Overview
From 4 March 2024, the Act introduces into the Companies Act 2006 a prohibition on a person being appointed as a director if they are disqualified under directors’ disqualification legislation. If a director is appointed in breach of the prohibition, their appointment will be void. The Act also amends the grounds on which a director can be disqualified under the Company Directors Disqualification Act 1986.
Whilst not stated in the Act itself, the Government has confirmed its intention to bring into force its existing powers to restrict the use of corporate directors. This restriction is not yet in force.
Directors’ disqualification
A person can be disqualified from becoming a director of a company where grounds for disqualification exist under the Company Directors Disqualification Act 1986 (CDDA). Disqualification proceedings are a civil, not criminal, process and disqualification orders are made by the court.
From 4 March 2024, the Act inserts a new provision into the Companies Act 2006 which prohibits a person from being appointed as a director of a company if that person is disqualified under the CDDA. (An exception to this prohibition will apply if the director has been given permission by the court or has been granted a licence by the Government.)
If a director is appointed in breach of the new prohibition, their appointment will be void.
The Act also amends provisions of the CDDA to allow for disqualification on the following grounds:
- Persistent breaches of relevant provisions of companies’ legislation: a person may be disqualified if in the preceding five years, they have been found guilty of three or more “defaults”, which will include financial penalties; and
- Disqualification of persons designated under sanctions legislation: a person subject to relevant financial sanctions will be prohibited from being a director of a company.
Corporate directors
Although not included in the Act itself, the Government has confirmed in one of its Factsheets that it intends to bring into force its existing powers to restrict the use of corporate directors. This will be carried out in parallel with the Act becoming effective but the exact timing has yet to be confirmed.
The Government’s existing powers were introduced by the Small Business, Enterprise and Employment Act 2015, which introduced a new section 156A into the Companies Act 2006. Section 156A, which has not yet been brought into force, requires all directors to be natural persons and prohibits the appointment of corporate directors. The requirement for all directors to be natural persons is subject to exceptions to be specified by the Secretary of State in regulations.
The Factsheet confirms that the exceptions to the general prohibition will be “principle based,” as set out in a December 2020 Government consultation. This will mean that a corporate entity will only be eligible to be appointed as a director if:
- the corporate entity has “legal personality”;
- all of the corporate director’s own directors are natural persons; and
- those natural person directors must, prior to the corporate director appointment, have been subject to an appropriate identity verification process.
Once the provisions are in force, companies with corporate directors will be given 12 months to comply. During that time, they must ensure that their corporate directors comply with the exception requirements, or they must resign or be removed from office.
Practical steps
Companies with a corporate director should consider whether the corporate entity will meet the requirements allowing it to remain as a director. If they do not, then thought should be given to finding an appropriate replacement director and to arranging for the corporate entity to resign or be removed from office.
