Company Directors: It's a Numbers Game

October 8, 2010

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:

  • Individuals' liability
    Directors can be personally liable for the actions of companies, such as certain health and safety breaches and trading whilst insolvent. A "natural person" may be reluctant to join the board without appropriate insurance/indemnities being put in place.
  • Bank mandates
    Commercial bank mandates generally require the identification of formal authorised signatories (usually directors) who can sign cheques on behalf of the company. Care should be taken that any resignation of corporate directors, or appointment of natural directors, does not result in the company being unable to settle liabilities on a day to day basis.
  • Accords with Articles?
    Companies should check that their Articles of Association permit the appointment of additional persons to the board. If there is, for example, a cap on the number of directors, the extra step of amending the Articles through a shareholder resolution will be necessary.
  • Execution of documents
    Companies must comply with specific formalities when entering into agreements. Companies must ensure that they are able to duly execute contracts and have the required signatories available for execution. For a company to execute certain documents (including deeds), it requires either two authorised signatories or one director with his signature witnessed.
  • Appointment/resignation
    Directors’ service agreements should take account of the requirement that, on resignation, they also need to leave the boards of any group companies where they are a member.
  • Companies House filings
    A company without an eligible natural person as director may not be considered to be in good standing. It would therefore not be possible to file annual accounts at Companies House.

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