Tackling economic crime and corporate transparency (Part 2) – the new Bill

Company information

Amendments being made by the Bill to sections in the Companies Act 2006 (CA 2006) concerning the formation of a company include the following:

• Subscribers to the memorandum of association must set out their full name (so Joe Bloggs rather than J. Bloggs, for example) and registration applications must include a statement that none of the subscribers are disqualified directors. If any are, but have received court permission to act as a director in the jurisdiction the company is registering in, this must be specified (with the relevant court named).
• An application to form a company must include an express statement that the company’s purposes will be lawful. If it is subsequently proven that that is not the case, there will have been a false filing that the Registrar of Companies (Registrar) can reject with the consequence that the company is not formed.
• The statement about the company’s proposed officers will need to confirm that those directors have verified their identity and are not disqualified directors under directors’ disqualification legislation or are not otherwise ineligible to be a director. The statement of persons with initial significant control (PSCs) must also include a statement that none of the proposed registerable persons or registerable relevant legal entities are disqualified under directors’ disqualification legislation and that their identity has been verified (see further below).

Company names

The Bill gives the Secretary of State certain powers in relation to company names as follows:

• The Secretary of State will be able to prevent a new company registering where they consider that the purpose of the company’s name is to facilitate what would, in the UK, be an offence of dishonesty or deception, and conduct outside the UK can be taken into consideration.
• The Secretary of State will be able to prevent the registration of a company (including an overseas company) with a proposed name which the Secretary of State believes suggests a connection, where none exists, with a foreign government or its agencies or with international bodies such as the United Nations or NATO.
• It will not be possible to register a company under a name which consists of, or includes, what in the Secretary of State’s opinion, is computer code. This is because computer code embedded in an IT database can maliciously infect the systems of those who access or download data to their own systems. 
• Where the Secretary of State believes a company’s name should be changed as it gives a misleading indication of its activities, this discretion is extended by broadening the applicable context of harm to the public and making it clear that such harm can potentially manifest itself outside the UK.
• While companies will generally have 28 days from the date of a direction to change their name to comply with that direction, the Secretary of State will have discretion to extend that period.
• The Secretary of State will be able to direct name changes where it is felt that a company name has been or is intended to be used for criminal purposes outside the UK, or where a name has been wrongly registered. It will also be possible to disapply various prohibitions and restrictions on the use of certain words and expressions in company names if the Secretary of State believes there is a case for them on national security grounds or to prevent or detect serious crime.

The Bill also includes provisions to prohibit a company that has been directed to change its name (and has done so), from re-registering under its previous name or one similar to it, and to prohibit directors or shareholders involved with that company from using the original name (or similar) in forming another company. In addition, some changes to the way in which objections to company names are considered by the company names adjudicator are proposed, as well as changes to enhance the Registrar’s powers in connection with company name changes. 

Registered office and email address

There will be a new requirement for a company’s registered office to be at an ‘appropriate address’ at all times. An ‘appropriate address’ means an address where, in the ordinary course of events, a document addressed to the company, and delivered there by hand or by post, would be expected to come to the attention of a person acting on behalf of the company, and the delivery of documents is capable of being recorded by the obtaining of an acknowledgement of delivery. Failure to meet this requirement will be an offence punishable by fines.

Among other things, the Registrar will have power to change the address of a company’s registered office, both on application and on its own motion, if not satisfied that it is an appropriate address.

In addition, all companies will have to maintain an appropriate email address, being one at which, in the ordinary course of events, emails sent to it by the Registrar would be expected to come to the attention of a person acting on behalf of the company. Failure to maintain an appropriate email address, without reasonable excuse, will be an offence and the company and its officers will be subject to a criminal penalty. The purpose of this new requirement is to allow the Registrar to communicate with companies electronically but the registered email address will not made available for public inspection.

