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12 Aug 2019

Register of beneficial owners of overseas companies – what’s the latest?

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When will the legislation come into force?

At the moment, the new legislation to increase the transparency of overseas investment in the UK is intended to kick in in 2021, although the exact date for implementation has not been confirmed. Once the law has come into force, overseas entities owning UK property will be required to disclose their beneficial ownership structures on a publicly accessible register.

Entities who do not comply with the new rules will not be able to deal with UK property.

Background

Following an initial consultation in 2017, the Government published a draft bill in July last year, with an invitation to the Joint Committee (a group of MPs and Lords appointed to review the proposed legislation) to provide a report on the draft bill. The Government’s response to the Committee’s report has just been published. In this briefing we look at both the Joint Committee’s comments and the Government’s response.

The principal points are:

What information will need to be disclosed?

Overseas entities that come within the remit of the register will be required to provide information on their registrable beneficial owners similar to that required under the People with Significant Control (“PSC”) Regime under the Companies Act 2006 (for example, the beneficial owner’s name, nationality, address and nature of control over the company). 

Schedule 2 to the draft bill sets out various conditions for determining who is a beneficial owner. These are based on the conditions for determining whether an individual is a person with “significant control” of a company for the purposes of the PSC Regime.

One of the conditions is that the relevant individual, legal entity or public authority will be a beneficial owner if they hold, directly or indirectly, more than 25% of the shares or voting rights in the overseas entity. The Committee urged the Government to consider lowering this threshold but the Government intends to keep it at 25% - the sensible rationale being that it mirrors the level of control a person needs (under English company law) to block a special resolution of the shareholders of a company. This also reflects the level of control required for disclosure on the PSC register at Companies House.

It is worth noting that it is possible for an individual to hold less than 25% of the shares or voting rights in an overseas entity and still be registrable as a beneficial owner where they have “significant influence or control” over the entity. It has been recognised by the Committee and the Government that it will be essential to provide clear guidance on what this means in practice, and that because the same test applies in the PSC Regime, the guidance should take account of the guidance which already exists for the PSC Regime.

The draft bill also grants the Secretary of State the power to modify the registration requirements where information is available elsewhere on an “equivalent register”. This will mean that the overseas entity still has to register in the UK but that their disclosure requirements may be reduced. The Government is still considering what best constitutes an equivalent register but has confirmed that it must, at a minimum, be publicly accessible.

How will it be policed?

Overseas entities will be prevented from carrying out typical dealings with UK property such as buying/selling, granting leases of over 7 years and granting security, unless they have provided sufficient information about their registrable beneficial owners to Companies House. HM Land Registry will not register any of these dealings unless the applicant has provided a registration ID number, which Companies House will issue once satisfactory beneficial ownership information has been received.

Distressed disposals

Having been involved in the consultation process we are delighted to see that the bill addresses some of the concerns that we raised concerning distressed disposals of property owned by a non-complying overseas entity.

The draft bill now provides exceptions for certain dispositions of property where the overseas entity which owns the relevant property has not complied with its statutory obligations. For example, on an enforcement sale (i.e. the exercise of a power of sale by a security holder or a receiver appointed by it).

Insolvency

There are no equivalent carve outs for the sale of the property by insolvency officeholders. This may be because an administrator (for example, where the overseas entity is capable of being put into an English administration process) would have control of the company itself rather than just the specific asset. We would therefore anticipate that, prior to a disposal of property, administrators should be in a position to update the register themselves or require the directors to do so (as is the case with updates to the PSC register for UK companies that are in administration). We will look out for Government guidance to clarify this point.

When must the register be updated?

Under the draft bill, a registered overseas entity will be required to update its beneficial ownership confirmations each year, and it is a criminal offence to fail to do so. However, the Committee noted that the register should be as accurate as possible at the point at which dispositions take place – i.e. in addition to the annual update. The Committee’s concern is that it is on the disposition of the property that any potential money laundering is likely to occur. The Government is considering how this may be achieved practically, and so this is likely to be one of the few areas where the draft bill is significantly amended. We will keep an eye on developments in this regard.

Impact for Lenders

Given the importance of ensuring that an overseas entity complies with its registration requirements (in order to ensure the disposition and registration of security at HM Land Registry are not prevented due to non-compliance by the overseas entity) lenders are likely to want to stipulate additional CPs on affected transactions.

The draft bill requires the registrar to provide every registered overseas entity with a notice confirming registration, which will include the entity’s registration ID number. So, for example, where an overseas entity is borrowing to finance the purchase of a property, a lender is likely to require a borrower to provide a certified copy of this notice.

Notwithstanding the exceptions which could benefit a lender needing to enforce its security (described above), a lender may also want the overseas entity to provide undertakings to comply with its ongoing obligations under the regime.

Next steps

We will continue to keep a close eye on this topic. We will provide further updates as the draft legislation progresses and make sure that you’re fully briefed well before the expected 2021 implementation date.

If you have any questions as to how the legislation might affect you or your clients we would be delighted to help. Please contact Archie Campbell or your usual contact at Stephenson Harwood. 

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KEY CONTACT

Archie Campbell

Archie Campbell
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T:  +44 20 7809 2377 M:  Email Archie | Vcard Office:  London

Paul Hayward-Surry

Paul Hayward-Surry
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James Linforth
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Jayesh Patel
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Jonathan Proctor
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George Vaughton

George Vaughton
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