Corporate Directors – An Upcoming Change in UK Company Law

UK company law has historically imposed few restrictions on allowing companies or other artificial legal persons – as opposed to natural persons (i.e., human beings) – to act as directors of other companies. These are commonly known as “corporate directors”. In the future, only natural persons may be appointed as directors. Limiteds with administrative headquarters in Germany are not affected by this change, as the German commercial register has always required directors to be natural persons.

Background

To date, it was common practice in the UK to appoint legal persons as director of a company (“corporate directors”). 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

Recent 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 (i.e., human beings, and not artificial legal persons such as companies) and will prohibit the appointment of corporate directors. This will apply to all companies, including private limited companies (“Limited” or “Ltd.”) as well as public limited companies (“PLC”). The British government is currently reviewing the possibility of exempting limited liability partnerships (“LLP”) from this rule. To date, a final decision has not yet been made.

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. All UK-registered companies should review the composition of their boards of directors, and consider making arrangements very soon to replace any corporate directors with natural persons.

The new regulation is expected to come into force in October 2015, but the exact date has not yet been confirmed by the UK Government. 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.

Limiteds with administrative headquarters in Germany are not affected by these changes, since the directors of these companies were always required to be natural persons in order to be able to register the branch office with the German commercial register.

Contact:
Geraint Tilsley, Partner at Geldards LLP.
Dumfries House, Dumfries Place, Cardiff CF10 3ZF, UK
Geraint.Tilsley@geldards.com
+44 29 2039 1867