Companies House, the UK’s official company register, has recently come under the spotlight due to a series of rogue filings that have affected over 190 companies, including several high-profile organizations such as Sainsbury’s, Macquarie and the Bank of England, to name few. The filings, falsely indicating the release of existing charges, have raised serious questions about the integrity and reliability of the corporate register, igniting a debate on the need for legislative and procedural enhancements to protect investors against such vulnerabilities.
In response, Companies House has embarked on an ambitious reform plan, coinciding with the introduction of the Economic Crime and Corporate Transparency Act (ECCTA) aimed at granting the register greater powers to vet and rectify information.
Legal Implications of Erroneous Release
Charges capable of registration under the Companies Act 2006 (Act) must be registered within 21 days of the date of creation of the charge. The registration process can be considered straightforward and may be initiated by the chargor or any person with an interest in the charge, including the chargeholder or its legal advisers. Thus, the Companies House register plays a pivotal role in ensuring the correct priority of rights in an insolvency scenario: a security which is not registered within the prescribed timeframe will likely be void against liquidators, administrators and creditors.
To release a charge, in addition to any document evidencing the formal release and any other procedural requirements which may be necessary, it is also considered best practice to inform Companies House of such discharge. While not a legal requirement strictly speaking, doing so benefits the security provider by notifying third parties. However, the level of scrutiny on the discharge filing appears less strict (and it is usually processed rather quickly) – which is because even though the relevant charge is removed from the register, the security itself may not (yet) be released.
Whilst an erroneous or even fraudulent release may seem just an innocent mistake, it can lead to greater consequences in private equity and leveraged finance transactions.
Compromised Position of Secured Parties
A charge that is mistakenly marked as discharged at Companies House could jeopardize the secured party’s (most frequently, a lender) position. Although the underlying security agreement may still be valid between the parties, the erroneous discharge could mislead third parties and potentially affect the lender’s priority in case of the subsequent borrower’s insolvency.
Protective measures
Rectifying an erroneous release may require corrective filings with Companies House and, in more complex cases, applying to the court for an order to correct the register. The parties involved may also want to enter into new agreements to reaffirm the security interest if a charge was wrongly discharged, which can again affect the secured party’s priority vis-à-vis subsequent creditors. In fact, this process does not always restore the original priority of the charge, especially against third parties who were not aware of the mistake in the first place.
The Economic Crime and Corporate Transparency Act
The recent issues with rogue filings at Companies House have highlighted the urgent need for reforms to improve the security and reliability of corporate filings. The ECCTA is a positive step towards achieving these goals. By empowering Companies House with enhanced capabilities to request evidence and eliminate inaccurate data, the ECCTA seeks to bolster the transparency and reliability of corporate information.
Stricter Verification Requirements
Key elements of the ECCTA include amendments to the Companies Act 2006 to introduce stricter requirements for companies registered in England and Wales in their interactions with Companies House. These amendments encompass new identity verification requirements for directors, persons with significant control (PSCs), and members of a limited liability partnership, alongside restrictions on who can file documents on behalf of companies, changes to company record-keeping requirements, restrictions on the use of corporate directors, and enhanced powers for Companies House to verify, remove, or decline information on the companies register.
As a result, Companies House will take a pivotal role in the fight against economic crime transitioning from a passive repository of company information to a more proactive gatekeeper, ensuring the reliability of company data and enhancing its powers to investigate and enforce compliance.
The new reforms introduced by the ECCTA include a “failure to prevent fraud” offense for organizations that cannot demonstrate having “reasonable procedures” in place to prevent fraud. Additionally, there are requirements for identity verification for registered company directors and those filing on behalf of companies, as well as measures to improve the accuracy of financial information on the register.
Implementing the ECCTA will still require substantial secondary legislation and updates to Companies House’s operations systems and these changes will roll out gradually, contingent upon the development of necessary systems and legislation. However, the reform marks a notable advance in the UK’s regulatory framework to deter economic crime and enhance corporate transparency, with significant implications for how companies operate and are regulated – and a cascade effect on cross-border transactions involving a UK holding or subsidiary. It represents a notable progress in the UK’s efforts to fight economic crime and boost corporate transparency contributing to make the UK a less appealing target for criminals exploiting corporate entities for illicit purposes.
With the right assistance from experienced advisors, particularly those familiar with private equity and leveraged finance matters, market players will not need to worry so strongly that they can effectively achieve protection when dealing with registering and (most importantly) keeping in force their charges, especially in cross-border transactions.
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