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The UK’s overseas entity registration regime (Regime) came into force in 2022.
It requires any overseas entity – a legal entity governed by a non-UK law (OE), to be registered at Companies House in England & Wales if it:
owns freehold land or leasehold land (with an original term of over 7 years) situated in England & Wales (Land); or
register itself as owner of Land at HM Land Registry (HMLR);
grant a lease of registered land with a term of over 7 years; or
grant a legal charge over Land.
Limited exceptions apply and similar regimes apply in Scotland and Northern Ireland.
The Companies House Register of Overseas Entities (Register) turns one year old on 1 August 2023, but before reaching for any birthday cake, OEs who are registered on the Register will need to turn their attention to an important ongoing requirement. Failure to do so, could create problems for lenders.
looks at what the ongoing requirement is;
explains when it needs to be complied with;
explores why non-compliance by OEs could be problematic for lenders; and
provides practical tips to help lenders navigate this topic safely.
The ongoing requirement for OEs: the updating duty
When an OE applies for registration at Companies House, it must among other things, take reasonable steps to identify its beneficial owners and disclose information about its beneficial owners or managing officers.
However, the OE’s task does not stop there. Once registered, OEs have a duty to periodically check that the day one information provided remains correct and up to date and if it has changed, they must update it (the updating duty). Changes may also need to be verified using a UK regulated agent and in any event, as part of the updating duty, OEs must provide an update statement to Companies House even if nothing has changed.
When does an OE have to comply with the updating duty?
An update must be given to Companies House within 14 days of the end of every 12-month period following the OE’s initial registration date. However, an OE can reduce that to a shorter period by notifying Companies House. OEs who registered in the early days of the Register going live should be thinking about their update requirements now.
In its guidance, File an overseas entity update statement issued on 28 June 2023, Companies House reiterated the importance of the updating duty by saying that an ‘overseas entity ID will become invalid until you bring your record up to date and file your update statement.’
Non-compliance: issues for lenders
The potential problems for lenders arise from the fact that an OE will lose its registered status at Companies House if it fails to comply with the updating duty.
In turn, where registered status is lost, HMLR could refuse to register transactions involving an OE, including security registrations.
Where transactions cannot be registered at HMLR, there are knock-on consequences that lenders need to be aware of which could include the following:
If an OE cannot register its purchase of Land which is funded by a loan, any dealings with that Land (for example, to realise value which is intended to repay a lender’s facilities, or to provide robust security over it) could be hampered as the OE will not be able to establish status as registered legal owner. This is important for lenders not only for day one acquisitions that they fund, but also where an OE acquires Land during the course of the life of a facility (for example, under a permitted acquisition regime).
Taking security over Land:
HMLR will not register a lender’s legal charge over Land if the OE did not have registered status on the Register when it granted the charge. Non-registration may in turn create other issues; for example where security has been granted over the same Land to another secured creditor, non-registration may create priority issues which dilute the potential enforcement proceeds available to the lender. Lenders need to be aware of this irrespective of whether they are funding a Land acquisition, or the OE already owns the Land in question at the time of funding/taking security.
Permitted disposal proceeds and security releases:
If an OE sells property under a permitted disposal regime in a facility agreement or otherwise with the lender’s consent, but fails to have registered status at the time of the disposal, HMLR could refuse to register the sale. If completion mechanics are not carefully thought through, this could result in the sale proceeds being withheld by the purchaser and if the lender is expecting those proceeds to prepay or repay its position, it could find itself with empty pockets. Therefore, lenders need to ensure they do not inadvertently release security where the OE has lost its registered status, to avoid finding themselves in both an unpaid and unsecured position. Lenders should also bear this in mind on any final repayment and release of security where the exit from the facility involves a disposal of Land.
Borrowers acquiring properties from seller OEs:
If a borrower acquires Land from a seller who is an OE, then irrespective of whether the borrower itself is an OE, the seller will need to have registered status as at the date of the sale. If the OE seller has failed to comply with its updating duty at the time of the sale, HMLR could block the registration of that sale and in turn, a lender may not be able to register the security it has taken in connection with funding that purchase.
