Tuesday 31 March 2015

Small Business, Enterprise and Employment Act 2015 :All Company Directors Must Now be Natural Persons

This is part of a series of posts on the Small Business, Enterprise & Employment Bill that has now come into force on 26 March 2015 following the grant of Royal Assent and is now the Small Business, Enterprise and Employment Act 2015 (“the Act”).
This series of posts is intended to update the readers of the key changes, which should radically transform the transparency of the marketplace as regards the operation, control, ownership and risk associated to limited companies in the UK.
We have not addressed all of the issues described in our previous posts, to avoid duplication, but would welcome any queries from the reader in this respect.
The commencement of these changes is different dependant on which part of the Act is being reviewed (Section 164 of the Act defines commencement) and we have highlighted below the relevant commencement dates. Where we below stated “to be announced” this means it has not yet come into force and will commence upon the making of a Commencement Order.
The changes as set out below will be extremely important to all directors, companies and individuals with business in the future and it cannot be emphasised too strongly how important it is that you are prepared for these proposed changes. At Francis Wilks & Jones we can advise on all matters subject to these posts.
All Company Directors must now be natural persons – COMMENCEMENT ORDER TO BE ANNOUNCED
Sections 87 and 88 of the Bill removes the ability to appoint corporate directors to the Board of Companies and insert a statutory requirement that ALL company directors must now be natural persons. There is however a provision that enables the Secretary of state to make exceptions to this rule, but we presume this will largely be in respect of government institutions, companies limited by guarantee and not-for-profit organisations.
A breach of this, both by the appointing company, the appointed company (if one is wrongly appointed) and directors of both of these companies (including shadow directors) may make these companies/their directors liable to criminal proceedings. The sentence is limited to a fine. However, it is important to note that the existence of any such criminal proceedings may make directors unable to continue acting in that capacity or alternatively they could later be deemed in breach of their fiduciary duties.
The amendments (new Section 156C of the Companies Act 2006) do provide for current corporate directors. They can remain appointed until 12 months from the day that the Act comes into force, and so these corporate directors (in respect of all UK companies) must be removed no later than 25 March 2016.
If you require any assistance on the impact or effect of any of these changes, or indeed you require assistance in making these changes and advice on the consequences,then please contact Francis Wilks & Jones.

Transparency of Companies: Beneficial Interests

This is part of a series of posts on the Small Business, Enterprise & Employment Bill that has now come into force on 26 March 2015 following the grant of Royal Assent and is now the Small Business, Enterprise and Employment Act 2015 (“the Act”).
Schedule 3 to the Act (via Part 7 at sections 81-82inserts a new Section 9(d) into the Companies Act 2006 to require that all companies maintain a register of people who have a significant control over the company” (called a PSC Register) and also a new Part 21A of the Companies Act 2006, to set out these requirements, with certain provisions applicable to both “registrable” (i.e. directly owned) and “non-registrable” persons (i.e. those owning through a legal entity such as a trust or offshore company).
This will undoubtedly have consequences for current offshore trusts and tax structures existing through offshore companies.
The Act requires that companies themselves be responsible for determining who should be put on a PSC Register and therefore this obligation (and the risk of error) falls to directors to ensure this register is correct. An error can result in directors being individually subject to criminal proceedings including a prison sentence of up to two years, so it is very important the PSC register is accurately maintained.
We expect that the definition of “significant control” will be widely interpreted but Schedule 1A to the Companies Act 2006 (as inserted) provides a definition that “significant control comprises an individual with at least a 25% shareholding (directly or indirectly) and exercises a “significant control”. However, the threshold for measuring this could be critical. Equally, as previously stated, this is undoubtedly increase the prevalence of shadow directors (although the Act provides for greater risk on their part), but ultimately proving someone is a shadow director is not always that straightforward.
No doubt such changes will have an incredible effect on various tax structures and the use of off-shore companies as shareholders through trust schemes.
However, this register will now be a public document filed at Companies House.
If you are a shareholder or director with concerns over such changes to the legislation, or alternatively may be a creditor or are otherwise concerned as regards the ownership of a company and its future, then please contact Francis Wilks & Jonewho will be able to assist you with the details of such changes.

