Companies Act 2006 (Amendment of Part 25) Regulations 2013
Lord Popat
That the Grand Committee do report to the House that it has considered the Companies Act 2006 (Amendment of Part 25) Regulations 2013.
Relevant document: 16th Report from the Joint Committee on Statutory Instruments
Lord Popat
My Lords, I am grateful for the opportunity to debate the proposed regulations to reform and modernise the system for the registration of company charges. For many years I worked as a business and finance consultant, and I cannot stress enough the importance of a clear, transparent system that enables companies to access the finance they need and lenders to provide finance with confidence. This is particularly important in the current economic climate.
These regulations intend to modernise the system for the registration of company charges—a system which is more than 100 years old. The changes to this system of registration are intended to retain the fundamental principle of the current system, which is internationally well regarded, while making those critical changes that will allow this system to continue in a way that is effective and efficient.
Secured lending is vital to support economic growth. It allows companies to access the finance they need to grow and enables lenders to invest in a company with greater confidence. In fact, the World Bank, in its report Doing Business 2012: Doing Business in a More Transparent World, considered the laws relating to collateral to be crucial to supporting economic growth and transparency. The statutory schemes for registration of company charges contribute to the UK being rated equal first, with Malaysia, in the section on getting credit.
In the early 1900s, a system was conceived which required companies to register debt secured against their assets. This allowed lenders to see clearly whether assets were already encumbered and to offer finance with confidence. The fundamentals of this system remain and have been the subject of further reviews and consultations, including the Crowther report in 1970, the Diamond report in 1989, the 2001 recommendations of the Company Law Review and the most recent consultation led by the Department for Business, Innovation and Skills in 2010 on reforms to the system, based on the considerations of these earlier reviews.
Over the past 10 years there has been ongoing engagement with legal practitioners and academics as well as credit reference agencies and investors to determine what reforms should be made to this system. These stakeholders have generously offered their time and expertise to support our reforms and to test out how these may work in practice. This is vital in preventing unintended consequences later on.
The proposed system will deliver benefits to business of around £21 million every year through a reduction in unnecessary bureaucracy as well as a simplification and modernisation of the system.
I will now take a few moments to outline the key elements of the reforms. First, we have amended the regulations governing the system for the registration of company charges to take advantage of modern technology. Companies, legal advisers and accountants will now be able to submit the charge for filing electronically and will be able to pay their £13 charge electronically too. This has the twin benefit of reducing the time and bureaucracy of filing a charge, while also allowing the registrar to operate a more efficient system.
Secondly, the regulations set out a far simpler model for determining whether a charge is registrable. Lenders and companies want to be able to register charges so that they can invest or attract investment, but the complex list of types of registrable charges had led to confusion and wasted effort in simply ascertaining whether a charge could be registered. The new regulations place the onus rightly on the presenters of the charge to make this commercial decision, subject to a few clear exemptions where the registration of the charge was not in any way useful to the public, investors or companies.
Thirdly, following on from my previous point, the system recognises that the incentive on investors is to register their charge rather than risk it being void against a liquidator or administrator. In the rare instances where a company itself registers the charge, it is commonplace for investors to require the company to submit the charge for registration as part of the financial agreement. The existing criminal sanction is therefore entirely unnecessary and these regulations repeal it.
Fourthly, the system will deliver far greater transparency around financial arrangements as, due to the technological advances, the whole charge instrument or deed will now be available electronically in addition to the summary information. Of course, the regulations also include sensible safeguards against fraud and allow personal information, bank account numbers and signatures to be redacted.
Finally, the proposals will for the first time create a system that fits around the different property laws and processes that operate in different parts of the United Kingdom. Many lenders and companies operate across the UK and now they can take the same approach to the registration of the charges, regardless of where they are. I hope that nobles Lords will support these important reforms.
Lord Stevenson of Balmacara
My Lords, I hope it is in no way a measure of the interesting comments made by the Minister in his introduction that the only other noble Lord who was present has fled quickly from the room and is therefore not in a position to respond to his kind invitation to speak, but that leaves the burden on me. I appreciate the way in which he introduced this change and want to make it clear from the start that we broadly welcome it. It is a good idea, but possibly rather later than perhaps it could have been, as the Minister hinted at in his introductory comments.
This has obviously had a troubled background in the sense that, as we discovered, the original consultation was in March 2010 and had to be reissued for further consultation a couple of years later before the department was able to come forward with a modified proposal. Therefore, my first question to the Minister is whether we ended up with a situation in which we have the least worst solution rather than the best solution. Just to amplify that, most people seem to want—and the majority of the responses within the impact assessment suggest this—a fully operable system, with all the detail. There were, however, a significant number of people who felt that that was going to be burdensome and difficult, so the compromise is neither one thing nor the other. I would be grateful if he could make a few remarks to illustrate what he thinks is the end result and how it meets the benefits specified in the documentation.