Enforcement of security and enforcement options:
Lenders may typically enforce standalone legal charges via the appointment of a receiver, in turn exercising their power of sale or leasing. An OE’s lack of registered status at the time that power is exercised should not affect the ability to register that transaction. However, if a lender wishes to enforce a registered legal charge granted by an OE via a different process (e.g. by putting the OE into administration where that is an available and viable option), if the OE who granted the charge does not have registered status at the time of the enforcement sale, HMLR could refuse to register that sale.
Whilst there are some limited exceptions to HMLR’s restrictions, it is important to stress that these are typically going to be the exception rather than the norm. For example, in theory, innocent harmed parties may be able to look to the courts for help where things go wrong, but there is no guarantee of that. Neither is this a satisfactory situation to be in for any lender requiring the certainty that its borrower can get adequate title to Land and that it can protect its security.
Whilst a feature of the Regime is that OEs will only lose registered status until such time as they remedy their failure to comply with the updating duty, in practice that will be of little help to lenders on time sensitive transactions, particularly if OEs need to update and verify new information. Additionally, typical power of attorney type powers in security documents which allow lenders to step into the security provider’s shoes to protect their security interests are likely to be of no practical use.
So, given the potential issues at play, how can lenders protect themselves?
Practical tips for lenders
For new facilities where a lender is funding a registered OE’s Land purchase and/or taking security over Land from an OE, the following are worth bearing in mind.
Check when the OE’s ‘Annual Statement Date’ is on the Register. This should state the ‘due date’ for its next annual statement. Also check the Register to see if the OE has shortened its updating period to less than 12 months as this will impact the date on which the update statement is due.
If the due date is anticipated to coincide or overlap with completion of the underlying facilities or purchase and the update has not yet taken place, check that the OE is processing its update.
Check the Register says the OE has complied with its latest updating duty immediately before completion and drawdown. Also check there is nothing else on the Register that suggests that the OE has lost its registered status or applied for removal from the Register. It is also worth including a condition precedent in the facility agreement to this effect.
If the borrower is acquiring a property from an OE, check the OE seller has complied with its updating duty immediately before the sale is completed/funds are released and again, consider a condition precedent to that effect. Sale contracts should contain similar conditions to mitigate the risk of any oversight.
Where lenders have existing facilities, the two main areas to watch out for are dealings of Land (whether a disposal, lease or acquisition and any related releases or new security) and enforcement of security.
Whilst undertakings in facility agreements that require a registered OE to comply with all laws (or similar representations and warranties) should help to focus the mind of a registered OE to comply with the updating duty and avoid HMLR restrictions, if the OE fails to do so, a lender could be left in a tricky position.
Again, the safest option for lenders is to engage early in all cases and ensure that adequate conditions precedent exist which allow the lender to check that the OE has the necessary standing on the Register for any post-day one of the facility transactions.
The updating duty is set to become more complicated
Under the Economic Crime and Corporate Transparency Bill currently being scrutinised by the UK Parliament, it has been proposed that the updating duty will be extended to also require a registered OE to update information in the following two circumstances:
if it becomes aware that relevant information previously provided to Companies House has changed. Updated information must be provided as soon as practicable and in any event, within 14 days of the OE becoming aware; and
prior to any acquisition or disposal of Land, an update must be given no more than 14 days prior to that acquisition or disposal.
The proposals will also allow Companies House to make information requests (for example to check the accuracy of information delivered) which OEs will also have to comply with (information duty).
Failure to comply with either or both of the extended updating duty or the information duty would also mean that an OE would lose its registered status until such time as it remedied the breach.
Whilst final confirmation of these changes and an implementation date are awaited (which is unlikely to take place before early September), the UK government’s intention appears to be clear – to seek transparency from OEs about their ownership structures at all material times.
Therefore, where an OE is already on the Register, lenders should check that the OE’s registration status has not been compromised at all relevant inflexion points throughout the financing life cycle.
To contact Stephan, or read more about his practice, click here.
Important: Information in this article is for information purposes only. It is not legal advice and should not be read or taken as such and may not be relied on as such.
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