The Department for Business innovation & Skills (‘BIS’) is currently seeking further views on proposed amendments to the system of registering charges against limited companies and in particular the possibility of the charge document itself being made available on the public register.

Generally, a limited company is required to register a charge at Companies House within 21 days of the charge being granted. The consequences of failing to do so are serious – it is actually a criminal offence to fail to register a charge within the prescribed period (a little appreciated fact, which might make some directors slightly nervous). In practice though, the most serious consequence is that the charge is void against a liquidator/administrator/creditor of the company unless it is properly registered. That and the chargeholder concerned is highly unlikely to tolerate the failure to register for very long and may in some circumstances threaten to withdraw the facilities secured by the charge.

Some commentators have argued that the proposed reforms will save significant amounts of time (and in turn cost) for those tasked with registering charges. At present a limited company is required to complete a form “MG01” in order to register a charge. Form MG01 contains certain specified information: details of the company, the chargeholder, the sums secured, the assets charged, date of the charge and whether any commission is payable in connection with the charge, etc. Have some sympathy with the commentators though – it can be a time consuming process to duplicate information that is already contained in the charge and to reproduce it in a format which fits with a Form MG01 (it is also true however that a number of lenders produce their own pre-printed forms MG01 these days – a victory for common sense all round).

Under the proposals for reform the charge itself would be sent to Companies House for registration with a much slimmed down form MG01 (no getting away from the form then) with more limited details (including matters such as whether the charge has been redacted in any way to remove any confidential or sensitive information). The charge document would then be made available on the public register for inspection and the public would have a much better picture as to what exactly is covered by the charge rather than a snapshot as is currently the case (although in fairness most forms MG01 are pretty detailed these days). While it is argued that this gives the public a more complete picture and leads to efficiencies, if there is widespread or significant redacting of charge particulars this could in fact make examination of charges far more complicated – potentially an interested party would have to look at the MG01, the redacted copy of the charge and the full copy itself to get a complete picture.

In addition the criminal sanction for failure to register is to be abolished and there would no longer be a statutory requirement to register the charge. However the charge will still continue to be void as against creditors if it is not properly delivered within the relevant time limits. In practice therefore, while there may be no statutory obligation to register, registration is still going to be mandatory as a result of lenders’ standard requirements.

A further part of the proposed reforms is to look at whether evidence will now be required in order to substantiate satisfaction of a charge/confirmation that the charge has been discharged. This is currently undertaken by companies filing a form MG02 – something which the lender effectively has no control over and which could easily lend itself to fraud for those so minded. There is a suggestion that evidence (e.g. in the form of a deed of release executed by the lender) might be needed in the future.

At present the only safeguard against fraud is that the person filing the form MG02 commits an offence of making a false statement if the charge has not been released/satisfied – which for those committed to fraud is hardly much of a safeguard. The downside to this reform however would be that lenders would have to provide evidence of discharge, increasing the burden on them and possibly adding to transactional delays as well. There is a suggested halfway house – Companies either have to provide evidence of release or explain why there is none available – in practice most prudent advisers acting on behalf of those acquiring assets from a company subject to a charge (or taking a new charge over a company’s assets) in those circumstances will probably still insist on evidence being produced in the absence of a convincing explanation to the contrary.

The 21 day time limit for registration will still continue to apply however and a court application will generally still be necessary to extend this time limit and to correct certain errors in the particulars delivered. BIS are not consulting on whether this time limit should be changed. The time limit is draconian given the problems faced by lenders when charges are not properly registered and it is a missed opportunity to look at this again.

The possibility of electronic filing is to be reviewed as well – a welcome step in the right direction and which helps to mitigate against some of the problems arising out of the 21 day time limit for registration.

Interestingly it may be the case that “negative pledge” provisions (a clause in a charge preventing a company from granting further charges without the chargeholder’s consent) might have to be disclosed on the proposed new particulars – which is not currently the case and again is to be welcomed.

Finally, where real property is concerned dual registration at the Land Registry will still be required – although there are hints that this too may be looked at again in due course.

The draft regulations implementing proposed reforms should be available in early 2012, in the meantime BIS is inviting further comments until 30th September 2011

For more information please contact Michael Williams on 01792 529685 or email michael.williams@jcpsolicitors.co.uk