The numerous and much-publicised banking and corporate financial scandals of the last five or so years have led to, amongst other things, increased scrutiny of corporate governance by both regulators and governments. In the UK, there has been a strong focus on enhancing corporate transparency and accountability, culminating in the publication, on 25 June 2014, of the Small Business, Enterprise and Employment Bill (the ‘Bill’). The Bill is currently progressing through Parliament, with the expectation that it will become law in advance of the next General Election, which is scheduled to take place in May 2015.
The Bill was born out of a discussion paper published by the Department for Business Innovation & Skills (“BIS”) in 2013. We reviewed that paper in our October 2013 edition of the FI and D&O International Review. In fact, very little has changed between the paper and the Bill, and the fundamental purpose of the changes set out in the Bill remains to ensure that the UK is regarded as a trusted and fair place for business. The Bill covers a variety of topics; however, for the purposes of this article we consider the wording and impact of the Bill in relation to the new provisions on corporate transparency, the role and accountability of directors generally and the powers of liquidators and administrators to assign causes of action.
Introduction of a “Person with Significant Control” register
The Bill, if made law, will introduce a requirement for UK companies to keep a register of people who exercise ‘significant control’ (see Part 7, Schedule 3).
Broadly speaking, the statutory definition of a ‘person with significant control’ is an individual who owns more than 25% of a company’s shares or voting rights, or exercises control over a company or its management. Companies will be required to take reasonable steps to identify people they know or suspect to have significant control and those persons with significant control will be obliged to supply information or face sanctions.
This reform is intended to increase transparency around who ultimately owns and controls UK companies and will help deter, identify and sanction those who hide their interests in UK companies to facilitate illegal activities. These provisions do not, however, apply to LLPs.
Corporate and shadow directors
A major change proposed in Part 7 of the Bill is the requirement that company directors must be ‘natural persons’ in order to increase accountability, breach of which will be an offence. Consequently, the use of corporate directors, which is not that prevalent in UK companies in any event, will be prohibited save for a number of limited exceptions.
Section 78 of the Bill will also extend the application of the codified general duties of directors under sections 170-177 of the Companies Act 2006 to shadow directors.
Directors’ disqualification & compensation orders
Part 9 of the Bill introduces amendments to the Company Directors Disqualification Act 1986 (‘CDDA’). The main change is the increase in the matters to which a court must have regard when determining whether a person is unfit to act as a director of a company.
It is widely felt that the current legislation (Schedule 1 CDDA) is outdated, particularly in light of today’s globalised economy. The Bill proposes that a director’s overseas misconduct be taken into account in disqualification proceedings, and introduces disqualification for persons who are not directors but who exert requisite influence over a director.
The Bill also proposes giving the court a new power to make a compensation order against a director, on the application of the Secretary of State, where the conduct for which that director has been disqualified has caused loss to one or more creditors of an insolvent company of which they have at any time been a director. Such orders may therefore substantially increase D&O exposures.
The Bill permits the assignment, by liquidators and administrators, of actions for wrongful and fraudulent trading, preferences, and transactions at undervalue to creditors. Whilst this may help creditors seeking redress from unscrupulous directors, the inherent risks of such claims will remain and it is unclear whether the changes will result in more litigation. Furthermore, creditors will not be able to utilise the detailed investigative powers of administrators and liquidators under the Insolvency Act 1986 prior to issuing any proceedings. Notwithstanding this, there will be certain instances where it is attractive for both the office holder and creditors to agree to an assignment of claims. Office holders will have to consider the terms of any assignment and whether to accept a lump sum for the assignment or a percentage of the fruits of litigation.
Administrators will also be afforded the same rights as liquidators to commence fraudulent trading and wrongful trading actions (thereby bypassing the need for, and saving the costs of, first placing the company into insolvent liquidation).
The expectation is that the Bill will become law before May 2015, and D&O insurers should therefore not delay too long in reviewing policy conduct exclusions to assess whether they adequately address the making of compensation orders against a director. Equally, D&O insurers may wish to consider whether further information on a director’s history, both in the UK and abroad, is required upon renewal of a policy in light of the expansion of matters a court will take into consideration when determining director disqualification proceedings.