Monday 30 March 2015

Small Business, Enterprise & Employment Bill - Reform of the Pub Code

This is part of a series of posts on the Small Business, Enterprise & Employment Bill that has now come into force on 26 March 2015 following the grant of Royal Assent and is now the Small Business, Enterprise and Employment Act 2015 (“the Act”).
This series of posts is intended to update the readers of the key changes, which should radically transform the transparency of the marketplace as regards the operation, control, ownership and risk associated to limited companies in the UK.
We have not addressed all of the issues described in our previous posts, to avoid duplication, but would welcome any queries from the reader in this respect.
The commencement of these changes is different dependant on which part of the Act is being reviewed (Section 164 of the Act defines commencement) and we have highlighted below the relevant commencement dates. Where we below stated “to be announced” this means it has not yet come into force and will commence upon the making of a Commencement Order.
The changes as set out below will be extremely important to all directors, companies and individuals with business in the future and it cannot be emphasised too strongly how important it is that you are prepared for these proposed changes. At Francis Wilks & Jones we can advise on all matters subject to these posts.
Pub Tenant landlords and Reform of the Pub Code – COMMENCEMENT 26 MAY 2015
It is well publicised that following derestriction of the pub sector in the 1990s a new corporate phenomenon occurred, the Pub chain. This comprised large companies acquiring pubs and then entering into onerous leases with incoming tenants, with the effect that rents sky rocketed and tenant landlords often faced difficulty in making the business work.
The Act has been altered from the Bill stages and changes to the regulation of this sector now appear at sections 41 – 73 of the Act.
These reforms establish the Pubs Code Adjudicator, the implementation and powers of which are contained within Schedule 1 to the Act. The Act also requires that the Secretary of State conduct a review of the Pub Code and introduce regulations about terms of a tenancy or other agreement between a pub-owning business and a tied pub tenant within 12 months (i.e. before 25 March 2016) and requires that market rents be offered to tied pub tenants.
As stated in my previous blog, the Acto introduces an arbitration process to settle disputes between the pub tenant and the pub-owning business, where conventionally the balance of power lies with the pub-owning business (and therefore, currently, the pub tenant rarely has – or can afford – legal assistance or protection). The Bill provides for the appointment of an Adjudicator, as part of the arbitration process, to investigate the dispute and report on his/her findings and recommendations – this report is required to be published and the Adjudicator can also impose fines on the pub-owning business only (not the tenant).
There are also provisions allowing the Adjudicator to advise the pub tenant or the pub-owning business, publish the criteria adopted in reaching his/her decision (presumably with the intention of there eventually being a precedent procedure followed and adhered to in such circumstances) and the application of the Pub Code.
The use of the Adjudicator will be reviewable after 31 March 2017.
Should you have any query as regards the application of this process, at Francis Wilks & Jones we can assist in this respect.

Sunday 22 March 2015

Sales out of Administration to Connected Persons

This is part of a series of blogs on the Small Business, Enterprise & Employment Bill (“the Bill”) that is proposed to come into force in April 2015

Section 117 of the Bill seeks to incorporate more future regulation of Administrators. These provisions set down authority for the Secretary of State to introduce statutory instruments to regulate the sale of company businesses out of Administration to “connected persons”.
The use of the out of Court process to appoint Administrators in recent years has lead to the publicly debated issue of insolvency and management buy outs, where companies are placed into administration, the business sold simultaneously (often referred to as a “pre-pack”) and the same management remain in control of the business, assets and goodwill, albeit under a different company number. At the same time all unsecured creditors are left with a claim in the administration and unsurprisingly feel a little disgruntled at the company’s apparent continued trading.
The public perception of this has always been that there has been some sort of fraud or deviance which has allowed management to take the best parts of the business away whilst not being accountable to unsecured creditors (some of whom may be heavily reliant on this relationship). This is often incorrect – the alternative could be far worse, management may be the only ones who know the business, are in a position to acquire it and the sum paid is usually the best outcome for creditors as a whole.
However, to combat the public criticism of this, the Bill allows the Secretary of State (currently Vince Cable) to introduce rules and regulations to control such sales, make the sale subject to creditors’ approval (primarily with an emphasis on unsecured creditors having a say) and generally provide an ability for unsecured creditors to more fully understand the process.
The ability to introduce these changes expires 5 years from commencement of the Act introduced (once the Bill has been approved by Parliament) and so this is expected to be introduced very shortly.
This concludes my blogs on the current contents of the Bill, but there will undoubtedly be many changes by the time it is introduced into legislation. If you would like to discuss any aspects of these blogs, please do not hesitate to contact me or my colleagues at Francis Wilks & Jones.

