Update: company

Directors' duties

Kiani v Cooper and others [2010] EWHC 577 (Ch) has been reported as the first English case where a claimant has secured permission to both commence and continue one of the new forms of statutory derivative claims under part 11 of the Companies Act 2006 for directors' breach of duty.

The case involves a property development company with two directors who are also 50/50 shareholders. One alleges that the company has wrongly paid monies to other undertakings, which her co-director has an interest in, without her agreement and that the invoices in question were either inflated or the work to which they related had not been done.

Commentators had expected a flood of the new derivative claims through the courts following the implementation of the Companies Act 2006, but as the permission of the court is required to commence and then separately to continue the claim, these fears seem to have been unjustified. To secure permission to continue the claim the claimant must convince the court that he could not pursue the claim in his own right; for example as an unfair prejudice claim (under section 994 of the Act) and satisfy the court that the continuance of the claim would not be in breach of his director's duties (if applicable) including the overriding duty imposed upon directors to promote the success of the company.

Re Mumtaz Properties Ltd [2011] EWCA Civ 610 CA has provided further judicial direction on the criteria for considering whether an individual had been responsible for acts sufficient to constitute him a de facto director of a company, for the purposes of section 212 of the Insolvency Act 1986.

The court held that all relevant factors had to be taken into account and that liability would be imposed on those who assumed to act as directors, exercised the powers of directors and discharged the functions of directors, whether validly appointed or not. In this case the court held the individual was 'one of the nerve centres from which the activities of the company radiated'.

In Re Onslow Ditching Ltd [2011] EWHC 257 (Ch), the High Court considered breach of director's statutory duties under the Companies Act 2006 in conjunction with the offence of wrongful trading under section 214 of the Insolvency Act 1986.

The directors involved, who had failed to halt the company's activities when it was clear to them that the company was insolvent, were found guilty both of misfeasance and breach of duty as well as wrongful trading. When the company was finally liquidated there was a deficiency as regards unsecured creditors of at least £900,000. They were found to be in breach of their duties to the company and its creditors, from the point that they knew the company could not meet its funding conditions and had no other funding options available. It was held that they were liable as a result of permitting the company to commence and continue its property development activities, in circumstances where they knew, or ought to have known, that it was speculative, inadequately funded and bound to fail.

Legislation

Section 22 of the Companies Act 2006 is still not in force! This is the section which will enable a company's shareholders to entrench certain specified rights in the company's articles of association so that more than the usual 75 per cent (special resolution) shareholder consent is required before the entrenched provisions in the articles can be changed.

As this provision was heralded as the safeguard for companies concerned over the automatic transfer of the provisions from their memorandum of association to their articles, with the implication that they could be changed by shareholders holding 75 per cent of the capital, it is disappointing that the Department of Business Innovation and Skills feels it needs to further reconsider the impact on its implementation on other provisions elsewhere in the Act.

The countdown to the Bribery Act is on until its implementation on 1 July 2011. Four new offences will be created including the corporate offence of 'failure to prevent bribery'. Companies will be required by the legislation to carry out an effective risk assessment and thereafter to put in place a proportionate anti-bribery policy in line with the guidance set out by the Ministry of Justice.

Digital registry

Companies House is pressing ahead with its plans to become a fully digital electronic registry by March 2013.

The move, which will make it mandatory to file annual returns and accounts and other company forms which relate to main company changes (registered office director/secretary details and company name changes) electronically, will also see the demise of paper-based incorporations.

Companies House is working with accounts software providers to enable accounts to be submitted to HMRC and Companies House by the same means, and introduced a new simple web incorporation service in April 2011, at a cost of just £18 via its website, in conjunction with the government's 'Start-Up Britain' campaign.

Companies and their professional advisers can now register electronically for informal correction of mortgage documents under section 1,075 of the Companies Act, and, subject to successful testing being completed from July, companies will also be able to register up to four names and email addresses with Companies House eReminder service. Each address will receive electronic reminder notices in relation to the relevant dates for the filing of annual returns and accounts, as an alternative to paper reminders being simply sent to the registered office address.

Companies House WebCHeck service and the existing Companies House Direct services will be merged to provide one portal for all electronic searches and document downloads and the existing electronic 'Monitor' service will become free of charge to enable companies to be notified electronically when any document is filed.

Paypal will also be introduced as an alternative payment method in addition to debit and credit cards, for WebFling and in relation to WebCHeck.

The planned timeline of digitalisation would mean that 98 per cent of the entities on the public register and more than 92 per cent of total transactions would be fully electronic by March 2013.

On the positive side, the process of submitting accounts, filing annual returns, etc. will become easier '“ the percentage of electronic transactions that are 'right first time' are quoted as less than one sixth of the rate for paper submissions, with faster processing and reduced fraud also cited as advantages of digital integration.

Becoming a fully electronic registry will also offer businesses substantial savings, in some cases up to 50 per cent compared to paper-based submissions. Projected savings on a UK-wide basis would be in excess of £2m.

While this announcement must be viewed positively in terms of streamlining Companies House services, and also from the point of view of businesses reducing their overheads, Companies House will need to ensure that its security systems are fully workable to enable both the company's officers and their appointed professional advisers to file documents on their behalf.

Lending

Despite the high street banks claiming to be lending more and having lending targets in place, the government has recently had to threaten the imposition of further punitive taxes on the banks' profits if they continue to fail to meet these targets in accordance with the Project Merlin agreement.

Most business owners' experience is that the process is still hard going and there is little evidence that lending is becoming more widely available for small to medium businesses. Feedback from business owners indicates that the initial application process is more difficult and the subsequent credit approval stage more challenging and expensive than ever before.

Even where banks are agreeing to lend, this is often done strictly on their terms and with large arrangement fees and high interest rates. Personal guarantees are becoming the norm rather than the exception. This is forcing businesses to look elsewhere and to that end deals are being financed in different ways to traditional bank borrowing. Management buyouts in particular are being completed with a higher level of deferred consideration and we are seeing more use of private equity investors or other non-high street commercial lenders.

Banks are right to be cautious and carefully assess the criteria of new customers, but it seems their current attitude and the strict filtering process is not proving effective. Financially solid businesses with many years of excellent trading figures and history with the banks are being refused finance or are simply being put off by the level of scrutiny and the cost of borrowing from the banks.

It seems the banks need to learn how to filter out 'the bad' while supporting 'the good' thereby minimising their exposure, without quashing the entrepreneurial spirit this country was once known for.