Corporate Law Update

In this week’s update: proposals for the reform of Companies House, a partnership continued to exist even when the business was operated through a limited company, proposals to strengthen the modern slavery regime and a few other items.

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Government publishes proposals to reform Companies House and increase transparency

The Government has published its response to its consultation last year on reforms designed to enhance the role of Companies House and increase the transparency of UK corporate entities.

The Government’s original consultation was launched in May 2019. You can read more information on that consultation in our previous Corporate Law Update.

The key proposals arising out of the Government’s response are set out below.

Verifying the identity of individuals

  • New directors, members of limited liability partnerships (LLPs) and general partners of limited partnerships will need to verify their identity with Companies House as a condition to their appointment taking effect. Existing directors will also need to verify their identity, with sanctions for non-compliance.
  • Likewise, new and existing persons with significant control (PSCs) will need to verify their identity, with criminal sanctions for non-compliance. Shareholders generally, however, will not need to verify their identity.
  • Individuals that present information on behalf of entities will also need to verify their identity. Companies House will reject a filing by a presenter who has not been verified.
  • On top of this, agents who file information on behalf of entities will need to be supervised by an appropriate authority, open an “agent” account with Companies House and supply certain information about themselves.
  • Verification would be carried out under a digital verification process. This may involve cross-checks with the UK Passport Office and the Driver and Vehicle Licensing Agency (DVLA). There will also be a non-digital alternative.
  • The identity verification checks will not replace the existing anti-money laundering (AML) and customer due diligence (CDD) checks that regulated businesses are required to undertake.
  • The Government will work with regulated businesses and authorities to avoid any duplication in identity checks where adequate third-party identity checks have already been completed.

Financial statements

  • In line with other jurisdictions, the Government will consider introducing a legal requirement for all business entities to tag items in their accounts, possibly to iXBRL (as is soon to be mandatory for companies admitted to an EU or UK regulated market).
  • A new limit will be imposed on the number of times a company can shorten its accounting reference period, as this is currently open to abuse as a way to extend an entity’s filing period.
  • The Government will consult on whether any improvements can be made to the way in which entities present their financial information. This may include changing the format of accounts and requiring additional information to be included (such as turnover).

Other matters

  • The Government will consult on ways to give Companies House powers to query and reject information submitted to it, including applications to use a company name (for example, if it appears the name is being used fraudulently or in connection suspicious or malicious activity).
  • In an effort to protect the personal information of directors, the requirement for a director to supply their “occupation” to Companies House will be abolished, and all directors will be able to apply to remove the “day” element of their date of birth from public view. (Currently, this is not possible where the information was first filed before October 2015.) The Government will also allow directors to remove their signature from public view, as well as their residential address if it has historically been used as the company’s registered office.

Separately, and in connection with its response, Companies House has confirmed that it has stopped removing records for dissolved companies from its Companies House Service (CHS) and will put records for companies dissolved since 2010 back onto CHS from January 2021.

Partnership was not ended by forming a company

The High Court has held that a partnership between two individuals had begun some time before they signed a partnership agreement, and had continued even though they had set up a company and transferred partnership business to it.

What happened?

Malik v Hussain Junior [2020] EWHC 2334 (Ch) concerned a restaurant business set up by two individuals. The business was run from a premises in Manchester that had originally been acquired by one of the two individuals in early 2000. In 2001, the two individuals entered into discussions with a view to re-developing the premises as a restaurant.

In mid-2002, the individuals incorporated a company to run the business, with one of them becoming the company’s sole director and the other its company secretary. However, the premises remained in the individuals’ names, and the company rented it from them in order to run the business.

In due course, the relationship between the two individuals broke down. Legal disputes arose concerning numerous aspects of the business, including the effect of a partnership agreement they had executed several years later and whether one of the individuals had been running a competing business without approval.

However, two particularly interesting aspects were the following.

  • Had a partnership arisen between the individuals during their discussions in 2001? One of the individuals claimed that the discussions had been merely informal and no business was taking place, and that this was not enough to create a partnership. He also claimed that the fact the individuals had set up a company showed they had not intended to create a partnership.
  • If a partnership had arisen, had it been impliedly dissolved when the individuals incorporated the company to run the business? The same individual claimed that, by using the company to run the business, the individuals had transferred the partnership business to it, ending the partnership.

What did the court say?

The court said that a partnership had arisen in 2001. In the judge’s view, all of the “essential ingredients of a partnership” had been present.

Under the Partnership Act 1890, a partnership arises automatically when two or more individuals carry on a business in common with a view of profit. There is no need for a formal partnership agreement.

In this case, the two individuals had agreed to go into business together with a view to owning the premises and using it to run the restaurant business and to obtain rental income. Although they had not commenced trading at that point, the judge was satisfied that they regarded themselves as partners.

There was no evidence to suggest that, when the individuals first entered into discussions, they had intended to run the business through a company, rather than a partnership.

Indeed, they had opened a joint current bank account (through which rental payments were subsequently paid) and decided to obtain a joint loan facility, in each case in their own names (and not the company’s). The state of affairs had lasted for two months, which was sufficient to establish a partnership. The fact that the business was not trading was irrelevant, as, in the judge’s words, “trading is not an essential pre-condition for a partnership to exist”.

