The Register of Overseas Entities one year on – a happy birthday for lenders?

Introduction

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

• wishes to:

• register itself as owner of Land at HM Land Registry (HMLR);
• transfer Land;
• 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.

This article:

• 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:

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

New facilities

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.

Existing facilities

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.

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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.