Secondly, I was having difficulty following the figures, possibly because there were two different consultations and two different levels of issuing comment. The summary document which accompanies the impact statement says that the impact on businesses is expected to be a reduction in the burden on those filing charges, generating a net savings of £21 million a year. However, the impact assessment itself says that the net cost to business will be about £21 million as well; I may have misread that, but I would like a comment on that from the Minister. It seems like a modest reduction, given the amount of effort that goes into registering charges. As the Minister said, this is at the heart of all business transactions involving inter-business acquisitions and sales; any lending going on will always require some sort of assessment of the overall capacity of the organisation to which it is being lent. Therefore, we are saying that this is a very modest change.
However, costs are not symmetrically based; they will fall on those who have to prepare and generate the new input documents which the document says will be recouped through efficiency savings over an estimated period of four years, but no evidence about that is given. I just want to be sure that these are really modest savings and would like it on the record that that is correct.
My third point is about the costs burden arising from moving to a new electronic system. We are all sceptical about the claims that are often made for these systems but this is by all accounts a rather simple one. It is a register that is not capable of doing very much more than simply holding data. Can the noble Lord give a bit of context for how much testing of this new register has been done and whether he is confident that it will be up and running and ready? Quite a lot of time has been spent preparing for it, after all, so I hope that it will be but I would like to be confident.
Finally, I trained as an accountant in Scotland, where one of the things that was drummed into me early on in my studies was the difference between the charging register system in Scotland and that in the rest of the country. In Scotland, it is not necessary to register all charges. There is very little mention of that in the Explanatory Memorandum while there is some comment on it in the impact statement. It would be for the benefit of the Committee if the Minister could simply mention what exemptions there are for Scotland and how they will be accommodated given that the overall aspiration of this move, which I do not dissent from, is to try to provide a simple system for the whole of the country despite the differences in responsibilities between the various territories.
Lord Popat
I thank the noble Lord for a number of the issues that he has raised on these regulations. First, let me explain the cost versus the benefits side. Currently, to register a charge the fee is only £13 but there is a huge cost to the businesses and companies when it comes to dealing with a large number of forms through their accountants, solicitors or agents for registration. Electronic transmission will be much easier, as when we do our tax returns and VAT returns electronically. A company can in fact register electronically a director or company secretary. Having business knowledge and a business background, I suppose that this is something that should have been done many years ago.
This is a welcome move for a number of organisations, in particular credit reference agencies, lawyers and accountants but, most importantly, the lenders themselves. It gives a lot of security to lenders because we can register a charge electronically within one day. Currently, the system takes as long as eight days. Lenders will be pretty well secured on day one of release of the money to the companies to which they are lending, so it is a much safer system than we have now.
In the old days, I remember that we used to rush to Companies House in London. Now, Companies House is based in Cardiff and there is also a 21-day time limit, so in that respect the cost saving to the companies is quite huge. Even if it takes roughly half an hour for the lawyers and their secretaries to do the necessary paperwork for company registration, that half an hour is charged as a cost to the client so that will be a saving. That is what the £21 million saving is all about. With regard to the cost of putting it in practice, which is something like £750,000, if you can imagine the time saved by Companies House staff in Cardiff in processing manual applications compared to electronic applications, I would guess that that £750,000 will be recouped in four years’ time. A lot depends on the number of applications going through electronically, which is currently about 90,000. If the numbers go up, recouping the cost will probably take less than four years.
This was taken to be a compromise on future lenders’ requirements and to simplify the particular archive held in their own system. I will explain what I mean by that. When their auditors come, companies are required to do company registration, with its charges. The auditors can actually get information electronically and that screen saves audit fees for the companies, so there is that advantage too. I am afraid that it was not a compromise.
On why this took so long, we obviously had a number of reports on this and took the necessary time, as it is a complex area. We engaged all the stakeholders, who are now largely satisfied, including the Law Society and firms of chartered accountants.
With regard to Scottish companies, this provision will apply to the United Kingdom throughout. The system is not different for Scotland in this respect. I believe that I have answered most of the noble Lord’s questions.
Lord Stevenson of Balmacara
My Lords, I do not think that the Minister quite got the grasp of what I was saying about Scotland. Scottish law does not require the automatic registration of all charges. In England and Wales you have to register them automatically. Therefore, given the Government’s drive for simplicity, I was asking whether the Minister could say a little more about how there can be a very simple and universal system, yet also allow Scotland the discretion to not register where that is appropriate. For instance, unincorporated companies do not need to register charges in Scotland.
While I am on my feet, I might add that the Minister did not answer my question about whether the system had been tested and to what extent he felt that it was fit for purpose and ready to implement.
Lord Popat
The draft form has been tested with the stakeholders and other learned registrars and the system works well.
The Deputy Chairman of Committees
My Lords, I think that the clerk is indicating, very sensibly, that we might need a moment to pause for officials to change but if that is not necessary, we will proceed.