Directors

Proposed new provisions relating to directors include the following:

• The Bill amends the Company Directors Disqualification Act 1986 to prohibit certain designated persons (as defined by section 9(2) Sanctions and Anti-Money Laundering Act 2018), from acting as directors of companies. In addition, the CA 2006 will provide that disqualified directors (including those disqualified as they are undischarged bankrupts, subject to bankruptcy restrictions orders or undertakings, debt relief restrictions orders or undertakings and moratoriums under the debt relief orders, as well as designated persons referred to above) cannot be appointed as directors of a company and, if they are, their appointment will be void.
• The CA 2006 will make it clear that this prohibition on appointment of a disqualified director will not provide protection from criminal prosecution or civil liability if they were to act as a director, or if the company’s directors usually act on the disqualified director’s instructions. This is intended to ensure that third parties and anyone who has relied on the actions of an invalidly appointed director are not unfairly disadvantaged. 
• New section 169A(2) CA 2006, sets out that a person who ceases to be a director as they have become disqualified under directors’ disqualification legislation, remains liable for their actions if they continue to act as a director. This includes acting as a de facto director, and such disqualification will not provide protection from criminal prosecution or civil liability if the individual continues to act as director, or if the company’s directors usually act on the disqualified director’s instructions.
• The amended CA 2006 will provide that an individual should not act as a director unless they have verified their identity (see further below). As a result, until they verify their identity, they should not take any actions on behalf of the company in their capacity as a director. If they fail to verify their identity and continue acting as a director, they will be committing an offence punishable by fines. Companies will be required to ensure that their directors do not act as directors unless they are verified and will commit an offence if they do not do so. However, any action taken by an unverified director will be valid.
• It will be a new offence for an individual to act as a director unless the company has notified the Registrar of the director’s appointment within 14 days of their appointment. The notice must include a statement that the director’s identity has been verified. The purpose of this obligation (in addition to directors having to verify their identity) is to ensure that all directors are included on the companies register. There will be a defence for directors who can prove they reasonably believed the company had given notice of their appointment to the Registrar. 
  
   

Register of members

A number of provisions relating to registers of members are included in the Bill:

• It is to be made clear that for individual members, their forename and surname should be entered in the register.
• Power is being given to the Secretary of State to make regulations to change the information required to be entered in a company’s register of members and to make changes to other parts of the CA 2006 where relevant. For example, regulations may require all members to provide an address. Currently only the subscribers of a company are required to provide their name and an address, but those who subsequently become members are only required to provide their ‘name’. The aim of this is to enable the collection of more information about members in the future. This would align the position for members with the position for directors and for PSCs.
• Currently the court may only order the rectification of the register of members in relation to names. The rectification power will be broadened so it is available in respect of any information on the register of members. This means if a company’s register of members does not include information that it is required to include, or includes information that it is not required to include, then the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register.  
• Provisions protecting information in the register of members are to be included in the CA 2006 and the Secretary of State will have power to make regulations requiring a company to refrain from using or disclosing ‘individual membership information’ except in specified circumstances, where an application to the Registrar is made to request this.
• The current option for private (non-traded) companies to elect to keep information about their members on the ‘central register’ maintained by the Registrar is being removed so that all  companies will be required to maintain their own register of members. Companies that keep such information on the central register will have a transitional period to enter the information on their own register of members.
• All companies (including traded companies) registered under the CA 2006 before clause 44(3) in the Bill (requiring full names to be set out in the register of members) comes into force, will be required to provide a full list of shareholders with the first confirmation statement filed on a date that is after the day on which clause 44 comes into force.

Accounts and reports

The Bill includes some reforms relating to the information that must be filed at Companies House. 

Micro-entities will be required to file a balance sheet and a profit and loss account, and may choose to file a directors’ report. Small companies that do not meet the micro-entity threshold will be required to file annual accounts and a directors’ report. The option for small companies to prepare and file abridged accounts is also being removed

Where companies rely on audit exemptions (including dormant companies), their directors will have to make a statement when claiming an audit exemption, to confirm that the company qualifies for the exemption.

