Implications for lenders when taking security over shares in a Scottish company

17th August 2017

The Department for Business, Energy & Industrial Strategy (“BEIS”) has clarified that a person taking security over shares in a Scottish Company must appear on the company’s Register of People with Significant Control (“PSC Register”), together with the shareholder.

By way of recap, from 6 April 2016 all Companies and LLP’s have been required to create and maintain a PSC Register. The purpose of this being to enhance transparency by disclosing to the public through the Company’s House register, any individual who holds significant control in a Company (“PSCs”) and, in the event of corporate shareholders, registrable relevant legal entities (“RLE’s”). Failure by a company/ LLP to comply with its duty to create and maintain a PSC register is a criminal offence by the company/LLP and every officer in default and liable to imprisonment, a fine, or both.

The detailed rules relating to when a person is considered a PSC are contained in the Companies Act 2006 (“CA 2006”). In brief, a PSC is an individual who satisfies one or more of the following conditions;

  1. holds, directly or indirectly, more than 25% of the shares in the company (Ownership of shares).
  2. holds, directly or indirectly, more than 25% of the voting rights the company (Ownership of voting rights).
  3. holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the company (Ownership of right to appoint or remove directors).
  4. has the right to exercise, or actually exercises, significant influence or control over the company (Significant influence or control)
  5. In the event of Trusts/Partnerships etc.:
  • the trustees of a trust or the members of a firm which is not considered a legal person under their governing law, meet any of the above conditions in respect of a Company, and
  • they have the right to exercise, or actually exercises, significant influence or control over the activities of that trust or firm.

Application of the above may seem relatively straightforward, even if it is burdensome for small, family run businesses without complex structures. However, there are additional carve-outs provided, meaning that not all of those meeting the above criteria are “registerable”. These carve-outs are limited to individuals who hold an interest in a Company indirectly through their interest in another Company.

There has been much uncertainty in the Scottish securities market as to whether the available carve-out applies where a lender takes security over shares in a Scottish company. Unlike English law, Scottish law provides that where shares are provided as security, a transfer of title must take place even though the shareholder directs the lender in how to exercise the rights attaching to those shares.

BEIS has provided clarity to the Scottish markets by confirming that a lender, in such circumstances, is under a statutory duty to notify the company whose shares have been taken as security. This is because the lender, together with the borrower, must appear on the PSC Register. Notification must be provided to the company within one month from the day the lender becomes a registrable person and failure to do so would be a criminal offence. It follows then, that the carve-out does not apply where shares in a Scottish company have been used as security.

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