Update on restricting UK corporate directors

Why should I read this?

Alongside the fundamental changes to Companies House processes, and the laws around corporate transparency which came into force on 4 March 2024 under the Economic Crime and Corporate Transparency Act 2023 (ECCTA) - reported on in our briefing here - the UK government also appears to be taking steps to implement its existing power to restrict the use of corporate directors.

This will have implications for UK companies that currently have corporate directors.

What else do I need to know?

The prohibition on corporate directors of UK companies was originally due to come into effect in 2016.

Section 87 of the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) makes provision to prohibit the use of corporate directors. The provisions include scope to set out exceptions so that companies might, in prescribed circumstances, continue to have corporate directors. Further, the provisions allow a transitional phase of 12 months on commencement within which companies must adapt to achieve compliance.

What are the exceptions?

Whilst the above provisions of SBEEA 2015 give the Secretary of State the power to make regulations setting out the exceptions to the general requirement that directors must be individuals, no exceptions are set out in SBEEA 2015 itself.

The government consultation on proposals to enhance the role of Companies House and increase corporate transparency and the subsequent Corporate Transparency and Register Reform White Paper (see Annex 3) envisage certain exceptions to the general prohibition on corporate directors. The government proposed that a corporate director may be appointed where the directors of that company are themselves natural persons and are, prior to the appointment, subject to a Companies House identity verification process. The company will still have to have at least one natural person appointed as a director (as required currently).

Timing and next steps

Regulations were made on 29 February 2024 that bring into force provisions giving the Secretary of State the power to set out (by further regulations) exceptions for circumstances in which a person who is not a natural person may be appointed as (or remain) a director of a company.

The provisions of ECCTA relating to identity verification are not yet in force (but could be implemented later this year). The government has previously indicated its intention to bring into force the power to restrict the use of corporate directors in parallel with the identity verification provisions of ECCTA becoming law. As noted, we can, therefore, expect further regulations that set out the more limited basis on which companies will be permitted to retain or appoint corporate directors in the future.

What should companies do?

Companies with corporate directors should keep a watching brief on developments.

When the regulations setting out the exceptions from the general prohibition are published, companies will need to ascertain whether their corporate directors can remain in office. Under the provisions of SBEEA 2015, the regulations will have to specify that a company must have at least one director who is a natural person, as is the case currently. As noted, there will be a 12-month period before corporate directors who are not exempted will automatically cease to be a director.

Further reading on the Economic Crime and Corporate Transparency Act 2023

• ECCTA: UK Registrar of Companies gets new powers and corporate changes
• UK: Corporate criminal liability – reforming the Identification Doctrine