Corporate deal obscured by frosted glass

Name, rank and serial number…

On 5th April 2017, the Government published a call for evidence on the latest proposal in its on-going project to make the UK “the world leader in corporate transparency”. Snappily titled “A register of beneficial owners of overseas companies and other legal entities”, the paper outlines a proposal to require Companies House to establish a public register of the beneficial owners of overseas companies owning UK property or engaging in UK government procurement. Overseas companies will be expected to populate this database by applying to register the identities of their beneficial owners.

This is, in effect a version of the recently introduced “Register of Persons with Significant Control of UK companies”; this time aimed at overseas companies and other entities. The proposed threshold for registration is the same; 25% of direct or indirect share ownership or voting rights, or the right to appoint a majority of directors or some other ability to exercise significant influence or control.

Understandably the Government is anxious to find ways of enforcing compliance that work in the real world, where overseas beneficial owners and directors are effectively beyond the reach of UK law. Two sanctions are proposed. One would prevent overseas companies buying, selling, leasing or mortgaging UK real property unless they have been issued a registration number by the Companies House confirming that the required information has been filed. The other would prevent overseas companies participating in Government procurement work without the relevant registration number from the Companies House.

The sanction preventing dealing in property would be enforced by the Land Registry which would refuse to register a transfer, lease or mortgage by or to an overseas company unless the company’s registration number were given to it. The Land Registry will check that the registration number was valid on the date the transfer, lease or mortgage was done. A refusal to register would leave a property transaction in limbo, with the buyer as the beneficial owner and the seller holding the legal estate in the property as trustee for the buyer. To counter this point, the Government is contemplating making such a transfer, lease or mortgage legally void as soon as it is made if the overseas company involved does not have the magic registration number on the completion date.

It is hard to see this mechanism appealing to banks and other secured lenders. The seller’s funder would hate being forced – after its mortgage has been released – to repay money already received in satisfaction of the seller’s mortgage debt. The buyer’s lender would hate to see its money pass to the seller but not get its mortgage registered against the title.

Companies House will have to some degree, change its role. Right now it is simply a database. If it gets what appears to be correct information, it registers it. Companies House is not currently required to act in a judicial manner. But the paper refers to overseas companies being allocated a registration number but only “… if their application is successful.”   This appears to contemplate conferring some kind of decision-making power on Companies House. The paper is silent on what – if any – method of appealing an unfavourable decision might be set up.

The paper clearly expects those dealing with overseas companies to act as unpaid special constables, policing compliance with the new regime. This might be a worthwhile expense if it resulted in the “fair, transparent and clean environment” that the Government says it wants to create. Sadly this is unlikely to be the case.

The proposed regime only covers the beneficial ownership of companies and shares in companies, not the beneficial ownership of property itself. Let us suppose that a notorious criminal, Mr. V. Bent, owns or controls at least 25% of StoogeCo N.V. It is registered in the Felonious Republic of Kleptoria and is the registered proprietor of 25 Laundry Row, Knightsbridge. Mr. Bent’s involvement in StoogeCo ought to show up on the proposed register. But suppose StoogeCo is a company over which Mr. Bent exerts no control and in which he has no financial stake. StoogeCo may even have a valid registration number. If StoogeCo simply holds 25 Laundry Row on trust for Mr. Bent, implementation of these proposals will reveal nothing of his involvement.

Not for the first time, it appears quite possible that new proposals, laudable though they are, at least in intent, will in reality merely lumber the law-abiding with more inconvenience and expense; without significantly incommoding the terrorists and criminals at whom they are targeted.