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Small Business, Enterprise and Employment Act 2015

Schedule 1B: Enforcement of disclosure requirements

538.Schedule 1B is intended to incentivise compliance with the requirements of Part 21A. It provides a means other than the threat of criminal prosecution by which companies may encourage persons to respond to notices issued under sections 790D or 790E. This may be particularly helpful where those in receipt of the notice are outside the UK.

539.Provisions are loosely based on the provisions in section 794 of CA 2006 (‘Notice requiring information: order imposing restrictions on shares’) and subsequent. However, rather than require companies to apply to the court in order to apply restrictions, the company may itself apply the restrictions subject to the requirements detailed below. This is intended to reduce the administrative cost and burden for the company and the court, whilst maintaining due regard to the rights of individuals and third parties.

Right to issue restrictions notice

540.Paragraph 1 provides that if a company serves notice on a person with a relevant interest (see paragraph 2, below) under section 790D or 790E and that person fails to comply within the specified timeframe, the company may give the person a warning notice that they intend to issue the person with a restrictions notice. A restrictions notice may be served one month after a warning notice has been given if the person has not complied with the section 790D or 790E notice and no valid reason has been provided as to why they have not done so.

541.The company must have regard to the rights of third parties in respect of the relevant interest in deciding whether to issue a restrictions notice (sub-paragraph (6)).

Relevant interests

542.“Relevant interest” refers to any shares or rights held by the person on whom notice has been served (paragraph 2). Part 3 of Schedule 1A applies to determine whether a person has a relevant interest. The exception is where shares are treated under paragraph 19 or 20 of Schedule 1A as held by a person other than the holder of the share or right. For the purpose of Schedule 1B, both the holder and the controller of the share or right are considered to have a relevant interest.

Effect of restrictions notice

543.Paragraph 3(1) sets out the effect of a restrictions notice issued under paragraph 1, and circumstances in which the restrictions do not apply. Interests subject to restrictions may not be transferred and no rights may be exercised or shares issued in right of that interest. The company may not pay any sums due in respect of the interest other than in a liquidation.

Protection of third party rights

544.Paragraph 4 provides that following application by any person aggrieved that a restrictions notice issued by the company under paragraph 1 unfairly affects the rights of third parties in respect of the interest subject to restrictions, the court may give a direction that certain acts do not constitute a breach of the restrictions. The direction is given by the court for the purpose of protecting the third party rights in question and is subject to such terms as the court thinks fit.

Breach of restrictions

545.Paragraph 5 specifies the actions that constitute offences in relation to an interest subject to restrictions. These include where a person who knows their interest to be subject to restrictions fails to tell any person with the right to vote in respect of that interest of that fact (unless they know the person to be aware of that fact) (sub-paragraph (3)) and where a person enters into an agreement in respect of the interest that is void, knowing that to be the case (sub-paragraph (4)).

546.It is also an offence, committed by the company and every officer in default, for a company to issue shares in contravention of a restrictions notice (paragraph 6).

547.Offences under paragraph 5 and 6 are triable either way and punishable by a fine (paragraph 7). These offences may not however be prosecuted without the consent of the Secretary of State (see section 1126 CA 2006, ‘Consents required for certain prosecutions’, as amended by paragraph 9 of Schedule 3). This is based on the precedent for equivalent offences in Part 22 of CA 2006 (see section 798, ‘Penalty for attempted evasion of restrictions’).

Relaxation of restrictions

548.Under paragraph 8, a person aggrieved may apply to the court for the restrictions to be lifted. The court may only do so if the relevant facts about the interest have been disclosed without any person having gained an unfair advantage or if the interest is to be sold (see paragraph 9). Sub-paragraphs (4) and (5) make further provision in the case of shares to be sold.

Orders for sale

549.Paragraphs 9 and 10 set out the procedure by which shares subject to restrictions may be sold. Application to the court to do so may only be made by the company in question. Provision is made, where shares are sold, for the proceeds of the sale (less costs) to be paid into the court for the benefit of persons beneficially interested in the relevant interest, so that such persons may apply to the court to have the proceeds paid to them.

Company’s power to withdraw restrictions notice

550.A company must itself withdraw the restrictions imposed if it is satisfied that there is a valid reason to justify the person’s failure to comply with the notice; or if the relevant information in respect of the notice is provided; or if it discovers that there is an unfair impact on third parties in respect of the interest subject to restrictions (paragraph 11). This provision does not prevent the company from withdrawing the restrictions notice in other circumstances.

Supplementary provisions

551.Paragraph 12 provides that the Secretary of State may make regulations under the negative resolution procedure in relation to the issuing and withdrawing of restrictions notices. In particular, regulations may prescribe the form and content of warning and restrictions notices, and the manner in which they must be given.

552.They may also make provision in respect of the factors constituting a “valid reason” for failure to comply with a notice and what happens to matters pending at the point restrictions are lifted (for example, if a dividend is due to be paid but has not been issued in respect of that interest).

Offences for failing to comply with notices

553.Paragraph 13 provides that is an offence for a person (including the officers of the entity in the case of legal persons) to whom a notice is addressed under section 790D or 790E to fail to comply with the notice or to knowingly or recklessly make a false statement.

554.The offence does not however apply if the person can prove that the requirement was frivolous or vexatious (paragraph 13(3)). The offence is triable either way, punishable by imprisonment or a fine. This is based on the offence provision in section 795 of CA 2006 (‘Notice requiring information: offences’), which applies to persons failing to comply with notices issued under section 793 (‘Notice by company requiring information about interests in its shares’). The offences are considered sufficiently similar such that the same penalty should apply.

Offences for failing to provide information

555.Paragraph 14 provides that the penalty for a person failing to comply with a duty under section 790G or 790H or knowingly or recklessly making a false statement in respect of that duty is the same as that under paragraph 13 (see above). It is considered that the offences are sufficiently similar such that the same penalty should apply.

556.The offence will not apply to a person who could not reasonably have known that they were a registrable person or RLE in relation to the company or that a relevant change had occurred (see sections 790G(1)(b) and 790H(1)(c)).

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