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Get ready to replace your corporate director

This year, it will become illegal for companies to appoint ‘corporate directors’.

Traditionally, companies have been relatively free to appoint other corporate entities, such as limited companies or LLPs, as directors. There are various reasons why this can be useful. For example, where a person holds shares in a company and also has the right to be appointed as a director, he or she may prefer to install a corporate director instead, so as to avoid personal liability to the company as a director.

However, it is not a giant leap to see how this approach can be used to add a layer of opacity to corporate structures. As such, the government has sought to put an end to the practice.

Although the final implementation date is yet to be confirmed, the Department for Business, Energy and Industrial Strategy has suggested the new law will come into force during 2018.

Only ‘natural persons’ (i.e. people, rather than companies or LLPs) will be permitted to act as company directors. Any corporate entities that are acting as company directors will automatically cease to be directors 12 months after this law comes into force. The problem is that we don’t yet know exactly when that will be.

It is likely that there will be a number of exceptions to the prohibition, although the government hasn’t identified these either. Therefore, any companies with corporate directors should reckon with the possibility of these corporate directors having to be removed relatively soon.

Aside from looking at whether any of the exceptions apply, this will raise a number of questions. For example:

  • how best to remove the corporate director (i.e. proactively before the deadline or automatically when the deadline arrives);
  • whether a replacement director is needed;
  • how to identify replacement directors; and
  • whether the new director should be appointed on different terms to the outgoing corporate director, to take account of the fact that he/she is a natural person rather than a corporate entity

For now, there are still a lot of uncertainties.  If you think your business might be affected, and you would like to discuss the legal implications, please contact Tim Lucas on 020 7288 4753 or by email at TimothyLucas@boltburdon.co.uk.

You can also contact one of the other solicitors in our Corporate and Commercial team here.

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