Ashurst and Practical Law Corporate Update Q1 2024

The articles below were first published in Q1 2024 in the company law section of PLC Magazine, the leading monthly magazine for business lawyers advising companies active in the UK.

1. Economic Crime and Corporate Transparency Act 2023: one step at a time

29 February 2024

A few months have elapsed since the Economic Crime and Corporate Transparency Act 2023 (ECCTA) received Royal Assent on 26 October 2023, introducing significant new measures aimed at improving corporate transparency and tackling economic crime. 

ECCTA amends the Companies Act 2006 and other laws and is being implemented in stages. Although much of the secondary legislation, supporting guidance and the implementation schedule are yet to be issued, some provisions are already in force and others will be shortly.

Businesses will be able to better navigate some of the compliance and governance challenges ahead if they are aware of when different parts of ECCTA take effect and have prepared for them.

October to December 2023

The first tranche of changes came along with, and shortly after, ECCTA received Royal Assent.

Corporate criminal liability. The first substantive reform took effect from 26 December 2023 when the scope of corporate criminal liability was widened, making it possible to prosecute a company, limited liability partnership (LLP) or partnership if a senior manager acting within the scope of their actual or apparent authority commits a specified economic crime.

A “senior manager” is anyone who plays a significant role in the decisions or the management of the business. The specified economic crimes are wide-ranging and include fraud, false accounting, money laundering, sanctions evasion, bribery, and tax evasion. The senior manager test applies to companies and LLPs of all sizes.

Businesses must ensure that there is sufficient oversight and knowledge of where, how, and by whom decisions are being taken. Individuals identified as senior managers should be given targeted training on economic crime offences and companies should consider what enhanced control measures may be required to monitor senior management conduct.

January to March 2024

The Registrar of Companies (the Registrar) confirmed in a blog that the following corporate transparency provisions would take effect in March 2024. More regulations are expected shortly to complete the implementation of the March 2024 changes.

Greater powers for the Registrar. The Registrar has new powers to ensure that information held at Companies House is accurate and complete. The Registrar can remove inaccurate information, request additional information, annotate information on the public register to alert users, reject a document containing inconsistent information and share information with other government departments, regulators and law enforcement agencies.

It would be prudent for companies to address any known errors, omissions or inconsistencies with information held at Companies House. Incorrect details can be corrected by filing Form RP04 at Companies House if the initial document was properly delivered but contained inaccuracies. Where the initial document was not properly delivered or contained unnecessary material, Form RP01 can be used.

Businesses should ensure that their internal processes for filing new information at Companies House are properly resourced, particularly for those private companies without a company secretary.

Registered office address. A company must have an appropriate registered office address where documents can be delivered and acknowledged by a person acting on its behalf. Companies cannot now use a PO Box as a registered office address. An offence will be committed by a company and its directors for non-compliance.

Registered email address. A company must register an appropriate email address with the Registrar where correspondence can come to the attention of a person acting on its behalf. New companies must supply an email address on incorporation. Existing companies can do so when they next file their confirmation statement. The registered email address will not appear on the public register and group companies can share the same email address. An offence will be committed by a company and its directors for non-compliance.

Company formation and names. For those involved in forming a company, there is an additional step to confirm that it is being formed for a lawful purpose. Existing companies must also confirm in their confirmation statement that their intended future activities are lawful. ECCTA also brings about stronger checks on company names that may give a false or misleading impression to the public.

Unless the timetable slips, these provisions are likely to come into force on 4 March 2024 and they are expected to apply to LLPs with some modifications.

Post-March 2024

Other key provisions in ECCTA that businesses should be preparing for are expected to come into force throughout 2024 as further regulations are issued. The timing of some of these will depend on Companies House implementing new technology and processes.

Identity verification. ECCTA introduces new identity verification procedures for directors, persons with significant control (PSCs), relevant officers of relevant legal entities (RLEs), members of LLPs and those filing documents at Companies House.

Identity can be verified directly with Companies House or indirectly through an authorised corporate service provider. The consequences of not complying with the identity verification regime include criminal proceedings and civil penalties. Persistent evasion by directors could also lead to disqualification.

