administrative removal powers, the requirement for digital filing, the obligation for companies to keep a register of directors and changes to other statutory registers and the register election regime.

The proposals are set out in three chapters: 

• Chapter 1: Introducing a new power to query information - This outlines the Government’s proposal to introduce a new power for the Registrar to query information. It sets out its scope, the risk-based approach and scenarios for when the power may be used. It also covers the Government’s proposed approach for how the querying power may apply to company names. 
• Chapter 2: Reform of the Registrar’s existing powers - This introduces proposals to reform some of the Registrar’s existing powers. This includes greater powers for the Registrar to administratively remove information from the register, and to close current loopholes, such as the rectification of a registered office address. It also sets out the Government’s proposals for conferring the power to require documents to be delivered by electronic means only from the Secretary of State to the Registrar. 
• Chapter 3: Rules governing company registers - This part of the consultation document sets out proposals related to changing parts of the rules governing the registers kept by companies themselves. It proposes removing the requirement to keep a register of directors. It also seeks views on the impact of making amendments to other company registers and on the election regime which was introduced in 2016.

Responses to the consultation are requested by February 3, 2021. The consultation paper notes that the proposals are likely to further primary legislation, as well as being dependent on funding for the associated operational changes at Companies House.

(BEIS, Consultation on powers of the Registrar, 09.12.2020)

(BEIS, Government launches consultations to crack down on company fraud and improve corporate transparency, 09.12.2020)

FRC: Updated guidance for companies on corporate governance and reporting – COVID-19 pandemic

On December 4, 2020 the Financial Reporting Council (FRC) published updated guidance for companies on corporate governance and reporting in light of the COVID-19 pandemic, which supersedes earlier guidance published by the FRC in March and May 2020. 

As well as encouraging listed and AIM companies to make use of the extensions already granted to them for publication of audited annual financial reports, the FRC highlights some key areas of focus for boards in maintaining strong corporate governance and provides high-level guidance on some of the most pervasive issues when preparing annual reports and other corporate reporting.

The FRC’s key messages to boards on corporate governance are to: 

• develop and implement mitigating actions and processes to ensure that the board continues to operate an effective control environment, addressing key reporting and other controls on which it has placed reliance historically but which may not prove effective in the current circumstances; 
• consider how the board will secure reliable and relevant information, on a continuing basis, in order to manage the future operations, including the flow of financial information from significant subsidiary, joint venture and associate entities; and 
• pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is made, not just proposed, and sufficient resources remain to continue to meet the company’s needs.

The FRC notes that making forward-looking assessments and estimates when preparing financial statements and providing other corporate reports is particularly difficult currently. Its guidance is intended to help boards focus on areas of reporting of most interest to investors, and to encourage them to provide clarity on the use of key forward-looking judgements. The guidance covers: 

• the need for narrative reporting to provide forward-looking information that is specific to the entity and which provides insights into the board’s assessment of business viability and the methods and assumptions underlying that assessment;
• going concern and any associated material uncertainties, the basis of any significant judgements and the matters to consider when confirming the preparation of the financial statements on a going concern basis; 
• the increased importance of providing information on significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made; and 
• judgement required in determining the appropriate reporting response to events after the reporting date and the extent to which qualitative or quantitative disclosures may be appropriate.

(FRC: Updated guidance for companies on corporate governance and reporting – COVID-19 pandemic, 04.12.2020)

FRC: Updated guidance for auditors and matters to consider where engagements are affected by Coronavirus (COVID-19)

On December 4, 2020 the Financial Reporting Council (FRC) published a Bulletin setting out updated guidance for auditors carrying out audit engagements that may be affected by COVID-19. It supersedes previous FRC guidance for auditors on this topic. 

The updated Bulletin now incorporates some new guidance: 

• In the section on the 'planned audit approach', there are examples of factors that may heighten risks of material misstatement due to fraud or irregularity. 
• In the section on 'compliance with laws and regulations', it points out that improper claims for financial support could result in liabilities for repayment and fines. 
• The section on 'subsequent events' has been edited to reflect the updated guidance for companies and other minor edits have been made in the Bulletin to reflect that this is no longer a 'new' situation. 

(FRC, Updated guidance for auditors and matters to consider where engagements are affected by Coronavirus (COVID-19), 04.12.2020)

Parliament: Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020

On December 9, 2020, the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020 were laid before Parliament and come into force on December 31,  2020. As a result of these Regulations, a temporary measure introduced by the Corporate Insolvency and Governance Act 2020 restricting the use of statutory demands and winding-up petitions, which was due to expire on December 31, 2020, has been extended to March 31, 2021. 

