Companies House consultation: Opportunity to strengthen fraud defences

13 August 2019

With economic crime and fraud never far from the headlines, Companies House – the central register of company information in the UK, and the body which incorporates and dissolves limited companies – is a key part of the business landscape. Insolvency practitioners, who are often called on to investigate potential fraud and other forms of misfeasance following the insolvency of a company, make thorough use of the Companies House register to build up a picture of directors’ track records, and to follow flows of money through annual accounts.

The recently-closed Department for Business consultation on enhancing the role of Companies House, and increasing the transparency of UK corporate entities – Corporate Transparency and Register Reform – affords the Government an opportunity to improve Companies House processes, for the future betterment of the UK’s corporate governance and anti-fraud framework.

Read R3’s response to the Companies House consultation (PDF)

Director ID checks are needed

The profession, and R3, has been concerned for some time about the relative laxness of some of the processes central to Companies House’s operations, especially those around verifying that directors are who they say they are. R3 has long called for director ID verification to be introduced, for example, and we think that some relatively simple reforms to strengthen the role and powers of Companies House could help to improve corporate governance, prevent and deter fraud, enable existing frauds to be identified and disrupted, and increase confidence in UK plc.

The current lack of director ID verification means that a company director who wishes to obscure their involvement with other companies can, without too much trouble, enter a slightly different version of their name onto the Companies House register – for example, by leaving off their first name and using a middle name instead. R3’s members also say they have come across UK companies with only overseas-registered corporates listed as directors, beneficial owners ‘parking’ unlawfully obtained personal assets into UK companies with friends or underage children named as directors, and the widespread use of individuals ‘fronting’ for owners or controlling directors.

The checks performed when opening a normal bank account are at present more rigorous than those carried out when registering a new company. Banks rightly recognise that not ‘knowing their customer’ can lead to misuse of financial systems to facilitate fraud. The protections offered to directors of limited liability companies by the corporate veil are powerful, and directors should be subject to a correspondingly greater degree of scrutiny. The implementation of an ID verification system is unlikely to discourage genuine entrepreneurship, but would be a significant deterrent to fraud, and would make a significant positive difference when investigating bad behaviour.

There is also a risk that directors who have previously been disqualified may continue to operate behind the scenes, as de facto directors, shadow directors, or ‘advisors’ to a company. Insolvency practitioners frequently see disqualified directors contributing to successive business failures or fraudulent activity, or breaching the terms of their disqualification by acting as shadow directors and ‘advisors’. While we recognise that directors should not be discouraged from ‘trying again’ in the spirit of the UK’s entrepreneurial culture, it is important that safeguards are put in place to protect against directors who are repeatedly acting improperly. Companies should be required to state on their confirmation statement (CS01) to Companies House the names of all directors ‘howsoever described’ rather than just the appointed directors – we hope that the Government listens.

We would also like Companies House to play a more proactive role in safeguarding the UK’s corporate governance framework, by being granted greater discretion to query information, and to ask for evidence to support the veracity of information submitted to it. Making the information held on the Companies House register as robust and accurate as possible can only help legitimate businesses, while making it harder for fraudulent operators to hoodwink good-faith suppliers and customers.

Dissolved companies – parity should be introduced

Another key area for action is the use of company dissolutions (as opposed to a solvent or insolvent liquidation process) to avoid scrutiny and liabilities. The Government has proposed that the conduct of directors in a dissolved company should be brought within the scope of the Secretary of State’s investigatory powers, which we think is a sensible move, provided that the Insolvency Service has sufficient resources to cope with the extra investigations that will be sparked as a result.

There are a number of alternative ways in which the Government could make it harder to use dissolutions as a means of avoiding scrutiny, including making the restoration of a dissolved company to the Companies House register an administrative process rather than a court-based process.

At the moment, there is a significant asymmetry between the cost to a director of avoiding scrutiny and the cost to the insolvency profession and creditors of putting things right. In many instances, restoration of a dissolved corporate requires an application to court. This can be costly in terms of both time and money, and thus all too easily allows directors to create a significant barrier to investigating their conduct. While there is opportunity to object to a dissolution and there are sanctions associated with misuse of the dissolution process or the failure to file accounts, R3 members report that these do not stop directors keen to avoid the spotlight.

To resolve this issue, the Government should remove this asymmetry, and the restoration of a company should, in all instances, be an administrative process. This could be triggered by a company director or creditor once suitable requirements have been met (such as producing evidence of an unpaid debt, or a commitment to petition for the winding-up of the restored company), and any fee for doing so should be similar to the cost of dissolving a company (currently just £10). Any restoration process would need to be clear about what would happen to a company once restored.

Conclusion

Introducing basic steps to protect the integrity of the Companies House database can only be a sensible move for the Government, as R3’s response to the consultation makes clear. We hope that the Government listens, and that its response to the consultation sets out new measures and a clear timetable to implement them, in order to boost anti-fraud efforts, not least on the part of the insolvency and restructuring profession.