There will be a transition period for those whose identities need to be verified. Nevertheless, businesses should start identifying and gathering information about those identities that will require verification.

Statutory registers. Companies will no longer need to maintain the following statutory registers at their registered office address: the register of directors, the register of directors’ residential addresses, the register of secretaries and the PSC register. Instead, these statutory registers will be held at Companies House.

Companies should begin checking that the information held in these statutory registers is accurate and up to date as they will need to send it to Companies House, as well as ensuring that it is kept up to date at Companies House.

PSC register. ECCTA introduces some new duties for companies to collect and report information about their PSCs, which reflect the fact that the PSC register will be held centrally at Companies House.

Companies should check that they have complied with their obligations to identify any PSCs and RLEs by sending notices to those concerned and that the information recorded in their PSC registers is correct.

Register of members. Companies should also check that the information in their register of members is in good order. The register of members must be maintained at the registered office, and it will now need to record full names and a service address for each member. Companies must also provide information about their members to Companies House in a one-off confirmation statement after this element of ECCTA is in force.

Corporate directors. Companies with corporate directors should be aware that, once the relevant part of ECCTA is in force, any corporate director will need to have legal personality and all the directors of the corporate director will have to be natural persons and have had their identity verified. Existing companies will be given 12 months in which to comply and within that time must ensure that their corporate directors comply with the new requirements.

LLPs may continue to appoint corporate members without natural persons but will need to provide details of a natural person in a management position who must have had their identity verified.

Failure to prevent fraud. The other key economic crime reform in ECCTA is the new standalone criminal offence of “failure to prevent fraud” under which a large organisation may be held criminally liable for failing to prevent fraud committed for its benefit by a person associated with it, such as an employee, agent or subsidiary of the organisation, unless it has reasonable prevention procedures in place at the time that the fraud was committed.

A large organisation is one that fulfils two or more of the following conditions in a financial year: more than 250 employees, £36 million in sales or £18 million in assets. The fraud offences cover existing common law and statutory fraud, in addition to offences related to false accounting. An organisation found to be liable under this offence can be subject to an unlimited fine.

Organisations should begin carefully assessing the risk of, and their response to, each fraud offence, according to the specific profile and activities of their business. Leveraging existing procedures and targeting focused areas to improve will be key to ensuring compliance while minimising the overall burden imposed by the new offence.

From May 2024 businesses will be subject to new or increased Companies House administration fees, as well as being exposed to new financial penalties for breach of company law introduced by ECCTA.

2. Unfair prejudice: statutory limitation periods do apply

28 March 2024

The Court of Appeal has held that claims in unfair prejudice petitions are subject to statutory limitation periods and that the length of the limitation period will depend on the relief sought.

Background. A claimant must bring a claim within the relevant limitation period applicable for the type of claim, otherwise a defendant has a complete defence to the claim on the basis that it is time barred.

The law on limitation periods is set out in the Limitation Act 1980 (1980 Act), which makes provisions in respect of different causes of action. The limitation period generally runs from the date on which the cause of action accrued. The limitation period is six years for certain actions in tort or for an action involving a simple contract (sections 2 and 5, 1980 Act).

The limitation period is 12 years for an action on a specialty, which includes an action in respect of a deed or an action asserting a non-pecuniary statutory right (section 8, 1980 Act).

However, a statutory claim, that is, a claim based on legislation not contract or tort, for a sum of money is subject to a six-year limitation period (section 9, 1980 Act).

A shareholder may petition the court for relief where the affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of some or all of the shareholders, including the petitioning shareholder (section 994, Companies Act 2006) (section 994). The unfair prejudice can take many different forms and the court has a very wide discretion to grant such relief as it sees fit.

In Bailey v Cherry Hill Skip Hire Ltd ([2022] EWCA Civ 531), the Court of Appeal held that no limitation period applies to a section 994 petition.

Facts. Z brought an unfair prejudice petition under section 994 against T and its directors, alleging that T’s affairs had been conducted in a manner that was unfairly prejudicial to Z.

Z later sought to amend the petition by adding a monetary claim. This was to address an alleged loss arising from Z being wrongly excluded from a bonus share issue, the extent of the loss being what Z could have received for the bonus shares on the subsequent flotation of T’s shares.

