In August 2011, the Department for Business Innovation & Skills ("BIS"), published its Revised Scheme for Registration of Charges Created by Companies and Limited Liability Partnerships (the "BIS Paper"), which sought views and provided commentary on Government proposals to revise the current scheme for the registration of charges under Part 25 of the Companies Act 2006, following the consultation in 2010. Below is a summary of the expected impact of these proposed changes on members of Lloyd's of London ("Lloyd's") syndicates.
Part 25 of the Companies Act 2006 (the "Act") provides a UK scheme for the registration of charges created by companies and LLPs, which has come under criticism for being cumbersome and failing to stay in line with changes in the law and commercial practice.
In March 2010, BIS published its response to the Government consultation on the proposals for the registration of charges, together with a draft impact assessment. The BIS Paper was published following the conclusion of the Government consultation.
Reforming the structure of the registration of charges scheme
The main purpose of the current scheme of registration in the UK under Part 25 of the Act is to publicise whether a company has used its assets to secure borrowing and penalise the concealment of secured credit. Under this current scheme, Lloyd's syndicate members are required to register charges post creation. A failure to do so will result in the following sanctions: a) the security becoming "void" against a liquidator, administrator and any creditor of the company; b) the amount secured becoming immediately payable; and c) a fine. The cost of registering a charge will vary depending on the nature of the security, however, the legal costs will no doubt be far in excess of the £13 Companies House fee.
The proposal is to amend Part 25 of the Companies Act 2006 and the BIS Paper sets out the proposed new wording. The main intention of the changes is to provide for a single scheme that applies to charges created by UK companies and LLPs regardless of the location of the charged assets or the law used to create the charge. The draft regulations will be published in early 2012, with changes set to come into force on 1 October 2012.
Lloyd's syndicates, of which there are more than 80 in the market, are made up of one or more members that join together as a group to accept insurance risks. The nature of Lloyd's syndicates mean they function much like permanent insurance operations. Membership of a Lloyd's syndicate is provided for and regulated by the Membership Byelaws and, unlike other players in the insurance market, precludes them from carrying on any activity other than their underwriting business at Lloyd's.
Under section 860(B) of the proposed changes, a charge which secures the underwriting obligations of members of Lloyd's is expressly excluded from section 860, which deals with registration by Companies House of charges created by companies; meaning that charges created by corporate members of Lloyd's to secure their underwriting obligations will not be registrable at Companies House.
The rationale behind removing the requirement to register charges against Lloyd's syndicates members is that under rule 23 of the Lloyd's Membership Byelaw (No. 5 of 2005) made on 7 December 2005 ". . .no corporate member shall carry on any business or activity other than its underwriting business at Lloyd's". Therefore the registration of such charges serves no useful purpose. Conversely it imposes an unnecessary and cumbersome burden on those members. Significantly, the Government consultation with Lloyd's has shown that the savings for Lloyd's corporate members in respect of registration of trust deeds would be £17,000 per annum and a further saving of £22,000 per annum for staff time. The savings for the total exclusion of Lloyd's corporate members from registration of security under the Act, are provisionally estimated to be over £50,000 a year. In coming to these figures, it has been assumed that lenders will still require security for their loans to companies.
The proposal to amend the current UK scheme for the registration of charges created by companies and LLPs and to provide for a single scheme regardless of the location of the charged assets or the applicable law used is a step in the right direction. Whether these proposed changes will go far enough is beyond the scope of this alert and will remain to be seen.
For banks involved in transactions with members of Lloyd's syndicates and the members themselves, the proposed exclusion at section 860(B) of the Act is a welcome step. The special nature of corporate members of Lloyd's in our view renders the requirement to register charges under the Act unnecessary, and will facilitate the execution of transactions between banks and Lloyd's syndicate members.