Identity verification for directors and PSCs

New identity verification requirements will apply to existing directors, PSCs, and those delivering documents to the Registrar. Existing companies will have a transition period in which to verify these identities. Identity verification requirements will also apply to all new registered company directors and PSCs. The aim of these new requirements is to make it harder to make anonymous filings at Companies House, to discourage the hiding of company control through nominees or opaque corporate structures, and to make the data provided by Companies House more reliable. 

Details relating to the procedure for identity verification are to be set out in regulations to be made by the Secretary of State under new section 1110B CA 2006 (which may also include exemptions from the identity verification requirements).  A Fact Sheet on identity verification published alongside the Bill states that an individual’s identity will be verified if the person has verified their identity with the Registrar directly via Companies House or if a verification statement in respect of the person has been delivered to the Registrar by an authorised corporate service provider (ACSP). 

The Fact Sheet notes that if a person is verifying their identity directly with Companies House, identity verification will link a person with a primary identity document, such as a passport or driving licence. The person undergoing verification will take a photograph or scan of their face and the identifying document. The two will be compared, using likeness matching technology, and the identity verified. If successful, the Fact Sheet states that the person will be notified in a matter of minutes. The Fact Sheet also states that primary identity documents may be checked against government databases as part of the identity checking process, that alternative methods will be available for individuals without photographic ID and that digitally assisted/non-digital identity verification will be available for users who cannot use the digital identity verification system.

It will be possible to use an ACSP to file with the Registrar, form a new registerable entity, or verify identity. For ACSPs (likely to be intermediaries such as accountants, legal advisers, and company formation agents registered with a supervisory body for anti-money laundering (AML) purposes and who already have an existing obligation to carry out customer due diligence checks on all of their clients), the Fact Sheet notes that identity verification will build on their existing checks. ACSPs will have to register with the Registrar and demonstrate that they are supervised for AML purposes. They will have to declare that they have completed all of the necessary identity verification checks when they interact with the Registrar and Companies House. 

As mentioned above, there will be a transition period for existing directors and their equivalents, and for PSCs to verify their identity, giving existing directors and PSCs time to comply with the new requirements.

For directors of a new company, identity verification must take place before an application for the formation of a company is delivered to the Registrar. Post-incorporation, a new director must verify their identity as soon as possible and must do so before their appointment is notified to the Registrar by a company (so within 14 days of their appointment).

Existing PSCs will be required within 14 days of the appointed day (to be determined by regulations)  to deliver to the Registrar a statement that their identity is verified and will be required to maintain that verified status from the expiry of this 14-day period. Registerable relevant legal entities (RLEs) will be required to deliver to the Registrar within 28 days of an appointed day (also to be determined by regulations) a statement specifying the name of their verified relevant officer (a director in the case of a company), together with a statement by that individual confirming that they are a relevant officer of the entity. RLEs will be required to maintain a verified relevant officer from the expiry of this 28-day period.

The Fact Sheet points out that in general, it is expected that identity verification will be a one-off requirement. Once a person is verified, they will obtain a verified status. However, there may be instances where re-verification is required, for example if someone changes their name. The events that will trigger the requirement to re-verify will be set out in secondary legislation following Royal Assent of the Bill.

The consequences of non-compliance with the identity verification requirements will depend on the circumstances. However, an individual who fails to comply with a requirement to verify their identity with the Registrar, could be subject to criminal proceedings (which could result in a fine), civil penalties issued by the Registrar, incorporations/registration of a new company being rejected, being unable to file statutory filings, the public register being annotated to show the individual’s status as ‘unverified’ and, for directors, failing to verify could also result in being prohibited from acting as a director.