T argued that Z’s petition was out of time.

The High Court held that Z’s petition was not out of time, following Bailey. T appealed.

Decision. The court allowed the appeal.

An unfair prejudice petition initiating proceedings is a “proceeding in a court of law” for the purposes of the 1980 Act. Therefore, it is possible for unfair prejudice petitions to fall within the scope of the 1980 Act and be subject to limitation periods. This point had not been fully argued in Bailey.

An unfair prejudice action is, in principle, an action on a specialty and therefore the limitation period is 12 years from the date on which the relevant cause of action accrued, unless, on the facts, a shorter period of limitation is prescribed by any other provision of the 1980 Act.

Here, because Z was seeking to recover a sum of money, the limitation period was six years from the date on which the cause of action accrued. Where the complaint is that the affairs of a company have been conducted in a manner that is unfairly prejudicial, a cause of action is complete once the conduct complained of has taken place, not when the court decides that the petition is well founded. Therefore, Z’s claims were statute barred.

Comment. This is a highly significant decision in relation to the law of unfair prejudice. In confirming that limitation periods do apply to unfair prejudice petitions, the court has overturned 40 years of case law, meaning that petitioners must bring claims within the relevant time periods stated in the 1980 Act.

As the most common relief sought in unfair prejudice proceedings is an order requiring the respondent to buy the petitioner’s shares, which is not a claim for the recovery of money, the applicable limitation period will usually be 12 years from the date on which the cause of action accrued. However, a petitioner must now appreciate that the limitation period will be six years in relation to any part of a petition seeking relief in the form of a sum of money. A petitioner will need to frame the petition particularly carefully if relief is sought for an order requiring the respondent to buy the petitioner’s shares, as well a monetary claim.

Despite this decision, the courts are likely to continue managing unfair prejudice petitions in a robust manner and are unlikely to be sympathetic to petitioners that exploit the limitation periods in the 1980 Act to bring up sham historic grievances. Although the precise implications of the decision will be seen in future cases, petitioners should not delay launching proceedings, which should ideally be based on well-founded claims that are specific and current.

Case: THG Plc v Zedra Trust Co (Jersey) Ltd [2024] EWCA Civ 158.

3. Directors’ duties: application of statutory conflict of interest duties

1 February 2024

The Court of Appeal has allowed an appeal against an order granting summary judgment in a derivative claim following the breach of statutory conflict of interest duties by a director.

Background. Section 175 of the Companies Act 2006 (2006 Act) (section 175) provides that a director must avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or may conflict, with the company’s interests (section 175 duty).

A director can be in breach of the section 175 duty unless the conflict of interest situation is avoided or authorised. The section 175 duty will not be breached:

• If the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.
• Where the matter has been authorised by the independent non-conflicted directors of the company, excluding the director seeking authorisation.
• Where the company’s shareholders approve the relevant act or omission.
• By directors acting in accordance with provisions for dealing with conflicts in the company’s articles.

Section 177 of the 2006 Act (section 177) provides that, subject to certain exceptions, a director who is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company must declare the nature and extent of that interest to the other directors (section 177(1)) (section 177 duty).

A director can be in breach of the section 177 duty for failing to declare an interest. However, it is unnecessary to declare an interest that cannot reasonably be regarded as likely to give rise to a conflict of interest or where the other directors are already aware of it or ought to be reasonably aware of it (section 177(6)(a) and (b)).

The proper claimant when remedying a wrong committed by directors against a company is the company itself. However, where certain wrongs are committed by directors, the court has a discretion to permit shareholders to bring a derivative claim in their own names on behalf of the company (section 260(1) and (2)(a)).

The court can wholly or partly relieve a director of liability for breach of duty if, having regard to all the circumstances, they have acted honestly and reasonably (section 1157, 2006 Act) (section 1157).

In Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048, a director was found to have given inadequate disclosure of commission he received personally by arranging transactions for his company.

Facts. Two minority shareholders and former directors (together, H) of a private company, C, brought a derivative claim in respect of alleged breaches of sections 175 and 177 by the continuing directors and majority shareholders, B and M.

