Corporate directors – the final curtain?

Changes to the law regarding use of corporate directors are planned in a bill that is currently going through parliament which will introduce a ban on corporate directors – subject to certain exceptions.

There are cases where it is perfectly legitimate to use a corporate director and the classic example is where a parent company appoints a corporate director to the board of its subsidiaries. This gives the parent company flexibility in that different people can represent the corporate director at board meetings. However the system is open to abuse in other cases and the proposed ban is designed to stop these. The abuse stems from the fact that companies are not required to provide information on the beneficial owners of corporate directors and so individuals can appoint corporate directors to hide the fact that they control a company and then use the company to help them carry out illegal activities. This can make it next to impossible to identify the real controller of a company, and in cases of infringement decreases the likelihood of a successful outcome for law enforcement and tax authorities, especially where the corporate director is an offshore company.

As things stand every company has to have at least one director who is a “natural person” (i.e. a human being) and this requirement was introduced in the Companies Act 2006. The changes (being introduced by the Small Business Enterprise and Employment Bill) will bring in a blanket prohibition on corporate directors (subject to a transitional 12 month period to allow existing appointments to be replaced), but the legislation would allow the Secretary of State to provide for exceptions to the prohibition where use of corporate directors is perceived either to be of value or represents a relatively low risk.

Consultation on the scope of the exceptions are underway and possible exceptions include:

• UK companies with shares admitted to trading on regulated markets;
• Large companies in group structures (where the case for an exception is regarded as being finely balanced); and
• Certain sector companies subject to extra regulation (including charitable companies and trustee companies of pension funds).

This tightening of the rules is designed to coincide with similar efforts to improve transparency in company ownership and control at an international level and is part of the Government’s programme of measures designed to enhance confidence in the UK business environment. Subject to Parliamentary approval, the bill is expected to come into force in March 2015.

If the bill is passed and your company has a corporate director, it will be advisable to check whether the corporate director falls within one of the exceptions (when they are published), otherwise there will be the 12 month grace period to amend your company’s director appointments.

If you would like any further information about this or related topics, please contact the Edwin Coe Corporate & Commercial team.

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