Monday 16 March 2015

Director Responsibilities and Duties - Part 4

Introduction
This is Part 4 of a series of articles considering the general question of Directors’ duties and responsibilities and in particular, what conduct can ultimately constitute a finding of “unfitness” and possible disqualification as acting as a director.
This article deals with failure to file statutory information, including tax returns and Companies House documentation, and the failure to maintain or preserve company documentation and accounting records.
Unfitness is governed by section 6 of the Company Director Disqualification Act 1986 (“CDDA 1986”).
1. The Court’s approach to the filing of company documentation
The courts take the view that the filing of such documents is absolutely necessary. This is to enable stakeholders in the company (creditors in particular) to understand the financial position of a company to assist them in deciding whether to get involved or not with the company itself.
For example, failure to file accounts when a company is in financial difficulty is viewed seriously by the courtsThis is because creditors and other third parties (including shareholders) will not be able to properly review and understand the financial position of the company and as a result may be unaware of financial difficulties faced by the company at a time that they may decide to commit their own resources either by way of trading with the company or investing in it as a shareholder.
2. What are a director’s statutory obligations on the filing of statutory information?
There are numerous statutory obligations of directors pursuant to the Companies Act 2006, including the following:-
a. Section 113 (keeping a register of members);
b. Section 114 (making the register to be kept available for inspection);
c. Section 162 (keeping a register of directors);
d. Section 165 (keeping a register of directors’ residential addresses);
e. Section 167 (the duty to notify registrar of changes of directors);
f. Section 275 (keeping a register of secretaries);
g. Section 276 (the duty to notify registrar of changes of secretaries);
h. Section 386 (the duty to keep accounting records);
i. Section 388 (knowing where and for how long accounting records to be kept);
j. Section 441 (duty to file annual accounts with the Registrar of Companies);
k. Section 854 (the duty to make annual returns);
l. Section 860 (the duty to register charges);
m. Section 878 (the duty to register charges; companies registered in Scotland).
In addition to the above, there are numerous other requirements to be adhered to such as;
The need by a director to ensure that the company is registered at Companies House
That the various director responsibilities to file financial accounts and audited accounts (where necessary) annually at Companies House are undertaken;
That the requirement to keep accounting records for at least 6 years are undertaken;
That the requirement to file an annual Company Tax Return (CT600) with Her Majesty’s Customs & Revenue (“HMRC”) is fulfilled;
That the statutory requirement to register for VAT when turnover reaches a certain threshold (although the company may voluntarily register earlier to gain the ability to reclaim VAT paid); and
The statutory duty to file returns on employee payments monthly and in respect of tax arising on profits annually.
The obligations on directors are onerous.
It is recommended that at all times you seek professional advice to guide you through this minefield of regulations and statutory requirements, the breach of any of which could lead to severe consequences.
However, in disqualification proceedings, these types of allegation are rarely made out in isolation and will usually feature in addition to other allegations .
3. What happens if a director consistently fails to file company documentationat Companies House?
In these circumstances, the following may happen:
  1. Failure to consistently file company documentation can lead to a finding of unfitness, particularly where loose “groups” of companies are formed by a singledirector and which in themselves appear to constitute some form of “phoenix” trading arrangement.
  2. A total failure by a director to file any company documentation is likely to lead to disqualification.
  3. Under Section 453 of the Companies Act 2006 a late filing penalty can be imposed on the company and this will be doubled if not paid within the required period. This duty exists regardless of whether the company is trading or is dormant.
  4. Ultimately, if a company continuously fails to adhere to its statutory duties to prepare and file annual accounts and returns at Companies House, the Registrar of Companies can strike the company off the register. This can have a severe effect on the company and turns its business essentially into a sole trader or partnership operation, with the appropriate personal liability for the owner/partner arising from consequential business dealings.
  5. Finally, under Section 212 of the Insolvency Act 1986, a director can be liable for any loss to a company arising by virtue of his breach of any of his duties (including the responsibility to prepare and file annual accounts).
4. What if a director has delegated responsibility for this function to external providers who simply failed to do the task?
This is a commonly asked questions by directors, especially of smaller businesses when things go wrong.
If responsibility for preparation and filing of company documentation has been delegated to third party providers (commonly a firm of accountants), then so long as the director had no reason to suspect the work would not be done, this should suffice to avoid disqualification.