H argued that B and M had wrongfully transferred land owned by C and diverted the opportunity to develop it (the project) away from C, including to a company, E, solely owned by B. In particular, the situation giving rise to the section 175 duty owed by B and M had not been authorised and they also failed to comply with their section 177 duty by failing to formally declare their interest in the project.

As H had declined the opportunity to co-fund the project, B and M argued that all parties were aware that C could not pursue the project and that B and M would seek to do so on their own behalf, including the transfer of land to E. B and M argued that, in the circumstances, there was no need for their conflicts of interest to be formally authorised under section 175 or declared under section 177.

The High Court granted summary judgment against B, holding that B was in breach of section 175 because his situational conflict of interest had not been authorised, and in breach of section 177 because he had not made full disclosure of all material facts (Gwembe). This failure to disclose sufficient information prevented B and M from successfully relying on the defences under sections 175 or 177. The court also refused B’s application for permission to amend his defence to rely on section 1157. As B had obtained a material benefit from his breach of duty by reason of having a beneficial interest in E, the court held that he would have needed to show an extremely powerful case in order to obtain relief under section 1157. B appealed.

Decision. The court allowed the appeal.

In relation to section 175, it was realistically arguable that if, as alleged, H had rejected a proposal that the project should be pursued through C and if it was understood and agreed that B and M could pursue it outside C, that constituted the necessary authority for the purposes of section 175 for B and M to do so.

In relation to section 177, the court had misapplied Gwembe. B would also have a real prospect of success in defending a claim for the breach of this duty under section 177(6) if he could show that H were aware that B and Ms could pursue the project outside C. It was relevant that the directors had previously conducted their own businesses and dealt with C’s assets in a very informal way.

The High Court had also erred in rejecting B’s defence under section 1157, as the reference in that section to a court “having regard to all the circumstances of the case” means that summary judgment should not be granted against a director indicating an intention to seek relief under the section. It was also an oversimplification to say that a director obtaining a material benefit from their own breach of duty must show an extremely powerful case to obtain relief under section 1157.

Comment. This decision illustrates the significance of directors appreciating the statutory conflict of interest duties that they owe to their companies and complying with them. The factual background can also be significant, with the decision highlighting that directors of a smaller company with more informal decision-making processes might, in certain situations, find it easier to defend claims for breach of their conflicts of interest duties by relying on the statutory defences available in sections 175 and 177 without formally disclosing their conflicts. However, even in this type of scenario, it would be sensible for directors simply to disclose the facts giving rise to any conflict of interest before obtaining the relevant authorisation in compliance with the 2006 Act and the company’s articles.
The decision also provides guidance on the application of section 1157 in relieving directors of liability for breach of their duties regardless of the availability of other statutory defences.

Case: Humphrey v Bennett [2023] EWCA Civ 1433.

4. Shareholder loss: unfair prejudice and derivative claims

1 February 2024

Summary. The Court of Appeal has clarified when a shareholder seeking relief by bringing a claim for unfair prejudice can also claim relief for loss suffered by the company in the same proceedings.

Background. A shareholder of a company may petition the court for relief where the company’s affairs are being conducted by the directors in a manner that is unfairly prejudicial to its interests as a shareholder (section 994, Companies Act 2006) (2006 Act) (section 994). The court has a wide discretion to make the order that it thinks is fit to remedy the unfair prejudice, including an order to buy shares (section 996, 2006 Act).

A shareholder can also, in certain circumstances, bring a derivative claim against the directors in respect of a cause of action vested in the company and seeking relief on behalf of the company (sections 260(1) and 260(2)(a), 2006 Act) (section 260). Permission from the court is not required to issue a derivative claim, but the claimant must obtain permission to continue the claim (section 261(1), 2006 Act). The court must dismiss the application if the evidence accompanying it does not support a prima facie case for continuing the claim (section 261(2)(a), 2006 Act).

The need to obtain the court’s permission to continue a derivative claim can sometimes make it a less attractive option than an unfair prejudice claim, especially as an unfair prejudice claim can, in certain circumstances, provide not only in favour of the shareholder bringing the claim but also in favour of the company. However, an unfair prejudice claim that also seeks relief in favour of the company should only be made in rare and exceptional circumstances (Re Chime Corp Ltd (2004) 7 HKCFAR 54 (Hong Kong)).

