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From 6 April 2016 all companies (as well as LLPs and ‘Societates Europaeae’) are required to keep a register of all individuals and legal entities that have ‘significant’ control over them. This requirement is in addition to information requirements such as the register of members and a register of directors. From 30 June 2016, companies are required to deliver this information annually to the central public registry at Companies House when making their Confirmation Statement (which replaced the previous Annual Return from June 2016). They will also be required to keep an up to date register throughout the year, which is to be made available upon an appropriate request.
From a lender’s perspective, the obligation to keep a PSC register and make filings is the responsibility of the company itself and not the person who has significant control. However, there are potential obligations on the lender if they are in fact a PSC or are considered by the company to be a PSC. This is of particular significance where security is taken over shares and has the potential to prove problematic for lenders where security is taken through a Scottish share pledge.
Failure to meet the PSC obligations could result in a fine and even a custodial sentence. It is therefore essential that lenders are aware of the legislation and the potential impact it may have on them as a result of share pledges in their favour. In this communique we will provide a brief overview of the legislation, look at its impact on lenders and provide some guidance for lenders on how to avoid falling foul of the legislation.
The requirements to keep a PSC register are set out in Part 21A of the Companies Act 2006 (as inserted by the Small Business Enterprise and Employment Act 2015 and other regulations).
The Companies Act 2006 contains a carve out for rights attached to shares held by way of security. Where a person has used their shares as security those shares are to be treated as still being held by that person where:
Therefore, where the grantor of a share pledge, prior to the security becoming enforceable, retains (i) the right to receive any dividends, interest, and other monies arising from the shares; and (ii) can exercise all voting rights to the shares in its own interests, the carve-out would apply. This in turn would mean that a security over shares in these circumstances would not require the lender to register as a PSC.
The position in Scotland however, (and in contrast to that in England and Wales where the use of an equitable security over shares is common) is complicated by the requirement to have shares held as security transferred into the name of the lender (or its nominee) and for the lender (or its nominee) to be entered into the register of members as the holder of the shares. This and the case law around ownership and rights in shares, make the position in Scotland less than 100% clear, leaving some uncertainty as to whether a lender taking security over shares should be registered as a PSC.
In an attempt to address this, a request has been made by a legal industry trade organisation to the Department for Business Innovation & Skills (BIS) for further guidance and clarification on the point. A response is awaited and may be useful, however ultimately the underlying legislation will determine the position rather than the view of BIS. This means certainty on the point (unhelpfully) may only occur following further legislation or litigation.
However, current market practice adopted in Scotland pending the BIS guidance is that a PSC filing is not required on the grant of a share pledge. We agree with this approach though would caution that this will be dependent on the wording of the security document. A share pledge which provides for the exercise of greater lender influence than would usually be the case, may result in the terms of the carve out being exceeded and a PSC registration being required.
Indeed if a share pledge was to be enforced via the lender exercising rights attaching to the shares, then at the point of enforcement the lender may meet the requirements of being a PSC and the company may be required to make a PSC filing. Of course, enforcement in practice is more likely to be via a sale of the shares and consequently it is the buyer rather than the lender that would in most cases be entered on the company’s PSC register. Even where this is the case, lenders must be mindful of the PSC registration requirements when enforcing securities over shares and of the possibility that they may be deemed a PSC. Indeed if the security is enforced and the sale is not immediate, a duty on the lender to supply their information as a PSC may arise.
The above would apply equally to security over shares created via the grant of a floating charge as it does to security over shares created via the grant of a share pledge.
As mentioned above, while the obligations to maintain the PSC Register are obligations of the company, there would potentially be obligations on the lender if they were in fact a PSC or considered by the company to be a PSC.
Where a company knows or has reasonable cause to believe that a person or legal entity (including a lender) is a PSC then they can serve notice on that person or entity requesting the information required for the PSC register. A lender would be obligated to respond to any notice served on them within one month. Failure to respond is an offence, punishable by imprisonment or fine, unless that lender can prove the information request was vexatious or frivolous.
It should be noted that “vexatious or frivolous” is a very high standard to reach and so a lender must, in almost all circumstances, reply to a notice served on them, even if only to state that they are not a “registerable relevant legal entity” in relation to that company. This will likely be the most common obligation on lenders to arise from the PSC registration requirements and so it is advisable that lenders have in place a process for dealing with notices within the timescale required.
Where a lender knows or ought reasonably to have known that its particulars are registerable but that they are not on the PSC Register, and that this has been the case for at least one month, then the lender will have an obligation to inform the company that they believe they are a PSC and provide the necessary information. This situation is most likely to occur where a lender enforces their security and it is advisable that the lender considers informing the company that they are a PSC where the sale of shares is likely to take longer than one month. Again, failure to comply is an offence punishable by a fine or imprisonment.
If the lender were registered as a PSC then they are obligated to keep the company informed of any “relevant change”, that being any change which would make the information regarding them on the PSC register incorrect. This includes if the lender ceases to be a PSC. Again, failure to comply is an offence punishable by a fine or imprisonment.
It should be noted that in complying with all of the obligations above it will be an offence for a person to make a statement that they know to be false in a material particular, or to recklessly make a statement that is false in a material particular. This is likely to be relevant to lenders when replying to notices for information served on them as it means that a standard response to a notice will not always be appropriate. Lenders will have to give some consideration as to whether the relevant share pledge (or other security) provides for the exercise of greater lender influence than would usually be the case. If it does, then a blanket statement that a lender is not a PSC without checking the terms of the underlying security may lead to recklessly making a statement that is false, an offence punishable by a fine or imprisonment.
The PSC Registration Requirements must be considered by lenders, especially when using Scottish share pledges to secure their lending. It may be advisable for lenders to conduct a review of their standard documents and any securities over shares which are unusual or provide for the exercise of greater lender influence than usual.