Audit and Technical Partner Leavitt Walmsley Associates Ltd
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Companies House reform: Ban on corporate directors

To conclude his series on tighter controls imposed to reduce corporate misbehaviour, Steve Collings looks at how the government intends to implement the ban on corporate directors.

23rd Feb 2021
Audit and Technical Partner Leavitt Walmsley Associates Ltd
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Companies House website
Companies House

The ban on corporate directors is not anything new as provisions were put in place in the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015). The SBEEA 2015 enacted a 12-month transitional phase to enable companies to achieve compliance.

However, these provisions have yet to be implemented and the government suggested this should be done in conjunction with the Corporate Transparency and Register Reform.

The closing date for comments was 3 February 2021.

In July 2013, the government asked for views on measures they could implement to ensure they know who really owns and controls companies in the UK. One of the proposals was that all company directors should be natural persons. Currently, the law only requires one director on the board to be a natural person and any number can be corporate directors (companies or other types of legal entity).

The government is uncomfortable with having corporate directors in place and wanted to consider whether UK companies should be prohibited from appointing corporate directors to the board. This is the case in other countries such as Germany and the US.

One of the government’s main concerns is that the use of corporate directors can ‘muddy’ the waters around ownership. In addition, the use of corporate directors could provide a screen for illicit activity.

Not every company that has a corporate director will be committing illegal activity and it would be wrong to suggest that is the case. However, there are some entities that do manipulate the use of corporate directors to prevent individual accountability.

Conversely, the government also acknowledged that there are legitimate uses for corporate directors within corporate governance arrangements. The Companies House reform consultation document cites an example of appointing a corporate director of a subsidiary in order to be able to have a number of individuals of varying professions representing that directorship in the boardroom, according to the agenda under discussion. It also suggests that corporate directors can be used to facilitate joint ventures or reduce administrative costs.

The SBEEA 2015 does provide the scope for the government to define exceptions to the ban on corporate directors. This would allow companies, in prescribed circumstances, to continue to appoint corporate directors.

Exemptions from the corporate director ban

In 2014, the previous Department for Business, Innovation and Skills (BIS) identified certain entities that could potentially be exempt from the ban on corporate directors:

 

Type of company Why they should be exempt from the ban
Companies with shares admitted to trade on a regulated and prescribed market. Respondents supported an exemption for these types of entities on the basis that they are subject to high standards of transparency in order to trade on these markets. Respondents also argued that the exception should also apply to subsidiaries, including where the listed company only holds a minority interest.
Large public companies in group structures and large private companies in group structures. Mixed views were received in this respect. Many respondents suggested that neither of these characteristics implied greater transparency. Respondents did highlight the administrative benefit of using corporate directors in these structures (eg reducing registering of new directors’ details at Companies House each time the relevant post in the parent company was changed).
Charitable companies. Most respondents highlighted additional benefits of corporate directors to charities. This included facilitating joint ventures between charities and enabling multiple experts to sit on the board within a single corporate director role. Questions were raised about the transparency requirements on charities and proposed that an exception would only be justified after approval by the charities regulator.
Trustee companies of pension funds. All respondents supported an exception for these types of entity. Respondents cited the benefits of using corporate directors on pension funds to reduce administrative costs and reducing liability exposure for experts that provide advice to pension funds and employer involvement in the funds.

Proposed plans

As a starting point, the government is proposing to create a principles-based exception alongside the ban on corporate directors. The principles suggested are:

A company can be appointed as a director, if:

  • all of its directors are, in turn, natural persons; and
  • those human directors are, prior to the corporate director appointment, subject to the Companies House identity verification process.
 As it reviews the entities that may be exempted from the ban, the government wants to avoid leaving the range of eligible corporate entities so wide that it undermines the purposes of the general prohibition. As part of the wider reforms, the government plans to introduce ID verification for general partners of limited partnerships and for “designated members” of LLPs.  The government suggest that this may be an appropriate basis for permitting appointments where the corporate director is one or other of those partnership forms.

In respect of overseas entities, the starting point would be to enable constructive cross-border relationships where appropriate. ID verification is expected to deliver a marked improvement in transparency. Hence, the government proposes not to differentiate between corporate directors by reference to their place of origin to enable UK and overseas entities to be subject to the same treatment.

Compliance and reporting

The consultation document suggests that the regulations will be structured to safeguard the integrity of the natural person principle from the perspective of the potential appointor company and the appointee at least insofar as both are UK registered companies. The Consultation Document provides an example as follows:

If UK Company C appoints UK Company D as director, any attempt by D to appoint a corporate director would be unlawful and, therefore, ineffective. This works both up and down the chain of directorships: C cannot validly be appointed as another UK company’s director while it has D as its director.As a further safeguard, and to cater for relationships involving non-UK companies, the government envisages overlaying a requirement for Company C to take all reasonable steps to assure itself that D has (and continues to have) no corporate directors. In its annual confirmation statement to Companies House, Company C must confirm that it believes this to be the position.

Section 167 of the Companies Act 2006 also requires the company to notify Companies House of any changes to its directors. Provision is made in the act for companies to notify the registrar when a director ceases to be a director at the end of the transitional period because it does not meet the conditions for remaining as a director. The existing offences of s167 will continue to apply in this respect. 

Conclusion

The government’s impact assessment suggests that around 33,000 companies currently have a corporate director on their board but that at least two-thirds of those companies would be compliant with the principles-based approach that has been suggested.

 

In addition, the provisions of SBEEA 2015 apply to companies incorporated under the Companies Act 2006. The government is, however, thinking about applying the principles of this consultation to other forms (limited partnerships and limited liability partnerships). Hence, where either a general partner or designated member is another corporate entity, they ought also to comprise all natural person directors who will be required to undertake ID verification.

This is the third article in a series on the reforms of Companies House. The first article examined how Companies House proposes to clamp down on fraud and the second article looked at how the powers of the registrar may be strengthened to challenge information submitted to Companies House.

Replies (4)

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By Paul Crowley
23rd Feb 2021 18:26

All this just for 11,000 companies
Out of a total of 4.2 Million companies
A quarter of a percent

Would the time have been better spent looking for Phoenix companies with patsy human directors
Not seen any issue with companies that I have come across that had corporate office holders. Just means 2 searches not one
Seen quite a few Phoenix with puppets at companies house but tax and insolvency 'crooks' the real operators.

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By Justin Bryant
24th Feb 2021 08:51

There is an easy way round this. Just appoint a man of straw director in Mauritius etc. and carry on as usual as a shadow director as per recent Paradise Papers exposé or whatever it was.

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By AndyC555
24th Feb 2021 12:26

When the concept of Limited Liability companies was being discussed back in the mid-nineteenth century, one advocate said that those opposing the idea were intent on "stopping ninety-nine good ideas to prevent the one bad idea".

Not sure of the percentage of good and bad ideas these days but that's the way legislation seems to be heading. Whipped up by campaigners who'd have us believe that it's a lawless wild west out there with everyone 'at it' we're burdened by ever bigger hammers to crack ever smaller nuts.

I liken it to police roadblocks being put up every 400 yards to check every car driving through just in case there's a body in the boot.

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By Arcadia
24th Feb 2021 13:51

A complete non-issue. It is only being raised so that they can say 'look we've tackled the problems with directors/Companies House' and can quietly bury any real reform.

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