Facts. N and K were the only shareholders and directors of a company, C. N alleged that K excluded him from managing C and acted in a manner that was unfairly prejudicial to him as a shareholder. N also alleged that K diverted C’s assets to another company, H, which was owned solely by K, in breach of K’s fiduciary duties to C.

N brought an unfair prejudice petition under section 994, seeking an order for:

• Permission to buy K’s shares at a price that reflected the damage to C.
• K and H to compensate C for its loss and that those assets be held on trust for C.

K argued that seeking relief in favour of C in the unfair prejudice petition was an abuse of process. K argued that the appropriate remedy was a derivative claim, which the court would assess at an early stage if there was sufficient evidence to continue the claim.

The High Court struck out the part of the unfair petition seeking relief in favour of C as an abuse of process. It held that only rarely and exceptionally will a court allow a claim to proceed by way of an unfair prejudice petition when it could otherwise be brought as a derivative claim (Re Chime).

N appealed against the striking out of the relief sought in favour of C in the unfair prejudice petition.

Decision. The court allowed the appeal.

The question of whether it is legitimate for an unfair prejudice petition to claim relief in favour of the company to which the petition relates depends in part on whether it includes a derivative claim. Here, although the petition advanced N’s claims in respect of a cause of action vested in the company, as required by section 260(1)(a), it did not seek relief on behalf of the company, as required by section 260(1)(b), and so did not constitute a derivative claim.

The High Court had erred in applying the test in Re Chime. In an unfair prejudice petition, the court has a wide discretion to grant relief, which includes granting relief in favour of the company, as well as the shareholder.

It would be inappropriate to simply strike out the part of the petition seeking relief in favour of the company if the petition also included a genuine claim for relief in favour of the shareholder. N’s interest in pursuing relief as a shareholder in the petition was genuine, in part because the remedy of buying K’s shares would be unavailable in a derivative claim. Therefore, it was not an abuse of process for N to also seek relief in favour of C in the petition.

If the relief sought in an unfair prejudice petition is exclusively in favour of the company or where the petition is not accompanied by a genuine claim for relief in favour of the shareholder, the court is likely to strike out the petition as an abuse of process. In these circumstances, the appropriate remedy is a derivative claim.

Comment. This decision is helpful for shareholders seeking redress against a company’s directors as it clarifies the relationship between unfair prejudice and derivative claims. In particular, there is now clearer guidance on when it is appropriate for an unfair prejudice petition to include a claim for relief in favour of the company, as well as the shareholder. By contrast, the decision also provides guidance about the likelihood of success when applying to strike out part of an unfair prejudice petition seeking relief in favour of a company.

Case: Ntzegkoutanis v Kimionis [2023] EWCA Civ 1480.

5. Corporate reporting: FRC annual review for 2023/24

1 February 2024

The Financial Reporting Council (FRC) has issued its annual review of corporate governance reporting for 2023 (the review).

Background. The FRC is responsible for promoting confidence in corporate reporting and governance, and monitoring the UK Corporate Governance Code (the Code), which applies to premium listed companies. The review showcases examples of high-quality and insightful reporting by many companies.

In June 2017, the Task Force on Climate-related Financial Disclosures (TCFD) developed recommendations on climate-related disclosures relating to governance, strategy, risk management, metrics and targets.

Facts. The review includes the following key recommendations:

