UK government to limit use of corporate directors and reform companies registry

The UK government is planning wide ranging reforms to the UK's register of company information. Together the reforms represent a significant step forward in improving the quality of the publicly available data held by Companies House.

Prohibition on corporate directors

The UK government has long been concerned about the use of long chains of corporate directorships fearing they disguise ownership and weaken individual accountability. It legislated to give itself the power to ban the use of corporate directors under the Small Business, Enterprise and Employment Act 2015. But those legislative powers have never been used.

Now, the government is revisiting the issue. It is proposing to implement the ban on companies having corporate directors subject to a "principles" based exemption. In short, a company will only be allowed to appoint a corporate director if all of that corporate director's directors are natural persons whose identity has been verified by UK Companies House.

This would apply to overseas entities acting as corporate directors as much as to UK-registered entities. If the corporate director took the form of a limited liability partnership (LLP) or limited partnership (LP), it would be the designated members or general partners who would need to be natural persons and have their identity verified.

The government is also minded to extend the ban so that a corporate entity could only act as an LLP's designated member or an LP's general partner if all the directors of that corporate entity are natural persons and have undertaken identity verification.

This represents a significant change from the current position, under which there are no restrictions on the use of corporate directors save that every UK company must have at least one natural director. Groups, joint venture companies and fund structures which regularly use corporate directorships will need to ensure that their arrangements will comply with the new rules.

Companies registry information

Information filed at the UK companies registry is freely and publically available online but there have long been criticisms about the accuracy of the data. In most cases, UK Companies House has limited powers (and resources) to verify filings and information is usually added to the database on an "as filed" basis.

The UK government has been aware of these problems for some time and consulted on changes last year. It has now put forward its proposals and is consulting on the detail of some of them. The most significant areas of reform are set out below.

Identity verification

Companies House will need to verify the identity of a person before they can be appointed as a director of a UK company. The director's appointment will take place at the moment when the individual is registered with Companies House. Directors will be able to have an individual account at Companies House so that once they have been verified their future appointments can be registered and confirmed straight away.

Verification will also apply to persons with significant control (PSC) but in this case verification will not be a pre-condition to filing. Instead, Companies House will flag on the register whether or not the PSC has been verified. PSCs will be responsible for their own verification.

In order to ensure that the entire database is built on accurate data, the government intends to roll out the verification process to all existing directors and PSCs.

Finally, verification will also apply to presenters of information. Entities which are supervised under Anti-Money Laundering legislation will be able to set up agent accounts and individuals filing under verified agent accounts will not have to verify their own identity.

Checking information

Companies House will be given the power to query and check information on the register. This power would apply where the identified error, inaccuracy or anomaly appears fraudulent, suspicious or "might impact significantly on the integrity of the register and the UK’s business environment". Issues may be raised by Companies House itself or by third parties.

Companies House would take a risk-based approach in prioritising queries so there would not be an expectation that every error brought to its attention would be investigated. Companies House would also be given a wider remit to query a company name – again using a risk based approach if the name was being used to facilitate fraud or criminal activity.

Removing incorrect information

Companies House will be given wider powers to remove incorrect information from the register. The government proposes extending the categories of information that can be removed directly by Companies House without an application to court to cover nearly all filings. This is a welcome change as currently only a limited category of filings can be corrected.

Register of directors

The reforms will remove the requirement for companies to keep a register of directors. The public register held by Companies House will become the single, verified source of information with respect to directors. The government is also considering whether changes should be made to other statutory registers but it has already stated that it is unlikely to remove requirement for a company to keep a register of members.

Improvements to accounts filings

The final piece of the jigsaw is improvements to the way that accounts are filed. The government is proposing to move to a single digital filing system for Companies House and HMRC, and may also shorten filing periods so that publicly available information is not so out of date.

The government is also considering reforms to the system for small companies, which currently have a number of options to reduce the information they file. Finally, it is contemplating giving Companies House a new querying power with respect to accounts and intends to compare data from accounts filed at HMRC to challenge any discrepancies which are identified.

Osborne Clarke comment

These changes will take time to finesse and implement. Some of the changes require primary legislation and so will need to go through the parliamentary process. We are therefore still some way off seeing them as a regular feature of UK company processes.

Nevertheless, the government has given a strong signal that it is committed to reform and we are likely to see some if not all of the changes coming in over the next 18-24 months. As a start, Companies House intends to start work with providers on the identity system that will underpin verification and aims to have finalised the system design and to start user testing by the end of the 2020/2021 financial year.