As part of its drive to promote transparency in business, the government is bringing in measures to outlaw the use of “corporate directors” in UK companies. “Corporate Directors” are companies which themselves act as directors of other companies. Historically, businesses have used corporate directors for a number of reasons, including:
- Administrative ease: any of the authorised signatories of a corporate director can sign on behalf of the company. In larger groups of companies using a corporate director might avoid having to make numerous filings at Companies House and in the registers of directors as compared with if a human (or natural person) director leaves the group; or
- It may be argued that the limited liability of the corporate director provides the protection of its own limited liability in carrying out its duties as a director.
The Small Business, Enterprise and Employment Act 2015 provides the legislative framework for the ban. However, the government has delayed the date when the ban comes into force: first from October 2015 to October 2016, and as no regulations have yet been enacted, the ban will first come into effect as soon as additional regulations setting out some exceptions to the ban are ready. We expect certain exceptions to be allowed on the basis of transparency of the operation of the company: for example, in favour of charitable companies or public limited companies whose shares are traded on a regulated market, but the scope of the exception may be widened further to include private companies.
Once the ban is introduced there will be a 12 month transition period, after which all appointments of corporate directors will be void and it will be a criminal offence for any to remain, for which a fine may be levied if corporate directors remain appointed.
Companies which have appointed corporate directors should maintain a watching brief for the regulations, as their introduction is likely to be the trigger for the year’s transition period during which corporate directors will need to be replaced. In the meantime, companies should also identify natural persons who may be able to replace the corporate directors.
By way of reminder, in addition to having a fiduciary duty to the company, the main duties of a director, as provided for in the Companies Act 2006, are:
- to act in good faith in the best interests of the company,
- to act within the powers conferred upon the director,
- to exercise powers for a proper purpose,
- not to fetter his discretion in exercising his powers as a director
- to avoid conflicts of interests.
Directors have further duties in relation to companies which are in financial difficulties, as they then have a duty to creditors,
- to ensure that the company does not trade wrongfully (i.e. when there is no reasonable prospect of it being able to repay its creditors)
- to ensure that the company does not trade fraudulently (i.e. when the directors know that the company is insolvent).