Trust and Transparency: an overview of the provisions relating to directors

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Originally published 12 August 2015 and last updated on 25 April 2016.

The Small Business, Enterprise and Employment Act 2015 ("Act") contains a number of provisions relating to directors. Some of the changes, for example the proposed ban on corporate directors, are part of the Government's drive for transparency in corporate management and control. Others, such as the ability of the court to disqualify a director following misconduct abroad and putting the legal duties of shadow directors on the same footing as those of appointed directors, are designed to increase trust in UK companies by improving the accountability of directors for misconduct. The key changes include the following.

Extension of directors' statutory duties to shadow directors – in force May 2015

The Act extends the liability of shadow directors (a person in accordance with whose instructions the board of a company is accustomed to act) so that, to the extent possible, they reflect the statutory duties applicable to appointed directors. The intention is to make the legal duties of shadow directors clearer and more comprehensive than they were previously and to increase the accountability of shadow directors who do not meet these standards.

These provisions came into force on 26 May 2015. Those involved in management structures with appointed or nominee directors, and controlling shareholders or others with significant influence over management decisions, should be aware that in some circumstances they could be acting as shadow directors and seek advice on their personal duties and liabilities where necessary.

Abolition of corporate directors – likely implementation date October 2016

The Act provides that, subject to exceptions which are to be provided by regulations, the appointment of new corporate directors will be prohibited, and the appointments of existing corporate directors will automatically cease after a 12 month grace period. Although the Government had originally indicated that these provisions would come into force in October 2015, the exceptions to the general prohibition have proved difficult to settle. The Government has therefore delayed implementation of the provisions, which are now expected to come into force in October 2016, to allow for further consultation.

Whilst it initially appeared as though the exceptions to the prohibition might centre around the size of the entity concerned and whether or not it was listed, the Government is now looking at a more 'principles-based' approach. Under the proposals currently being considered, a company would be able to appoint a corporate director if all of the directors of that corporate director are individuals and (if the corporate director is not a UK company) the laws under which it is established require certain details of its directors to be included in a publically maintained accessible register.

In addition, it would appear that the prohibition on corporate directors will not be extended to corporate members of LLPs. The most recent consultation in November 2014 indicated that, unlike the requirement to maintain a PSC register, the previous Government's view was that there was not a strong case for prohibiting corporate members of LLPs. However, this position is likely to be revisited if it appears as though LLPs become the vehicle of choice for those wishing to exploit this lack of transparency to undertake illicit activities.

Provisions relating to the accountability of directors for misconduct – implementation dates 1 October 2015 and 6 April 2016

The Act extends the provisions of the Company Directors' Disqualification Act 1986 with the intention of increasing the accountability of wrongdoers and preventing them from continuing to be involved in company management, thereby improving the trust and confidence of those dealing with UK companies.

In particular, the Act introduces two new grounds for disqualification as a director.

• Proceedings will be possible against a person on the basis that he has been convicted overseas of certain offences connected with establishing and running companies.
• Where a person has been disqualified in circumstances where his conduct makes him unfit to be involved in the management of a company and that person was acting on the directions or instructions of a third party, it will be possible to bring disqualification proceedings against the third party exerting that influence.

There has also been an expansion of the matters a court must take into account when determining an application for disqualification, including a person's track record, the nature and extent of any loss or harm caused and their activities overseas. When determining whether a person's conduct as a director of a company makes them unfit to be involved in the management of a company, conduct as a director of any overseas company must now be considered.

In addition, under the new rules, where a company becomes insolvent:

• insolvency practitioners will be obliged to report to the Secretary of State on the conduct of every director of the company at the date of insolvency (and during the three previous years) and in that report, describe any conduct which may assist the Secretary of State in deciding whether to bring disqualification proceedings - previously, insolvency practitioners were only required to report if they felt that the director's conduct showed he was unfit to be involved in the management of a company;
• the length of time during which disqualification proceedings can be brought against a director will be extended from two years to three years after the date on which the company becomes insolvent; and
• courts will have the ability to order a person subject to a disqualification order to make a payment for the benefit of one or more creditors of the insolvent company, where the conduct of that person which led to his disqualification has caused the creditor(s) to suffer loss.

The majority of these changes came into force on 1 October 2015 with the changes relating to the reporting obligations of insolvency practitioners coming into force on 6 April 2016.