However, the director will have to show that the third party was suitably qualified and was furnished with all relevant documentation enabling the statutory documentation to be produced. Ideally the director should check that the accountant is qualified and registered with the appropriate professional body. The same goes for solicitors and other third party professionals.
The director should also supervise their work (either directly or via senior management or internal accounting personnel appointed for this purpose) and ensure for example that the company’s accountants regularly report to the board on tax returns, payroll matters and accounting matters in accordance with their delegated duties.
The golden rule is that simply delegating tasks and then failing to take any interest or supervision in what is being done is not acceptable.
5. What are the general principles relating to the failure to maintain and preserve accounting records?
The courts view these types of allegation seriously for two reasons:
The on-going production of proper accounting records is important for the general health and well-being of any company. Failure to produce proper financial information such as management accounts means that directors cannot fully understand the true financial position of the company – something vital for its wellbeing.
If a company does later enter into liquidation, it is vital that a liquidator can fully understand how the company traded and what transactions were carried out. A failure to maintain records, (or deliver them up on liquidation) can only hinder the job of an appointed Liquidator (or Administrator where relevant).
In modern life, however busy a director maybe, the courts take the view that there is little excuse for not maintaining proper accounting records.
There are plenty of accounting software packages on the market which can be utilised. Equally, even if hard copy documents do not exist on liquidation, information should still be held on an accounting module on a server somewhere which can then be handed over.
An absence of both hard copies and any electronic records often raises suspicions(even if unfounded). Even when directors have employed a bookkeeper to maintain the accounts, the onus is still on the directors to ensure the bookkeeper undertakes the tasks delegated to that person.
6. What if a director is more focused on sales than finances – how do the courts approach this in terms of misconduct?
This is a regular issue which arises when claims are made against directors for a failure to maintain accounts, file tax returns or Companies House returns.
All financial accounts filed at Companies House must be approved by directors and signed off. This is not something that should be done lightly as the approval of such accounts (the directors’ signature appears on publicly available documents) is indicative of a knowledge of the contents and confirmation that these accounts represent a true and fair view of the company’s financial affairs.
All too common busy directors will sign off financial documents prepared by accountants or a fiancé director without fully understanding what they mean. Over reliance or misplaced trust is no defence to allegations of misconduct.
Accounts may be subject to any audit report filed with the accounts, which may be qualified as to whether the accounts are verifiable and/or accurate. However, in the absence of any such audit report, the assumption is that the directors are holding out this financial information to the public at large, creditors and shareholders and thus may have to personally bear any liability for reliance on such information.
Regardless of a director’s role in company, whilst it is acknowledged that sales are important it is also true that without due diligence on the accounts the company and its owners may never benefit from any profit generated as a result of proceedings brought in respect of such failings.
7. What should a director do to ensure such problems do not exist?
It is our recommendation that at all times the company should have regular legal and, most importantly, proper accounting advice extending to the internal form of the accounts, the maintenance of these accounts, the directors duties and the tax affairs of the company.
Accountants can often perform bookkeeping services, deal with tax returns, deal with payroll (and the PAYE/NIC aspects) and deal with the annual financial accounts and audit requirements.
Ideally a company should have a dedicated finance person with responsibility for overseeing this area. This should preferably be someone with accounting experience and ideally they should be a finance director, who can devote their entire role to managing the company’s finances. However, the use of a finance director will not alleviate the other directors from the responsibility to ensure that the finances of the company remain healthy.
8. What happens if a company falls behind on my tax liabilities? Can this affect a director personally?
If a director find him / herself in arrears with HMRC, the Revenue are unlikely to wait very long before notifying the director of this. HMRC will seek enforcement of any tax liabilities against a company and is the largest creditor responsible for presenting winding-up petitions.
However, if a director realises that there are tax arrears, then he/she need to act immediately.