Anyone wishing to file documents with the Registrar will need to verify their identity before they do so. This includes individuals filing documents on their own behalf and individuals delivering documents on behalf of someone else. In the latter case, the person delivering the documents must also confirm they have the relevant person’s authority to do so. This means that a director filing on behalf of a company would need to confirm they have authority to do so and the purpose of this provision is to serve as a deterrent to unauthorised individuals delivering documents to the Registrar.

Electronic delivery of documents

Changes to the CA 2006 will allow the Registrar, by means of Registrar’s rules, to mandate the manner of delivery of documents, removing current limitations on the Registrar’s ability to mandate electronic delivery. 

Two specific filing changes are included in the Bill. Section 649 CA 2006 (registration of court order confirming reduction of share capital and statement of capital) is being amended to remove the requirement to produce an original court order, although the production of a copy of the court order will continue to be required. This amendment makes section 649(1) consistent with other sections of the CA 2006, where only a copy of the order is required. In addition, section 89 Insolvency Act 1986 (statutory declaration of solvency) is being amended to replace the requirement to produce an original declaration of solvency with the requirement to produce a copy of the declaration of solvency. A new section 1068A is also being inserted into the CA 2006 to confer a general power on the Registrar to make rules that for filings that consist of more than one document, all component parts must be filed together.

Promoting the integrity of the register at Companies House

The Bill includes a number of provisions that seek to improve the reliability of data maintained by Companies House, including the following:

• The Registrar will have the power to reject documents which are not consistent with information held by the Registrar or available to the Registrar and where that gives the Registrar reasonable grounds to doubt whether the document complies with any requirements as to its contents. A document that is refused under this power will be treated as not having been delivered.
• The Registrar will have a new power to require information to be provided to enable the Registrar to determine whether a person has satisfied a statutory requirement to deliver a document, whether a document that has been delivered complies with the requirements for proper delivery, or whether (and, if so, how) to exercise the power to require a company to resolve inconsistencies between a document and other material on the companies register or the Register of Overseas Entities.
• The Registrar’s powers to remove material from the register are being enhanced by providing that the categories of material which may be removed are those which have been accepted despite not meeting proper delivery requirements, and those defined by the CA 2006 as unnecessary material. The Registrar may take a unilateral decision to remove material or do so upon application.

General false statement offences

The current general false statement offence in section 1112 CA 2006 is being amended by removing the need for a person to have ‘knowingly or recklessly’ delivered, or caused to be delivered to the Registrar a document or statement which is false, deceptive or misleading in a material particular for an offence to occur. The emphasis is being changed so that a false statement offence occurs where a person delivers a false, deceptive or misleading filing ‘without a reasonable excuse’. The reasonable excuse component ensures that the offence is not engaged in, for example, cases where a company reasonably relies on information provided by others which turns out to be untrue, or to prevent UK professionals assisting companies being prosecuted from having made an honest mistake.

New section 1112A CA 2006 adds an aggravated offence which is committed by a person who knows that the document or statement provided is misleading, false or deceptive in a material fact, while new section 1112B provides a defence to this. It provides that the Secretary of State may issue a certificate to a person, the effect of which is that the person is not liable for the commission of any offence relating to the delivery to the Registrar of a document that is false, misleading or deceptive or making a statement to the Registrar that is false, misleading or deceptive. However, the Secretary of State may only issue such a certificate if satisfied that the conduct amounting to such offence is necessary in the interests of national security or for the prevention or detection of serious crime. 

Similar new false statement offences (both in connection with responding to or failing to respond to information notices and more generally) are also being introduced by the Bill in relation to the new Register of Overseas Entities maintained by the Registrar pursuant to ECTEA. In addition, the Reports on Payments to Governments Regulations 2014 are to be amended by the Bill so that their structure of false statement offences is in line with those to be included in the amended CA 2006. This is so as to provide consistency and clarity to businesses. 

Enforcement of penalties

In relation to financial penalties, currently obligations in the CA 2006 relating to the functions of the Registrar are enforced through the criminal justice system. The exception to this is the accounts late filing civil financial penalty. The Bill reforms the role and powers of Companies House in this area. 

