Doubly secure

With the Governor of the Bank of England having warned that the UK may face a triple-dip recession, the financial landscape for limited companies looks set to remain unstable and uncertain for some time to come.

Against that backdrop, two developments have recently strengthened the law relating to corporate security, in two very different senses.

Security registration

Funding is currently a real challenge for limited companies, and once sourced, it is invariably heavily secured against the company’s assets. In this climate anything that streamlines any process a company has to go through, either administratively or by providing information, is to be welcomed. A few months ago, new statutory instruments were published which do just that in relation to the regime for registration of securities at Companies House.

The Companies Act 2006 (amendment of Part 25) Regulations 2012 revise the regime in Part 25 of the Companies Act 2006. The principal changes, which are likely to come into force on 6 April 2013, are:

• a single UK-wide registration system;
• allowing electronic filing of a copy of the entire instrument of security and brief particulars;
• removing criminal sanctions for failure to register a security;
• an assumption that all security (including under the law of Scotland) can be registered (with limited exceptions);
• improved access to and use of information available at Companies House, and ensuring security providers allow access to copies of the security; and
• abolition of the need for UK companies and LLPs to keep their own registers of security.

The removal of criminal sanctions should not mean a more relaxed approach to registration: the commercial sanctions of invalidity against a liquidator, administrator or creditor of the security provider remain. The 21 day time period for filing at Companies House also stays, although helpfully the regulations now give guidance on when that period starts for various forms of security.

Essentially, the changes mean more transparency and improved information on registered security interests, including being able to track any enforcement process underway.

In the current environment, anything which achieves that can only be beneficial for limited companies dealing with others, whether potential customers, lenders, private investors, potential partners or buyers.

Limited company status

The other sense in which corporate security has been strengthened relates to the status of the limited company as an entity separate from its shareholders and directors, under Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395. While family and corporate lawyers will have differing opinions on the merits of this decision, from the corporate lawyers’ point of view it helpfully restates the well established principle that a limited company is entirely separate from those who incorporate it, and dismisses any suggestion that because a single person is in control of a limited company, that company’s assets actually belong to that individual.

The case concerned the distribution of assets on the divorce of a couple who had been married for 20 years and had amassed considerable wealth, including a number of properties held by three limited companies owned and controlled by the husband. The Court of Appeal went against a long established practice of piercing the corporate veil and ordering the transfer of assets owned by a company, as if they were owned individually by one party to a divorce, to meet a capital award in favour of the other. Rimer LJ made, in particular, three strong arguments for the independence of limited companies:

• even in a company owned and controlled by one man, the shareholder could not distribute all the company’s assets to himself at any one time; he could only distribute profits that are capable of being distributed;
• third party creditors would not be willing to trade with companies owned and controlled by one individual if he could argue on insolvency that the company property actually belonged to him because he solely owned and controlled that company, leaving nothing for creditors;
• and the corporate veil could not be pierced without evidence that the companies had been incorporated to conceal impropriety.

This is not to say that putting assets in a limited company is a way to protect them from forming part of the pot to be distributed on divorce. The court could still order the transfer of shares in the company between the spouses, for example. Importantly, if there has been impropriety, the court will also still pierce the corporate veil.

What the decision does offer is a helpful reinforcement of the strength of the limited company as a separate entity, and that a court will not look behind it without compelling reason. Again, anything which strengthens the position of a limited company in relation to third parties has to be helpful in tough trading times.