Corporate update: the latest corporate law developments February 2023

Back-dated dividends: Court clarifies timing of actual distribution

In Manolete Partners plc v Rutter and Rutter [2022] EWHC 2552 (Ch), the High Court held that a dividend that had been “backdated” to July 2015 was, in fact, a lawful distribution under the Companies Act 2006 that had been made in July 2016 – the date that the directors had declared the dividend. The case provides a useful reminder of the importance of carefully documenting any decisions relating to the declaration and subsequent payment of dividends.

Facts

The directors and sole shareholders of a company owed money to that company, as noted on the directors’ loan account. In July 2016, they decided to declare a dividend backdated to July 2015, and to use that dividend to reduce the amounts owing on the loan account at that time. The company’s accountants recorded the dividend payment in the company’s accounting system on 12 April 2017, reflecting that the dividend was made in July 2015.

The company subsequently went into administration and the question arose as to when the dividend (a distribution under the Companies Act 2006) had actually been made. If the distribution had not been made until April 2017, then it would have been unlawful due to the company’s insolvency.

High Court decision

The Court held that the dividend amounted to a distribution under the Companies Act on the date that the directors had declared the dividend – July 2016. On that basis, the distribution had been lawful.

The Court found that the definition of “distribution” under the Companies Act requires a positive action which affects the company’s finances in some definite way. The positive action in this case was the decision in July 2016, not just to declare the dividend, but also to allocate it to the directors’ loan accounts. This action was recorded in the 2014-2015 accounts. The fact that the dividend was not recorded in the company’s internal accounting system until April 2017 was irrelevant. At that point, the company’s accountant was merely updating the internal records to reflect a dividend that had actually been made in 2016.

In legal terms, the director-shareholders had declared an interim dividend and then had agreed (in their capacity as shareholders) that the dividend would be paid into their directors’ loan account. The Court found that if a dividend was genuinely allocated by director-shareholders to reduce their directors’ loans and that was recorded in the company accounts, then that “payment” would amount to a distribution under the Companies Act without any further action and irrespective of the legal effect of their actions.

Comment

Directors are required to keep a record of any money they borrow from, or pay into, a company and this record is usually known as a director’s loan account. The company’s accounts should also show all money withdrawn from the company and all money paid back.

As illustrated by this case, it may be possible for directors who are also shareholders, to offset their loan accounts by declaring a dividend which then reduces the amount outstanding on those accounts. The declaration and payment of that dividend must, as ever, comply with the law relating to distributions, and will only be possible if there are sufficient distributable reserves within the company at the relevant time.

Directors should ensure that clear records as to the timing of any distribution are maintained. This is particularly important as the date that the distribution is made (as opposed to when it is approved) can have several important consequences, including as to tax. Although appropriate records should be kept in all instances, particular care should be taken when a distribution is being settled in some way other than in cash (for example, by setting off a debt). Those records should clearly show when the distribution was approved (usually by board or shareholder resolution) and also when and how that distribution was made. Accounting records (both internal and in relation to formal accounts) will be fundamental to this evidence.

Economic Crime And Transparency Bill: corporate implications in 2023

Following its introduction to Parliament in September 2022, the Economic Crime and Corporate Transparency Bill continues to make its way through the Parliamentary process. Predicted to receive Royal Assent in the Spring of 2023, the Bill sets out wide-ranging reforms to tackle economic crime and improve transparency over corporate entities. The Bill builds on the Economic Crime (Transparency and Enforcement) Act 2022, which received Royal Assent in March 2022.

Here we consider some of the Bill’s key proposals relating to improving the transparency of companies and their directors and shareholders (Part One of the Bill) and the proposed reforms in relation to limited liability partnerships (Part Two). The proposals relating to the Register of Overseas Entities (Part Three) are not covered.

Identity verification

One of the Bill’s most significant reforms relates to the introduction of compulsory identity verification procedures for all new and existing company directors, persons with significant control (PSCs) and also agents who file information at Companies House. There will be a transition period for existing companies to comply with the new verification requirements and failure to comply by the end of that period may result in criminal sanctions and civil penalties.

For directors of a new company, identity verification must be completed before applying to the Registrar to form the company. Post-incorporation, a new director must verify their identity before their appointment is notified to the Registrar. Companies must also ensure that an individual does not act as a director unless their identity has been verified.

