The end of the corporate director is nigh – or is it!

The Small Business Enterprise and Employment Bill contains provisions that will mean it is no longer possible for a company to have a corporate director.  In future all directors will have to be human.  The Government says that the change is to increase transparency in the ownership and control of companies and to make it harder for companies to be used to facilitate tax evasion, money laundering and other forms of criminal activity. The bill has had its third reading in the House of Commons and has now transferred to the House of Lords, and is expected to pass into law before the current Government finishes its term in office in April 2015. When the law comes into effect, existing corporate directors will automatically cease being directors.

It is established law that human director (A) of corporate director (B) is not automatically a director of the company (C) in respect of which B is the corporate director.  This means that, for example, in the event of C becoming insolvent, A can distance him/herself from enquiries into C and any wrongdoing which might give rise to claims against the directors. It also means that A is not covered by the report into directors’ conduct that every Administrator and Liquidator has to submit to the Insolvency Service.  Within regulated industries, it also means than in future A can say “no” when asked whether he/she has ever been a director of an insolvent company,  and so can successfully navigate any “fit and proper” tests.

The position of corporate director is therefore capable of being misused. It gives A the opportunity to control C without the responsibilities and liabilities that attach to a director. Of course, it is entirely possible that A oversteps the mark to the point that a Court decides that A is actually acting as a human director of C (i.e. is a shadow or de factor director of C) but this can be difficult to prove as a matter of evidence.

For some time it has been a legal requirement that every UK company must have at least one human director.  The thinking was that the human director would be answerable for any misbehaviour of the corporate director. The Government has now decided this degree of accountability is inadequate.

Currently, only 1.2% of companies registered in the UK have corporate directors. They are particularly prevalent within group structures where they are a useful and flexible management tool.  In this scenario, the corporate director will usually be another company in the group.  This enables the corporate director to attend board meetings or participate in board decisions through any one of its employees.

The Government is currently consulting on exceptions to the prohibition against corporate directors, and it seems likely that there will be a carve out for large public companies in group structures, particularly where the shares are traded on regulated or prescribed markets such as the FTSE and AIM.  At the moment “large” is defined as a company that meets two of three criteria being more than 250 employees, a balance sheet of £11.4m+, and turnover of £22.8m+ though these limits are set to increase. It seems less likely that private companies in group structures will be exempted.

So those who have used corporate directorships in relation private companies need to start planning now for their demise .

Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.