• Disclosures on non-compliance with the Code provisions should be improved. Companies are expected to provide meaningful explanations for non-compliance, including when practices will be aligned with the Code.
• Companies should consider culture-related risks and opportunities, and how this relates to strategy. Culture reporting should include practice and policy, and progress towards milestones. Better reporting would explain what the company’s values mean in practice, how they translate into behaviours and how they have been embedded.
• Disclosures should be improved by addressing the nature of the engagement, reflecting on feedback received and how this has led to high-quality outcomes, and its impact on board decisions. Companies should report on shareholders’ key priorities and, in relation to workforce engagement, why the chosen engagement method is considered to be effective.
• The FRC expects companies to improve their level of compliance across all recommended TCFD disclosures. Companies are reminded that good reporting includes disclosure of governance structures and processes in place to manage climate-related risks and their oversight by the board and management.
• Companies should define their business strategy clearly and link it to their diversity strategy. Reporting should include progress made on achieving set targets and improvements year-on-year. Diversity reporting should go beyond gender and ethnicity-related disclosures.
• Companies should report on actions and outcomes after evaluating their boards.
• Companies should be more specific in disclosing how audit committees have assessed the independence and effectiveness of the external audit process and report on their findings.
• Companies should focus on the most significant risks and report on changes to these risks during the year. Overall reporting on monitoring and reviewing risk management and internal control systems still needs improvement.
• Narratives on how remuneration is aligned with the company’s corporate purpose and values should be clear and transparent. Disclosures should include consideration of the impact of windfall gains and the use of any discretionary powers. In relation to bonuses and long-term incentive plans, annual reports should explain the rationale for each performance metric. Companies should improve their reporting of workforce engagement on remuneration.
• Boards should understand cyber risks within the organisation and how they are managed.

Source: FRC: Annual Review of Corporate Governance Reporting 2023, 16 November 2023, https://media.frc.org.uk/documents/Review_of_Corporate_Governance.pdf/.

6. UK Corporate Governance Code 2024: key changes and guidance

29 February 2024

The Financial Reporting Council (FRC) has issued a new version of the UK Corporate Governance Code (2024 Code) and accompanying guidance (the guidance).

Background. The current version of the UK Corporate Governance Code (2018 Code) has been effective since January 2019.

In March 2021, the government published a wide-ranging white paper on major reforms to the UK audit industry and corporate governance.

In May 2023, the FRC consulted on significantly revising the 2018 Code (the consultation).

In November 2023, the FRC confirmed that it would take forward only a few of the original proposals in the consultation. This significant shift followed the government’s withdrawal in October 2023 of burdensome draft non-financial reporting regulations for larger companies which, if implemented, would have led to a significant overhaul of the 2018 Code. 

Facts. Key changes in the 2024 Code include provisions that emphasise:

• A need for governance reporting to focus on board decisions and their outcomes in the context of the company’s reporting strategy and objectives. Where the board reports on departures from the 2024 Code’s provisions, it should provide a clear explanation.
• A need to assess and monitor how the company’s desired culture has been embedded.
• A requirement for appointments to the board and succession planning for the board and senior management to promote diversity, inclusion and equal opportunity. The list of diversity characteristics has been removed to indicate that diversity policies can be wide ranging.
• A recognition that the board’s responsibility is not only for establishing the risk management and internal control framework, but also for maintaining its effectiveness.
• That the monitoring and review of a company’s risk management and internal control framework should cover all material controls, including financial, operational, reporting and compliance controls.
• That the board should include in the annual report a description of how the board has monitored and reviewed the effectiveness of the internal control framework and a declaration of the effectiveness of the material controls as at the balance sheet date.
• That directors’ contracts, and any other agreements or documents that cover director remuneration, should include malus and clawback. A description of a company’s malus and clawback provisions should also be included in the annual report.

The 2024 Code will apply to financial years beginning on or after 1 January 2025 with the exception of the provisions relating to risk management and internal controls, which will apply to financial years beginning on or after 1 January 2026.

The guidance is non-mandatory and incorporates previous FRC guidance on board effectiveness, audit committees, risk management, and financial and business reporting. It includes new content in relation to provisions in the 2014 Code asking boards to monitor and review all material controls and make a declaration on their effectiveness, as well as in relation to the inclusion in the annual report of the board’s declaration of effectiveness of the material controls.

The guidance also reiterates the emphasis in the 2024 Code of outcome-based reporting without losing sight of the longer-term goals of sustainable value creation. It contains a new sub-section on good practice for the successful management of board committees.

Source: FRC: UK Corporate Governance Code, 22 January 2024, https://media.frc.org.uk/documents/UK_Corporate_Governance_Code_2024_kRCm5ss.pdf; FRC: Corporate Governance Code Guidance, 29 January 2024, www.frc.org.uk/library/standards-codes-policy/corporate-governance/corporate-governance-code-guidance/.