Insurers and their directors should be aware of Government proposals to enhance corporate transparency and accountability and to clamp down on director misconduct.

On 25 June 2014, the Small Business, Enterprise and Employment Bill 2014-2015 (the Bill) received its first reading in Parliament. The Bill contains, amongst other things, a number of proposed measures designed to promote transparency and accountability in UK companies.

Corporate transparency and accountability

Transparency and accountability are essential elements of good corporate governance and play an important role in promoting public trust and confidence in business. A lack of transparency and accountability erodes trust and may facilitate the misuse of companies for criminal activities such as money laundering, tax evasion and terrorist financing.

The Bill follows a 2013 consultation by the Department for Business, Innovation and Skills (BIS) entitled “Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Businesses”, to which the Government published its response in April this year. The proposed measures, set out in Part 7 of the Bill, include:

  • Creating a public central register of beneficial ownership information (although companies already covered by  the Financial Conduct Authority’s (FCA) Disclosure and Transparency Rules or listed on a regulated market subject to equivalent disclosure requirements will be exempt)
  • Reducing the potential for opaque control of company directors by:
    • Prohibiting the appointment of corporate directors (commonly used for occupational pension schemes) subject to certain specific exemptions
    • Extending the duties and liability of ‘shadow directors’ (unregistered individuals who control registered directors)
  • Abolishing bearer shares for UK companies

In addition, the Government has also proposed to increase the accountability of registered directors whose conduct falls below the expected standard by:

  • Increasing the scope of the director disqualification regime
  • Making it easier for creditors who have suffered loss to claim compensation from directors

Increasing the scope of director disqualification

Directors who fail to meet their legal responsibilities can be disqualified under the Company Directors Disqualification Act 1986 (CDDA). The matters which a court must take into account when determining whether to disqualify a director are set out in Schedule 1 of the CDDA; however, this schedule is viewed as outdated and there is currently a gap between what the law says and the factors that the courts actually take into consideration in practice.

Part 9 of the Bill proposes amendments to the CDDA to incorporate a wider and more generic set of factors that the court must take into account including:

  • The materiality of the director’s conduct;
  • Culpability of the director; and
  • The nature and extent of any loss or harm (or potential loss or harm) caused by the director’s behaviour.

The new factors will also specifically include:

  • Breaches of sector regulation: regulators such as the FCA and the Prudential Regulation Authority (PRA) will have greater power to share information with the Insolvency Service for the purpose of director disqualification proceedings
  • Overseas misconduct: The Secretary of State will have the power to disqualify a UK director upon conviction  of a criminal offence in connection with the promotion, formation or management of a company overseas. Such action could be taken prospectively against individuals who are not yet directors in the UK but who might pose a risk in the future

Compensating creditors

In its response to the BIS consultation, the Government emphasised its concern that the current disqualification regime does not adequately protect and benefit those who have suffered loss as a result of director misconduct. Although liquidators and administrators are currently permitted under the Insolvency Act 1986 (IA) to bring actions on behalf of creditors (for wrongful and fraudulent trading, preferences and transactions at undervalue), such actions are not commonly used and cannot be brought directly by creditors.

Consequently, the Bill also provides that:

  • Liquidators and administrators will be able to assign their permitted actions to the creditors themselves so that creditors will be able to pursue the directors directly
  • Administrators will be afforded the same rights as liquidators to commence actions for fraudulent and wrongful trading, removing the need for (and the cost of) placing the company into insolvent liquidation prior to commencing such actions
  • Any director who is disqualified may be ordered by the court to pay compensation to specific creditors (or to creditors generally) where his or her actions have caused loss

Conclusion

The Government hopes that the proposed changes will benefit UK companies and the wider economy by improving trust and confidence in business and making it harder for companies to be used to facilitate criminal activity. The Bill still faces a long passage through Parliament and it remains to be seen whether Parliamentary time will allow for the changes to be pushed through before the general election next year. Nevertheless, insurers and their directors should be aware of the planned changes to the law concerning corporate governance and the greater risk to directors who get it wrong.