As part of these reforms the associated sanctions are being improved by amending existing criminal offences, creating new criminal offences, and taking a power to create a new civil penalties regime. As a result, where the Registrar determines beyond reasonable doubt that a person has engaged in conduct that would amount to an offence under the CA 2006, the Registrar will be able to impose a financial penalty directly, rather than pursuing criminal prosecution through the courts, where that is a more appropriate use of resources.

The link between civil sanctions and director disqualification will also be strengthened by an amendment to section 3 Company Directors Disqualification Act 1986 to ensure that financial penalties can be used as grounds to disqualify a director.

Limited partnerships

Part 2 of the Bill introduces changes to the legislation on limited partnerships. The aim of this is to bring relevant legislation up to date and to tackle perceived abuses of limited partnerships. These changes include the following:

• Tightening registration requirements, by requiring more information about the partners of a limited partnership and requiring that this information is submitted by authorised corporate service providers, which are supervised for anti-money laundering purposes. 
• Requiring limited partnerships to have a firmer connection to the part of the UK in which they are registered, by having to maintain their registered office there. 
• Requiring all limited partnerships to submit statements confirming that the information held about them on the register is correct. 
• Enabling the Registrar to deregister limited partnerships that are dissolved or no longer carrying on business. 
• Sanctions will be enforced for breaches of the above obligations against the partners of limited partnerships.

The broader reforms to Companies House in other parts of the Bill will also impact limited partnerships by expanding the role and powers of the Registrar over limited partnerships, introducing mandatory identity verification of general partners and providing for enhanced data sharing of information about limited partnerships.

Impact of reforms on limited liability partnerships (LLPs)

A Fact Sheet on the impact of the corporate transparency reforms in the Bill on LLPs states that secondary legislation will be passed in due course which adapts company law, as amended by the Bill, to the law governing LLPs.

Among other things, this will mean that all of the members of LLPs will be required to verify their identities and it will be an offence to fail to do so. They will also be required to verify the identity of their PSCs. Where a partner is a corporate entity, all of the directors (or equivalents) will also be required to verify their identity.

The changes introduced through the Bill will also all apply to information that LLPs submit to Companies House. For example, the Registrar will be given new powers to query the information that is held about an entity on the Register. The Registrar will also be able to proactively exchange information with other bodies, for the purpose of exercising the Registrar’s functions or for purposes connected with the functions of a public authority that the Registrar exchanges information with.

LLPs that are the general partners of limited partnerships, and which are also corporate entities, will be required to name a managing officer who is an individual, for the purpose of communicating with the general partner and the new corporate director reforms which will be regulated for after Royal Assent of the Bill (see further above), will apply to LLPs acting as corporate directors. An LLP will only be able to act as a corporate director if all its members have had their identity verified.

Further transparency measures around company ownership and PSCs

A Fact Sheet on improving transparency of company ownership states that through regulations to be made under the CA 2006, more transparency will be required in relation to the current PSC regime set out in the CA 2006. 

Companies claiming an exemption from the requirement to provide details of their PSCs will need to state why they satisfy the conditions for an exemption and, if listed, they must state which market they are listed on and where their shareholder information can be found. This information will need to be provided via the next confirmation statement due after this requirement comes into force. 

Companies owned and controlled by a relevant legal entity (RLE) will need to state the conditions satisfied for that RLE to be recorded as a PSC, and, if the RLE is listed, state the market it is listed on.

Conclusion

Many of the provisions in the Bill have been long-anticipated, with potential reforms to the UK’s corporate registration framework and the role of the Registrar first being consulted on back in 2019. The Bill takes forward measures designed to prevent abuse of that framework and it builds on ECTEA which came into force earlier this year. Given its focus on further tackling economic crime, making it harder for unverified persons and entities to set up companies in the UK and strengthening the reliability of information publicly available at Companies House, its proposals are likely to be welcomed by most.