Hot on the heels of the Economic Crime (Transparency and Enforcement) Act 2022, the Economic Crime and Corporate Transparency Act 2023 (the Act) received royal assent on 26 October 2023.
The Act both introduces fundamental changes to the UK's corporate criminal liability regime and seeks to promote greater accuracy in the material maintained by the registrar of companies at Companies House (the registrar), each aimed at improving the transparency of UK companies and contributing to greater scrutiny of corporate criminal liability (including economic crime) in the UK. The implementation of the Act will be gradual via secondary legislation which will allow time for Companies House to provide necessary guidance (and potentially system updates). Companies House announced on 22 January 2024 that it aims to introduce the first set of measures at the earliest on 4 March 2024, provided the requisite secondary legislation has been implemented. It is therefore certainly not too early for companies to start thinking about what the changes will mean for them, particularly the Companies House related changes which are now firmly on the horizon.
This article looks at the key changes that companies would be advised to start thinking about noting that companies will now need to pay even more attention to their filings and records at Companies House to make sure they are compliant as the registrar is not likely to be as forgiving going forward. It also considers the potential knock-on effects of such measures for companies' debt facilities, and more particularly for lenders. In the debt finance world, lenders and their legal counsel have a sharp focus on borrowers' statutory compliance and will seek confirmation of this via the initial due diligence process and, going forward, via representations and undertakings from the obligors on their compliance with applicable laws and regulations. The impact of the changes is likely to be felt in several aspects of debt financing transactions including the due diligence process and need (and potential failure) to comply with agreed representations and undertakings, but also in filings required in finance transactions and deal timetables. These are all explored below.
Key changes companies should start thinking about:
Registered office and company email address – are they "appropriate"?
What is the change?
Every company is required to maintain a registered office address. Under the Act, companies must ensure that their registered office is, at all times, an appropriate address. In the ordinary course, the registered office address must be one where (1) if a document is delivered, it would be expected to come to the attention of a person acting on behalf of the company and (2) that delivery is capable of being recorded by obtaining an acknowledgement of delivery. If a company does not comply, without reasonable excuse, an offence is committed not only by the company but every officer of the company who is in default.
Similar amendments will be introduced requiring companies to have an "appropriate" email address. An address is deemed "appropriate" if, in the ordinary course, emails sent to it by the Registrar would be expected to come to the attention of a person acting on behalf of the company.
Focus on lenders: These changes are perhaps a welcome enhancement for lenders with UK borrowers giving greater certainty as to service of communications under their finance documents.
Action point: Where corporate groups have non-trading or dormant companies or a small number of employees, it is even more important that someone is monitoring that company's email inbox at all times. Companies should check the registered office and email address details for their group and make sure they are in all cases, "appropriate".
Statutory registers – do they need updating?
What is the change?
One of the more welcome updates for companies from an administrative perspective is likely to be the future removal of the requirement for companies to maintain independent registers for directors, secretaries and people with significant control (PSCs). Gone will be the days when the registrar could store a company's statutory registers. Instead, the Act will provide for those details to only be held on the public register at Companies House which will become the central verified source of information for third parties.
Unfortunately, other changes being introduced will add to the administrative burden for companies, such as the more specific details which will be required for a company's register of members – full names and service addresses must be provided for all shareholders, no more abbreviations.
Focus on lenders: These changes may also be welcome for lenders as they may assist in simplifying the due diligence process when investigating the position of the borrowing group and in providing greater immediate detail and clarity in terms of shareholder information.
Action point: Company secretaries and in house legal teams will need to familiarise themselves with the changes and in particular make sure that the registers are kept fully up to date. Companies could start looking at their registers now and seeing how much work there is to do in updating them where necessary.
Account filings for small companies – do you know what the requirements are?
What is the change?
Even if a company is subject to the small companies' regime in a relevant financial year, such company will still need to deliver to the registrar a copy of its annual accounts and the director's report. The requirements have been tightened up – if there is a small company in a corporate group, it will need to familiarise itself with the changes and prepare for the enhanced reporting requirements.
