Corporate update: the latest corporate law developments October 2024

Get ready to register as an ACSP to file information at companies house

A recent Companies House blog post provides some detail on the process that accountancy firms, lawyers, and other organisations will need to go through in order to register as an “authorised corporate service provider” (an ACSP). Such a registration will be required before the organisation can file information at Companies House on behalf of a company or other registered entity.

ACSPs

The introduction of ACSPs is the latest measure to be rolled out under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). That Act is aimed at combatting economic crime and preventing the abuse of corporate structures. A key part of the Act’s reforms is understanding exactly who is filing information at Companies House on behalf of registered entities.

Under ECCTA, Companies House will be required to verify the identity of anyone submitting information to the public register. Whilst this could be done by a verified director of the relevant company, many companies use third parties, such as accountants, to file information on their behalf. Such a third party will need to register as an ACSP in order to continue doing this. Only organisations that are covered by the Money Laundering Regulations, and supervised in the UK by one of the relevant Anti-Money Laundering (AML) supervisory bodies, will be able to register as an ACSP.

The registration process

The Companies House blog post indicates that the registration process should be completed by someone senior within the relevant organisation, such as a director. That person will need to have their own identity verified as part of the process. Once registered, the ACSP will be provided with a digital account and identity number which will allow them to file information at Companies House as well as complete identity verification checks for their clients.

The registration process is not yet open for applications. The Companies House Business Plan 2024-25 indicates that individual identity verification for directors and PSCs (persons with significant control) will be rolled out from March 2025. Registration of ACSPs is an important precursor to this and it is anticipated that the application process will open later this year.

Comment

Organisations should begin preparing for the registration process now. An appropriately senior person should be given responsibility for managing the process, including collating the information that will be required. This will include the organisation’s AML supervisory body membership number as well as information to verify the identity of the individual overseeing the process. Announcements from Companies House should then be monitored so registration can take place in good time to enable the organisation to continue submitting information to Companies House on behalf of clients.

Former BHS directors ordered to pay £110m for misfeasance

The long-running litigation relating to the collapse of British Home Stores (BHS) has culminated in the High Court ordering two of the group’s former directors to pay compensation of £110 million for breaches of the so-called “creditor duty”. The breaches resulted in the group continuing to trade at a time when it should have been put into administration (referred to in this case as “misfeasance trading”).

The landmark judgment in Wright v Chappell [2024] EWHC 2166 (Ch) provides useful lessons for directors of distressed businesses and, for the first time in a recorded decision, sets out how a court will calculate the compensation payable by directors for these types of misfeasance claims.

What is misfeasance under the Insolvency Act 1986?

If a company enters a formal insolvency process, such as liquidation or administration, then the officeholder may bring claims against its directors for misfeasance under section 212 of the Insolvency Act 1986 (IA 1986). Misfeasance in this context is broadly defined, but an action can only be brought where the officer breaches some form of duty that they owe to the company in their capacity as a director. To succeed with a misfeasance claim, the applicant must show a loss to the insolvent company caused by the relevant breach of duty.

If the misfeasance claim is successful, the court may order the director to compensate the company for the breach of duty by way of contribution to the company’s assets.

Background

In June 2024 (the June Ruling), the High Court ruled in favour of the joint liquidators of the BHS group, who had brought claims against its former directors for wrongful trading (under section 214 IA 1986) and misfeasance (under section 212 IA 1986).

The relevant individuals had been appointed as directors of the four companies within the BHS group following the group’s acquisition by a consortium company. A year after their appointment, the directors had resolved to put the BHS group into administration, and each company subsequently entered creditors’ voluntary liquidation.

In the June Ruling, the High Court found two of the former directors liable for wrongful trading and ordered them to contribute £6.5 million each to the assets of the BHS group.

