News

Banning corporate directors: consultation on exceptions

09 December 2020

At present, UK law requires only that one director on a company’s board be a natural person and permits other directors to be other companies or legal entities (“corporate directors”). The government intends to prohibit corporate directors and is consulting on a proposed exception to the ban. In September 2020, the government announced the introduction of a mandatory identity verification process for company directors.

December 2020 proposals

The government intends to bring into force legislation which will prohibit corporate directors, at the same time as creating an exception to the prohibition, so that a company may be appointed as a director if:

All of its directors are natural persons; and
All of those natural persons are subject to the Companies House identity verification process before the company is appointed as a corporate director.

An overseas company may be a corporate director of a UK company, if evidence is provided to Companies House that the overseas company has only natural persons as its own directors and subject to verification of those directors’ IDs.

Compliance and reporting

Any attempt to appoint a corporate director other than in compliance with these principles would be unlawful and, therefore, ineffective. A UK company (“C”) with a corporate director will have to take all reasonable steps to assure itself that the corporate director has (and continues to have) no corporate directors. C must also confirm that it believes this to be the position in its annual confirmation statement to Companies House.

Limited partnerships and limited liability partnerships

The government also plans to introduce ID verification for the general partners of limited partnerships (LPs) and for designated members of limited liability partnerships (LLPs).

Can an LLP or LP be a corporate director? The government comments that the proposed ID verification might be an appropriate basis for permitting the appointment of an LP or LLP as a corporate director.
Can an LLP or LP have a corporate designated member or general partner? The consultation notes that the proposed principles-based exception could be extended to LLPs by regulations, but that primary legislation would be needed to extend the exception to LPs. If extended this would mean that, where a designated member of an LLP or a general partner of an LP was a corporate entity, that entity’s directors must all be natural persons and would be required to undertake ID verification.

Background

The consultation follows on from the government’s “Transparency and Trust” discussion paper of 2013, aimed at enhancing the transparency of ownership of UK companies. Power to prohibit the use of corporate directors was included in the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015), with the ability to prescribe exceptions in regulations. The relevant provisions in SBEEA 2015 have not yet come into force. Consultation in 2014 proposed that certain types of company, including pension scheme trustee companies, should be excluded from the ban on corporate directors.

In 2015, the government consulted again, but this time proposed a simplified principles-based approach to exceptions from the prohibition. It now intends to legislate for this principles-based exception.