Focus on lenders: This is again perhaps good news for lenders as they have potentially quicker access to a financial snapshot about a potential borrower before getting into the depths of financial due diligence.
Action point: For small and micro companies in particular, financial directors should make sure they are up to speed with the accounts (and content) that need to be filed with Companies House (and by when).
Identity verification requirements – are you ready?
What is the change?
Both new and existing directors, PSCs and any persons submitting information to Companies House will need to verify their identity, most likely either via (1) direct verification at Companies House by a verified person or (2) indirect verification using an Authorised Corporate Service Provider (ACSP). This change throws up a variety of practical questions for both companies and professional advisors.
Focus on Lenders (Filings and Deal Timetables)
Filings:
Examples of this in operation in a debt financing context are:
- the process of registering security; usually this is done by lender's counsel, but will this now mean that the individual lawyer has to verify their own identify first or will it require law firms to become ACSPs, noting the potential liabilities associated with the verification process?
- filing of updated articles of association and special resolutions: quite often borrower's counsel will find themselves having to file copies of the updated articles of association and special resolutions at Companies House as part of the post-closing items on a financing transaction; will this now be something that companies themselves need to deal with?
Deal timetables:
Persons/entities that wish to be directors will not be able to act and perform functions as a director until their identity is verified and if they do, directors will face disqualification. This is going to be interesting for deal timetables. On transactions where an acquisition is being debt funded, often the directors of the target group companies change at completion and immediately thereafter those target group companies sign up to finance documentation. It is likely that going forward, parties may need to factor in time for the necessary identity verifications and reconsider the sequencing of completions. The same applies for changes to PSCs after an acquisition. It remains to be seen how stringent the registrar will be as regards timing for these identify verification requirements.
Action point:
In preparation for arguably the biggest administrative change under the Act, companies may want to start thinking about who needs to have their identify verified and what documentation will need to be available for that process. There will be a short implementation period for existing directors and personnel but amongst all the other changes, this is definitely one to get on top of. Another thing companies should check is whether they have any corporate directors in their group – for UK registered corporate directors, all directors of that company must be natural persons and any corporate directors not incorporated in the UK must be registered within the UK.
Is the Companies House record up to date?
What is the change?
The registrar is likely to carry out a higher-level diligence on filings at Companies House going forward. Further to the Act, the registrar will have the broad power to "carry out such analysis of information within the registrar's possession as the registrar considers appropriate for the purposes of preventing or detecting crime". Companies should be prepared to stand behind and verify information they are delivering to the registrar. The presumption that the registrar will take a passive approach is no longer a safe presumption; we need to prepare for a more active, analytic registrar in the future.
Focus on lenders: Companies would be advised to ensure their filings are on time, accurate and provide a comprehensive set of the information that is required by the registrar. Late/incorrect or incomplete filings will not look good to a prospective debt funder when their counsel comb through the company's filing history, and may inadvertently trigger representations and undertakings in relation to compliance with laws in facilities with current debt funders.
Action point: Company secretaries and in-house legal teams should make sure they are up to speed on what is required to be filed at Companies House and by when. Sluggish attendance to secretarial matters is unlikely to go unpunished, particularly where it is a regular occurrence.
What next?
The legal world will be keeping a beady eye on the gradual implementation of the Act and, for banking and corporate teams in particular, on how transaction timetables may be impacted and what additional diligence parties may need to carry out to make sure borrowers are complying with their enhanced obligations under the Companies Act 2006.
The start of 2024 brings with it both implementation of the first set of measures, at the earliest on 4 March, including those in relation to the registrar's abilities to check, query and reject information and the new rules in relation to registered offices, and the first set of commencement regulations for the Act, mainly focussing on national security-related defences and exceptions to certain requirements. We will no doubt see more developments as the year progresses relating to the aforementioned Companies House updates.
Find out more
To discuss the issues raised in this article in more detail, please contact a member of our Banking and Finance team.