The court also found that the partnership had not come to an end when the individuals set the company up and (effectively) transferred the business of running the restaurant to it. The evidence showed that they had not transferred all of the partnership’s assets to the company. Although there was some anecdotal evidence that this might have been their intention, there was no evidence that they had taken a “considered decision” to that effect.

Rather, they had transferred merely the management and operation of the business to the company, with the result that, from that point, the company managed the business on behalf of the partnership. However, the individuals, in their capacity as partners, had continued to hold the premises in their own names and to receive rental payments from the company into the joint account in their names.

The partnership therefore continued in relation to the management and letting of the premises and the management of the company. In effect, the individuals had outsourced part (but not all) of the partnership’s business, and so the partnership had not been dissolved.

What does this mean for me?

Partnership cases are usually very fact-specific. Questions over whether a partnership has been created rest heavily on what the parties actually did at various points on time.

However, the decision is a salutary lesson, when considering going into business with someone, to ensure that the parties’ intention as to their business relationship is properly documented at an early stage. It is important to remember that a partnership is not a legal entity and does not provide the protection of limited liability. Each partner will have unlimited responsibility for any debts and obligations incurred in connection with the partnership’s business.

If the parties do intend to create a partnership, they should enter into a partnership agreement setting out how the partnership will operate. If they fail to do so, the default provisions of the Partnership Act 1890 will apply, including that profits and losses will be shared equally, that every partner is entitled to take part in the partnership’s management and that no partner is entitled to remuneration. These can make it awkward to operate the partnership and will not always reflect the parties’ desires.

If, by contrast, the parties do not wish to create a partnership, they should make this clear. One way to do this is to include appropriate “no partnership” wording in documentation between the parties, such as any initial heads of terms or business proposal. This would typically state that the parties do not intend to create a partnership by virtue of their discussions or activities. Although a “no partnership” clause will not prevent a partnership from being created if the essential conditions are satisfied, it provides evidence that the parties do not intend to carry on a business in common.

Critically, this judgment highlights the danger of assuming that, by setting up a company, parties can avoid any partnership being created. This is not so. Often a company will indicate that business partners wish to operate through a corporate entity, merely holding economic shares in the entity that carries on the entire business.

However, it is equally open to the court to find that any company comprises simply one aspect of a partnership business, if the facts support that conclusion. The result is that the shares in the company might constitute partnership property (as in this case), or that a partnership may exist to carry on a parallel business related to, but distinct from, that carried out by the company.

Government sets out proposals to reform modern slavery regime

The UK Government has published its response to its consultation last year on proposals to enhance and strengthen the current obligation for certain organisations doing business in the UK to publish a slavery and human trafficking statement, or “modern slavery statement”, under section 54 of the Modern Slavery Act 2015.

The purpose of a modern slavery statement is to set out measures the organisation has taken to eliminate slavery and human trafficking in its organisation and supply chains.

The Government’s original consultation was launched in July 2019. You can read more information on that consultation in our previous Corporate Law Update.

The key proposals arising out of the Government’s response are set out below.

  • The Government will proceed to make reporting on certain areas mandatory. Currently, section 54 encourages (but does not require) organisations to report on six areas – organisational structure, policies, due diligence, risk assessment, performance outcomes and training. Future mandatory reporting will cover these six areas, as well (potentially) as additional areas.
  • It will also create a Government-run reporting service for modern slavery statements. Organisations will be required to publish their modern slavery statement through this service.
  • There will be a new single reporting deadline. Under the proposal, every organisation’s statement would cover the period from 1 April to 31 March each year and would need to be published by 30 September. Currently, Home Office guidance recommends that organisations publish their statement alongside their annual accounts, but there is no statutory deadline.
  • The Government will consider methods of enforcing the requirement to publish a modern slavery statement and issue a further update in due course.
  • The regime will be extended to cover public bodies. Rather than basing the requirement on turnover, a public body will need to publish a statement if its budget exceeds £36m.

Also this week…

  • Government extends period for holding “virtual” general meetings. The Government has published regulations extending the period during which companies can hold meetings of their members “virtually” from 30 September 2020 to 30 December 2020. Under the Corporate Insolvency and Governance Act 2020, general meetings, as well as certain other meetings of a company’s members, can take place purely electronically and need not be held at a particular place notwithstanding anything to the contrary in the company’s constitution. For more information, see our previous Corporate Law Update. The extension also applies to building societies, friendly societies, charitable incorporated organisations (CIOs), and co-operative and community benefit societies. The Government has not, however, extended the period within which a company has to hold an annual general meeting (AGM). 
  • FCA clarifies uncertainty regarding cannabis-related businesses. The Financial Conduct Authority (FCA) has issued a statement clarifying the position around listing shares of companies whose business involves cannabis, which may pose a risk of the creation of “proceeds of crime” under UK law. The FCA confirms that UK-based medicinal cannabis companies can be listed if they have appropriate Home Office licences for their activity. Overseas medicinal cannabis and cannabis oil companies, however, must satisfy the FCA first that they are appropriately licensed and that their activities would be legal if carried out in the UK. Recreational cannabis companies (wherever they are based) are ineligible for listing in the UK, as possessing and supplying cannabis for recreational use is a criminal offence in the UK. This is the case even if recreational use of cannabis is legal in the company’s home territory. Read our colleagues’ blog for more information.