The directors were also found liable for misfeasance on the basis that they had breached various of their statutory duties under the Companies Act 2006. The main statutory duty referred to was the so-called “creditor duty”. This creditor duty (as confirmed by the Supreme Court in the Sequana case) refers to the requirement for a director to consider the interests of a company’s creditors (in addition to shareholders) when exercising their usual duty to promote the success of the company, in circumstances where the company is insolvent or bordering on insolvency (section 172(3) Companies Act 2006). The Court held that if the directors had complied with this creditor duty, the BHS companies would not have continued to trade and would have gone into administration sooner than they did.

Due to the amount involved and the fact that it involved “a developing area of law”, no decision was made at the June Ruling in relation to the directors’ contributions for breach of duty (and the resulting misfeasance trading). This was held over to a later hearing to allow additional submissions to be made. The High Court’s recently handed down judgment (the August Ruling) sets out the conclusions reached by the Court at this later hearing.

Court decision on contribution for misfeasance

In the August Ruling, the Judge agreed that the correct starting point for assessing a director’s contribution for misfeasance was the total increase in net deficiency of the company’s assets (IND) resulting from the relevant breaches and the company continuing to trade after it should have been put into administration.

In this case, the BHS directors had been found to have breached the creditor duty on two separate dates when they had authorised the BHS group companies to enter into new finance arrangements with particularly onerous terms. The total IND between the first of these dates and the date that the group went into administration was £133.5 million – this was effectively, the difference between the group’s assets and liabilities at the point the companies entered into the additional loans and the point at which they went into administration.

For the directors to be liable for this full amount, however, the liquidators had to establish that the directors’ breaches of duty were the “effective cause” of the losses suffered by the group (though not necessarily the sole or only effective cause). The Court found that, with one exception, a £19 million increase in the companies’ pension deficit, the directors’ breaches of duty were the effective cause of the total IND. If the directors had complied with their duties – and had taken account of the interests of creditors at that time – the companies would not have entered into the financing arrangements and would have, instead, gone into administration.

After making the necessary adjustments, the Court held that the total compensation payable by the two directors was £110 million. The directors were held to be jointly and severally liable for this amount, with the Judge declining to exercise any discretion to apportion the liability between them.

Comment

This case provides a stark reminder for directors that they can be liable for misfeasance at an earlier point in time than for wrongful trading, and that time difference can have a significant impact on the compensation payable in relation to each claim.

The directors in this case were found to have breached the creditor duty (with resulting liability for misfeasance) almost three months before the threshold for wrongful trading had been met (i.e. when they ought to have concluded that insolvency was inevitable). This lower threshold for the creditor duty to be engaged may well lead to more claims for misfeasance in the future.

Crucially, directors will have a defence for a misfeasance trading claim if they can show that they considered creditors’ interests in good faith and concluded that it was in the creditors’ best interests to continue trading.

UK National Security and Investment Act: Third annual report published

The Government has published its third annual report (the Report) on the operation of the UK’s national security and investment regime during the period of April 2023 to March 2024. The Report provides statistics on how the regime has been functioning, including the number of notifications made, the key sectors involved and the origin of investments.

Background

From January 2022, the National Security and Investment Act 2021 (the Act) introduced a standalone statutory regime allowing the Government to scrutinise and intervene in acquisitions and investments for the purposes of protecting national security in the UK.

The Act authorises the Government to “call-in” and review certain transactions that meet specified criteria when they raise national security concerns. In addition, some transactions in economically sensitive sectors must obtain government clearance before they can take place (mandatory notification).

Following review of a transaction, the Government can clear it unconditionally, approve the transaction subject to conditions or block the transaction from taking place (or unwind it, if necessary).

The Report provides statistics on the second full year of the national security regime and is useful for investors seeking to understand how it is operating in practice.

