How corporate transparency and register reform affects corporate directors
Important legislation changes for UK businesses
In February 2022, the government published its Corporate Transparency and Register Reform White Paper. This sets out robust reform measures intended to combat fraud and economic crime by increasing the transparency of corporate entities in the UK.
In the paper, the government proposes significant reforms at Companies House and for the role of the Registrar – there is to be a new identity verification procedure for company directors and increased powers for the Registrar to question, request further evidence and reject corporate filings which appear inaccurate and to query information already on the register.
One important change relates to corporate directors.
Why is the legislation relating to corporate directors changing?
A corporate director is the term used when a company, firm or organisation, as opposed to an individual, is appointed as the director of another company.
There have been long standing concerns that the use of corporate directors has tended to muddy the waters as to who controls a company and that this opaque structure may be used to conceal illegal activity. Legislation prohibiting the use of corporate directors was included in the Small Business Enterprise and Employment Act 2015, but never implemented.
How do the proposed changes affect UK businesses?
At present, a company may appoint any number of corporate directors onto its board provided it has appointed at least one person to the board as well. Once the new reforms have been implemented, corporate entities will no longer be permitted to be appointed as directors of UK companies unless the exception applies. This exception is that a corporate director will only be permitted if:
- such corporate director is a company registered in the UK;
- all that company’s own directors are natural persons; and
- before the corporate director is appointed, the identities of the natural person directors have been appropriately verified by Companies House.
The restrictions on corporate directors will not apply to corporate members of limited liability partnerships (LLPs) or to corporate general partners of limited partnerships. However, such corporate member or corporate general partner will have to provide the details of their directors or a managing officer, whose identity must similarly be verified by Companies House.
The proposed reform, by avoiding an outright ban in favour of an exception principle, acknowledges there are legitimate uses for corporate directors, for example, in joint venture arrangements or when in a group structure, a corporate director is appointed to a subsidiary board.
What can businesses do to prepare for the changes?
Since the government expects to implement the transparency and reform legislation as soon as possible, now is the time to review the composition of company boards and to consider the implications for existing corporate directors. If your company has a corporate director, consider whether such appointment will be permitted under the exception principle and, if not, make the necessary changes to the composition of the board of directors.