Background

The Small Business, Enterprise and Employment Bill was recently introduced and could affect several areas relevant to participants in the finance markets. The Government has said that it expects this legislation to come into force by May 2015. Given the controversial nature of some of its provisions that statement might be wishful thinking - though there appears to be a desire to get at least some of this legislation onto the books as quickly as possible. Some of the provisions described below are Vince Cable's brainchild arising out of his department's recent "Transparency & Trust" consultation. It a large Bill which deals with everything from assignments of debt to zero hour contracts. The provisions of relevance to financial markets are:

Prohibitions on assignment of debts

The Bill would make contractual terms which had the effect of prohibiting assignments of debts ineffective at least to the extent specified in regulations to be made under the powers contained in the Act once it comes into force. This provision is aimed at making it easier for small and medium sized companies to raise finance based upon their receivables.

Modernising insolvency

The Bill contains a host of provisions designed to bring insolvency proceedings into the e-communications age and simplify Insolvency Practitioner (IP) communications with creditors. IP regulation would be tightened. It also deals with the hot topic of pre-pack insolvency the subject of the recent Graham Review and in particular the review of sales to connected parties which would be subject to review as explained in the latest RCR update. Fast track IVAs are targeted for termination as an abuse of the insolvency process.

Directors’ duties to apply to shadow directors

The Bill contains provisions which almost completely overhaul the law relating to shadow directors. The intention is to ensure that companies (and their insolvency officeholders) can more easily sue shadow directors where there has been nefarious conduct. The Bill contains a power to make regulations defining the scope of the duties owed by shadow directors as well as specifying the categories of persons who can be shadow directors. The provisions are likely to be of interest to anyone who appoints directors to portfolio companies as it may impact the steps they need to take to avoid liability.

Corporate directors

The Bill aims to restrict the circumstances in which one company may be the director of another company. There will be a limited range of exceptions such as one in relation to "group directorships" and appointments made in connection with pensions. The Bill contains provisions which provide that existing corporate directors will automatically cease to be directors one year after the new legislation comes into force.

Disqualification of directors

The recent Transparency & Trust consultation made clear the intention to overhaul the director disqualification regime and the Bill contains provisions aimed at this area. A much broader range of factors will be capable of being taken into account when considering disqualification proceedings including overseas misconduct or nefarious conduct relating to an overseas entity and breach of relevant regulations for companies that operate in regulated environments. There has been a realisation amongst Government that the current wrongful trading regime looks good on paper but has very little deterrent effect and even less practical impact on creditor recovery when it comes to egregious behaviour resulting in insolvency and loss to creditors.

There is a new power to apply for a compensation order against a disqualified director where creditors have suffered identifiable losses from their misconduct – further proof if it were needed that the existing wrongful trading regime has fallen into disrepute.

Wrongful trading

To create a market in wrongful trading claims the Bill contains provisions which would permit liquidators and administrators to assign claims against miscreant directors. The idea is that creditors should be able to take such claims safe in the knowledge that the fruits will belong to them and this should mean more claims are pursued.

Persons with significant control of a company/LLP etc

One of the big ideas coming out of recent G20 meetings was to limit the use of corporate vehicles for fraud. So, the Bill contains provisions which would make it mandatory for companies to maintain a register of persons who have significant control over that company. Details would require registration at Companies House. According to the Bill holding 25% of the voting shares would give someone significant control. See through provisions would apply to allow a company to ascertain actual controllers e.g. through trust structures.

Bearer shares/warrants

Bearer shares – or share warrants to bearer – will be abolished. Existing holders will have nine months to surrender their bearer shares for registered shares.