Highlights from the Report

• Notifications: 906 notifications were made in total, up from 865 in the previous reporting period. Of these, 753 were mandatory notifications, 120 were voluntary and 33 were retrospective validation applications (where transactions had completed without having obtained the necessary approval).
• Call-in notices: 41 call-in notices were issued (down from 65 in the last reporting period). 22 notices were made following a mandatory notification, 15 following a voluntary notification and 4 related to non-notified acquisitions.
• Final orders: Only five final orders were issued (down from 15 last year and despite 41 transactions being called-in) and the Government did not block or unwind any transactions at all. All final orders were conditional clearances.
• Sector: Transactions in the defence sector continue to be most likely to be called-in, with military and dual-use, communications, advanced materials, and academic research and development also featuring frequently.
• Origin of investment: Broadly mirroring the last reporting period, call-ins most frequently involved investors with links to China, the UK, and the USA. Interestingly, unlike previous reporting periods, no final orders were imposed on Chinese acquirers.
• Timing: The average time taken to accept a mandatory notification was six working days, up from four working days in the previous reporting period. Acceptance of voluntary notifications also took longer – up from four to eight working days in this reporting period.

Looking ahead

In April 2024, the previous Government published the outcome of its Call to Evidence on the Act and committed to implementing several changes to the national security and investment regime during 2024. Some of these proposals have already happened (including the publication of an updated “Section 3 Statement” and updated market guidance). However, with the election of a new Labour Government in July 2024, there is now some uncertainty both as to the scope and timing of further reforms. Unfortunately, the recently published Report does not provide any further details on these issues.

A new class of personal property

The Government has introduced legislation to create a new class of personal property, designed to cover digital assets in particular. Those assets will be considered personal property and afforded the same legal protections as existing classes of personal property.

Background

As the existence and use of digital assets has expanded in line with technological developments, the Government asked the Law Commission to consider how the principles of personal property law could apply to those assets. Without clarity around this, the status of potentially valuable digital assets in matters such as bankruptcy or insolvency, succession on death or even theft would be uncertain.

Traditionally, the law has recognised two broad categories of personal property:

• things in possession – tangible things that can be physically possessed; and
• things in action – legal rights or claims that were enforceable by court action.

But there was a concern that digital assets did not easily fall into either of these existing categories: they are not tangible, so cannot be categorised as things in possession; but neither can they be considered things in action in the narrow sense – indeed, some crypto-tokens are explicitly designed not to consist of a legal right or claim against a person. As a result, the legal status of these digital assets, and the rights of those claiming to own them, were uncertain leaving owners in a grey area if the assets were interfered with.

The “third thing”

In its Digital Assets Final Report, the Law Commission recommended the creation of a third category of thing to which personal property rights can relate. However, it also said the related legislation should not define the boundaries of that third category and this should instead be left to the courts to develop via common law.

The result is the Property (Digital Assets Etc) Bill which was recently introduced to Parliament. This short Bill confirms that: “A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither (a) a thing in possession, nor (b) a thing in action”.

Whilst the Bill does not provide that any particular thing will be personal property, it makes clear that the fact that something is not a thing in possession or a thing in action will not prevent it from being personal property. This then leaves it to the courts to develop this category of things, including where its boundaries sit and what rights attach to these things. In addition, although digital and electronic things are specifically mentioned in the Bill, the new third category is not limited to this kind of thing, leaving open the possibility of the courts finding that non-digital things also fall into the new category of personal property.

The new law will give legal protection to the owners of some types of digital and electronic assets. They will be able to take action in the event of fraud or theft of those assets and will be able to use legal tools such as injunctions in order to protect them. In addition, digital assets could form part of the owner’s estate on their bankruptcy or insolvency, so they could be sold to repay creditors, or on their death when they could be bequeathed to beneficiaries.

Comment

“Digital asset” is an extremely broad term. It covers a variety of things including digital files, digital records, email accounts, digital carbon credits, crypto-assets, and non-fungible tokens (NFTs). The Law Commission’s recommendations only apply to a subset of digital assets, of which the main one is crypto-tokens.

The UK is one of the first countries to recognise digital assets in law. It is hoped that the new law will give legal protection to owners and companies against fraud and scams, while helping judges deal with complex cases where digital holdings are disputed or form part of settlements (such as in divorce cases).

Whilst the new Bill is to be welcomed as a first step in developing a personal property system for these assets, there are still many issues that will need to be clarified by the courts. To assist in this, the Law Commission recommended that the Government create a panel of industry experts to provide guidance on technical and legal issues relating to digital assets.

First published in Accountancy Daily.