With effect from 1 October 2010 all companies registered in England and Wales are required to have at least one “natural person” on their board of directors. As the term suggests, a “natural person” is a living human adult (over 16). Those companies with only other companies on their board as directors (so called corporate directors), will be in breach of the Companies Act 2006 (the “Act”).
Far from being a small group, there are currently over 20,000 companies registered at Companies House with solely corporate directors.
Failure to appoint a natural person to the board could result in fines of up to £5,000. However, possibly more damaging are the problems that non-compliant companies may face regarding the legal operation of the company, both in the business world, and when it comes to meeting the regulatory requirements of Companies House.
Meet the Board
The required make-up of a company’s board of directors has been subject to recent legislative changes. It is the responsibility of those behind a company to stay up to date with the law and structure their business accordingly.
Under the Companies Act 1985, private companies were required to have at least one director on the board, thereby allowing single entrepreneurs to organise their business activities within a corporate framework and permitting groups of companies to have single directors on wholly owned subsidiaries.
Companies were also able to appoint another company as a sole director on the board rather than a “natural person”. This had benefits to organising groups of companies and limiting personal liability.
One rationale behind the changes brought in under the Act is to identify at least one person who can be held accountable for the company’s actions, and emphasise the importance of directors’ statutory duties. However, the unintended consequences of the reform could be significant.
Review and comply
Companies, and groups of companies, now need to ensure that if they do not meet the requirements of the Act, they take prompt action to appoint a natural person to the board of directors or face penalties under the Act.
While this may sound straightforward, it will be more onerous for groups of companies who should review all the entities within the group (including dormant or non-trading companies) and agree individuals to be appointed to the boards of each entity. This will require holding the relevant meetings (with the required quorums), passing the required director or shareholder resolutions, updating the register of directors and making the required Companies House filings.
There are also knock-on effects that companies should consider:
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