UK company law has historically imposed few restrictions on allowing companies or artificial legal persons to act as directors of other companies. These are commonly known as 'corporate directors'.
As part of the Government’s drive to encourage transparency, a ban on the use of corporate directors is due to come into force as part of The Small Business, Enterprise and Employment Act 2015.
It was expected that from October 2016, all company directors would have to be 'natural persons’ (i.e. human beings, and not artificial legal persons such as companies), with the new rules prohibiting the appointment of corporate directors.
However, the Government has announced a delay to the implementation date. No guidance has been given as to when we are likely to see the commencement of the prohibition but the Government has stated that it still intends to follow through with the restriction.
Such corporate directors are appointed for a number of reasons, including:
- in large groups of companies, the “head office” may use one company within the group to act as a director of subsidiaries within the group. This avoids having to change the identity of the director and having to make multiple filings with the Registrar of Companies if an individual (such as the Chief Executive Officer) with oversight of the group changes jobs or leaves the group.
- a wish to place a legal barrier between the individual(s) managing the company and possible legal duties imposed on the directors under UK law, arising for example in relation to environmental matters or insolvency issues. It should be noted that this device may not be effective, but is sometimes used anyway.
Drive for increased transparency
UK company law has been adopting a policy of increased transparency for some time, reflecting concerns common among several OECD and G20 countries regarding disclosure of company ownership and control.
Impending change in the rules
Forthcoming changes to the UK Companies Act will require all directors of companies incorporated in the UK (including England, Wales, Scotland and Northern Ireland) to be ‘natural persons’ and not companies.
An appointment made in contravention of this prohibition will be of no effect. It will also be a criminal offence to make such an appointment.
The new legislation gives a transition period for companies with existing corporate directors. After one year of the new rules coming into force, any remaining corporate directors will cease to be directors.
The UK Government will have power to make exceptions to the general requirement that directors must be individuals, but no such exceptions are set out in the legislation passed so far. However, the Government has said it is considering exceptions for group structures which include either a large listed company or a large private company, for charities and for corporate trustees.
Another exception proposed is a company could appoint a corporate director if that corporate directors has all natural persons as its directors as long as those directors’ details were contained in a publicly maintained accessible register.
The Government intends to publish draft regulations detailing the exceptions “as soon as it is available”.
Until such information is available, all UK-registered companies should review the composition of their boards of directors, and consider making arrangements to replace any corporate directors with natural persons.
Further information and legal support
If you would like more information about this development, please do not hesitate to contact any member of our Corporate Team.
(This article was initially written in May 2015 and updated in August 2015 after the UK Government confirmed that the implementation of this law would be delayed until October 2016. Most recently, the article was updated in October 2016 after the Government confirmed it intends to publish draft regulations detailing the exceptions “as soon as it is available”. )
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