The reason for extending the duration of these temporary insolvency measures is to continue to provide protection to companies from aggressive creditor enforcement whilst the adverse effects from the coronavirus pandemic continue and the related social distancing restrictions remain in place, including regional tiered restrictions, which affect normal trading. The extension of these measures means creditors cannot rely on statutory demands as evidence of a company’s inability to pay its debts and therefore it’s solvency, to bring winding-up petitions as they will be void. Where company winding up petitions are made, a petitioner will have to satisfy a court that the company’s inability to pay is not due to coronavirus.

The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2020

BEIS: Updated policy paper on the UK government’s position on the effect of the ESEF Regulation

On December 9, 2020 the Department for Business, Energy and Industrial Strategy (BEIS) published an update to its position paper on the Delegated Regulation on the use of the European Single Electronic Format (ESEF) published by the European Commission  on May 29, 2019. 

The position paper has been updated to take account of a number of recent developments, including the announcement by the Financial Conduct Authority that the ESEF requirements for filing and publication of machine-readable accounts and mandatory tagging of basic financial information will be postponed so that they will apply to financial years beginning on or after January 1, 2021.

The position paper has previously made it clear that when directors consider whether to approve company accounts as having been prepared in accordance with the Companies Act 2006, there is no requirement for them to consider the tagging of the accounts in ESEF and in particular to consider this as part of whether the accounts are ‘true and fair’. The tagging can be applied later, in a version prepared in XHTML format with iXBRL tagging.

However, the position paper now looks at whether the government will introduce mandatory reporting by the auditor on ESEF tagging. It notes that, as regards the contents of the audit report, there is currently no requirement in UK law for the auditor to report on whether the electronic formatting of the accounts complies with ESEF requirements. The European Commission argues that an auditor reporting requirement should apply. Having considered whether the UK should introduce such a requirement, the government has concluded this would not be appropriate at this stage.

The position paper also notes the following:

• Companies may wish to obtain a report from their auditors, or other assurance provider, that covers the tagging of the ESEF accounts, prepared in accordance with the FRC’s newly adopted ISAE 3000 standard.
• Issuers with securities admitted to trading on both UK and EEA regulated markets will need to consider what steps are also appropriate for compliance with the framework of each relevant EEA State.
• In the longer term, mandatory auditor reporting on electronic formatting of accounts will be considered in the context of the recommendations on audit made by Sir Donald Brydon.

(BEIS, Updated policy paper on the UK government’s position on the effect of the ESEF Regulation, 09.12.2020)

FRC: FRC announces its thematic reviews, audit areas of focus and priority sectors for 2021/22

On December 10, 2020 the Financial Reporting Council announced its corporate reporting and audit quality review programme for 2021/22 alongside its priority sectors for review.
Five thematic reviews of corporate reporting are planned as supplements to routine reviews of corporate reporting. These are as follows: 

• Going Concern and Viability – The FRC notes that management’s assessments and disclosures in relation to going concern and viability are of particular importance given the severe pressures that many companies are currently operating under. 
• IAS 37 – Provisions, Contingent Liabilities and Contingent Assets.
• Climate Risk follow-up – Streamlined Energy and Carbon Reporting - The FRC will review reporting under these new requirements which apply to accounting periods beginning on or after1 April 1, 2019. 
• Alternative Performance Measures - This will be a follow-up to the FRC’s 2017 thematic review to assess the extent to which its expectations on use of Alternative Performance Measures have been embedded into reporting practices.
• Interim Reporting – The FRC notes that  interim reports play an important role as a progress report on companies’ performance and financial position, which is especially necessary in the current environment given the economic uncertainties resulting from Covid-19. The FRC will review compliance with the requirements of the Disclosure Guidance and Transparency Rules and IAS 34 to identify areas of better practices. As this thematic will focus on interim reports issued during 2020 it will contribute to the FRC’s 2020/21 output.

The FRC’s Audit Quality Review team will pay close attention to the impact of Covid-19, fraud, estimates and climate risk when conducting its programme of audit quality inspections.

In selecting corporate reports and audits for review, the FRC will give priority to the following sectors: travel, hospitality and leisure, retail, property and financial services.

(FRC, FRC announces its thematic reviews, audit areas of focus and priority sectors for 2021/22, 10.12.2020)