PSCs will be required to verify their identity and maintain that verified status as long as they are registered at Companies House. Relevant Legal Entities (RLEs) will also need to appoint an individual as their “registered” officer and arrange for their identity to be verified. 

As for the method of verification, this can be carried out directly with Companies House or through an Authorised Corporate Service Provider. Verifying directly with Companies House will mainly be via a digital service that links a person with their primary identity document (such as a passport or driving licence). Further details relating to the procedure for identity verification will be set out in regulations.

Individual and corporate directors

In addition to introducing identity verification requirements, the Bill also contains several other provisions relating to directors. These include that an individual will not be able to act as a director if they are subject to UK sanctions (i.e. they are a “designated person”) and also that persistent failure to comply with filing or identity verification requirements will be grounds for disqualification as a director.

As for corporate directors, the Government has confirmed (in a Factsheet) that the powers it already has to restrict the use of corporate directors will be brought into force in parallel with the Bill. Regulations will be passed setting out that only corporate entities with “legal personality” will be appointable as corporate directors and that all directors of any such corporate entity must be natural persons who have already been verified. Existing companies with corporate directors will be given 12 months to comply.

Register Of Overseas Entities: registration deadline and new guidance

31 January 2023 was the deadline for overseas entities holding land in the UK to register at Companies House. Yet, according to a recent statistics, only around 10,000 of an estimated 31,500 eligible overseas entities have actually done so. To help those who are yet to register, HM Land Registry has issued a collection of guidance notes for overseas entities that want to buy, sell or transfer UK land.

The registration requirement

The Register of Overseas Entities (ROE) was introduced on 1 August 2022 by the Economic Crime (Transparency and Enforcement) Act 2022. Overseas entities that already owned or leased UK land were given a six-month transitional period to register with Companies House and give details of their beneficial owners.

The HM Land Registry guidance explains that a beneficial owner is an individual person, legal entity, government or public body that:

• holds, directly or indirectly, more than 25% of the shares in the overseas entity;
• holds, directly or indirectly, more than 25% of the voting rights in the overseas entity;
• holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity;
• has the right to exercise, or actually exercises, significant influence or control over the overseas entity; or
• is a trustee of a trust or a member of a firm that satisfies one of the above conditions.

Overseas entities must take steps to identify their beneficial owners and gather the information required to be registered in relation to them.

Although there was a transitional period for existing overseas entities that already held UK land, the registration requirements applied from 5 September 2022 in relation to new acquisitions after that date. So an overseas entity acquiring land after that date was required to register at Companies House and provide details of its beneficial owners before applying for the land transaction to be registered at HM Land Registry.

Verification and registration

The information that the overseas entity files at Companies House, including the information about the beneficial owners, must be verified by a UK regulated agent – that is a person or organisation based in the UK and supervised under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (such as a credit institution, an auditor or accountant, a legal professional or a company service provider).

The agent must itself have registered with Companies House and obtained an “agent assurance code” which it will then have to provide each time it submits information about an overseas entity to Companies House for registration. The agent is required to verify all the relevant information based on documents or information obtained from a reliable source which is independent of the person whose identity is being verified. This, coupled with the fact that delivering false information to Companies House is a criminal offence, has led to some concerns about the potential liabilities to which an agent will be exposed – The Law Society, for example, cautioned against UK lawyers undertaking the verification exercise given the risks of getting it wrong. A list of UK-regulated agents who have an agent assurance code and can complete the required verification checks is available via Companies House.

Consequences of failing to register

Those overseas entities that have missed the 31 January registration deadline will now find that they are unable to sell, transfer, lease or charge the land they hold: HM Land Registry will place a restriction on the title register of the relevant land which will not be lifted until the overseas entity has complied with its registration requirements and obtained an overseas entity registration number from Companies House.

In addition, by failing to register, both the overseas entity and its officers will be guilty of a criminal offence, punishable by a prison sentence and/ or a fine.

Comment

Overseas entities that have not yet registered at Companies House should do so as soon as possible. They need to investigate and identify their beneficial owners and engage the services of a UK regulated agent to then verify that information. Companies House have published a useful blog with tips to help speed up the registration process.

Anyone dealing with an overseas entity that holds UK land (for example, a purchaser acquiring a UK group where the land is held in an offshore company, or a lender taking security over UK land held by an overseas entity) should ask for confirmation of the overseas entity’s identification number before proceeding. If the entity is unable to provide this, the third party should insist that registration takes place before completion.

First published in Accountancy Daily.