The longer the issue is left and the worse the arrears become due to HMRC, the higher the probability that the company will be subject to winding-up proceedings and the directors could easily find themselves liable for other offences such as trading whilst insolvent or trading to the detriment of HMRC (both of which can lead to a director being disqualified).
Despite adverse publicity, HMRC can be reasonable if approached at an early enough stage. After all, they are interested in recovering tax, even if it might take longer than normal.
It is important that all tax arrears are verifiable and reflected in the company’s records. Simply leaving HMRC to raise assessments, which may fall well below the true liability, is a breach of a director’s fiduciary duties and may undermine any future negotiations.
HMRC may agree to enter into a Time To Pay arrangement (“TTP”) to allow the company to repay arrears during the course of trading. However, the directors will have to reach a decision as to whether the company can afford to maintain any such commitments under an agreed TTP – it is a breach of their duties just to negotiate such an arrangement without any belief it can be honoured in the future (as current tax liabilities will have to be simultaneously remitted) and may be seen as just a delaying tactic (which could in the future lead to disqualification claims and other claims for compensation against directors personally).
9. What can HMRC do against directors personally for a failure by the company to adhere to its statutory duties in respect of tax returns?
HMRC have a great amount of powers under the various Tax and Finance Acts. We would recommend that advice from a tax expert is sought in respect of tax liabilities at an early stage.
For example, where a company has unpaid National Insurance contributions, these sums can be sought from directors or managers of a business personally by way of Personal Liability Notices (“PLNs”) issued against them.
HMRC can also require directors of companies which have previously failed to pay security deposits in respect of any registration for VAT sought or required. This is particularly common where the previously failed company had a large indebtedness to HMRC for VAT or PAYE/NIC. These can be quite a substantial sums (especially for a new start-up business) and a failure to pay any such security sought can result in criminal proceedings against a director personally, resulting in a fine of up to £5,000 per invoice issued in breach of the requirement for a security deposit. Where lots of invoices have been raised this can lead to severe financial problems for directors or event bankruptcy.
As of October 2013 HMRC have an increased mandate not to offer excessively reasonable terms under TTPs and to enforce against non-tax paying companies and their directors more quickly. The Secretary of State in dealing with disqualification claims also issues a majority of these against directors for mistreatment of HMRC as an unsecured creditor.
If a director does find him /herself in difficulties with regard to paying tax, the key is to take early advice. Simply buying ones head in the sand can lead to the company being wound up and may also lead to personal liability for repayment as well as disqualification.
10. What if records are lost or destroyed? Can directors suffer personally as a result of this?
A director will only be liable for matters arising in a company which arise as a result of negligence or misconduct (whether intentional or unintentional). There will always be a defence that events were beyond his/her control, although the Court will generally look on this with a critical eye.
If, for example, a fire breaks out and accounting records are lost, it is essential that records are maintained as regards the fire report, any police report and any other documented reasons for the fire. The same considerations apply to flooding or any other natural event which may destroy company records. If records are stolen (for example on a laptop) it is essential that a police report is filed and the crime reference number taken.
However, company records should normally be preserved by a back-up located elsewhere and a failure to maintain any such back up may be a consideration in any future proceedings against a director.
The existence of cloud based technology makes it increasingly difficult for directors to argue that it simply wasn’t possible to properly back up accounting records.
The same applies to accountants who do not provide the services they were supposed to be providing, either in respect of filing/paying tax returns or preparing/filing returns at Companies House.
If they are properly supervised and reports sought on a sufficiently regular basis, this may be sufficient for the Court to accept that a director performed his/her function of diligence sufficiently well in this respect. However, if a director just “leaves them to it” and blames the accountants when the house of cards topples, his/her failure to communicate and oversee the accountants’ role will be criticised and may lead to a finding of unfitness and/or personal liability.
Should you require assistance with any concerns which relate to your Director Disqualification proceedings or your personal risk generally as a director, then please contact Francis Wilks and Jones LLP and we will be more than happy to discuss your concerns on an initial free no obligation basis.
Each case we deal with is unique to the individual concerned. Our team of experts can provide you with the tailored expert advice you need.
Call us now on 0207 841 0390 for your free consultation.