Ongoing government consultation on exceptions to the forthcoming ban on corporate directors

The Department for Business, Energy and Industrial Strategy (BEIS) has recently published a consultation paper in relation to the proposed implementation of the ban on corporate directors in the UK. The consultation forms part of the Government’s wider aim of enhancing corporate transparency, reform of Companies House and fighting economic crime in the UK.

The Small Business, Enterprise and Employment Act 2015 (SBEEA) included the prohibition of corporate directors and requires all directors to be natural persons. Corporate directors are often thought of as weakening corporate governance by preventing individual accountability, but corporate directors are also believed to be both useful and a legitimate option in certain circumstances.

The SBEEA provisions in relation to the ban of corporate directors were scheduled to come into force in October 2016, but have yet to be commenced. BEIS has indicated that it does intend to implement the prohibition, and publish regulations setting out exceptions to the ban in due course.

Previous consultations

Two consultations have already been undertaken in relation to the exceptions to the prohibition.

On 27 November 2014, a consultation paper was published which focussed on the types of companies which may be able to take advantage of an exemption to the ban. Such companies included listed companies and large public and private companies which are part of a group. Responses to the consultation also identified further additional categories where it suggested exception status might be appropriate.

On 26 March 2015, a further consultation was undertaken in relation to a principles-based exception to the prohibition, which raised the possibility of requiring that all directors of the entity acting as a corporate director must themselves be natural persons. In addition, it was proposed that the jurisdiction where the corporate director is incorporated must require that the details of the entity’s directors are available in an accessible and publicly-maintained register.

Current consultation – principles-based exception and compliance and reporting requirements 

The proposed exception which is the subject of the current consultation suggests that a corporate entity can be appointed as a director of a UK company if:

• all of its directors, in turn, are natural persons, and
• before the corporate director is appointed, all such directors of the entity to be appointed as a director are subject to the Companies House identity verification process.

The consultation has sought views as to whether the proposed exception is proportionate and offers a pragmatic balance between improving corporate transparency and allowing companies to realise the legitimate benefits of the use of corporate directors under certain circumstances. It has also asked if, assuming ID verification will be a key element of the corporate director regime, what the main arguments are for and against allowing limited partnerships and limited liability partnerships to be appointed as directors and, if they are to be allowed, how the principle of natural person directors should apply within these partnership models.

In addition, the consultation has also requested views on the compliance and reporting requirements which will be attached to the prohibition. It is expected that rules will be structured with a view to safeguarding the integrity of the natural person principle in relation to both the appointing company and the appointee, to the extent that both incorporated in the UK. For example, if UK company A appoints UK company B as a corporate director, an appointment of a corporate director by UK company B would be unlawful. Furthermore, UK company A cannot be appointed as another UK company's director while it has UK company B as its director.

As a further safeguard, and to govern the appointment of corporate directors which are non-UK registered companies, UK company A must take all reasonable steps to assure itself that the corporate director has (and continues to have) no corporate directors. Confirmation that any entities which are corporate directors have not appointed any corporate directors will be made by an appointer in its annual Confirmation Statement.

The consultation seeks responses on whether these reporting requirements appear proportionate and reasonable.

Potential extension of corporate director principles 

SBEEA applies to companies incorporated under the Companies Act 2006 but the Government is considering the application of the principles to other entities, including limited partnerships and LLPs.

It has proposed that the general partner of an LLP and the designated members of an LLP will be subject to the identity verification scheme currently being considered as part of the forthcoming Companies House reforms. This is likely to result in either general partners or designated members of an LLP being required to be natural persons.

Views have been sought on the application of the proposed corporate director principles to LLPs and limited partnerships and how the identity verification system would function in those contexts.

Next steps 

The consultation closed on 3 February 2021. The responses will be reviewed and a response issued in due course. It is expected that the proposals will be enacted alongside the proposals set out in the Corporate Transparency and Register Reform Government response, and the Government will ensure that the timetable for implementation and enforcement takes into account the difficulties currently faced by companies as a result of the Covid-19 pandemic.  Watch this space.