The Hidden Pitfalls of Appointing Corporate Directors

Table of Contents

• What is a Corporate Director?
• Legal Considerations for Corporate Directors
• Who Can Be a Corporate Director?
• How to Appoint a Corporate Director

1. Appointing a Corporate Director During Company Formation
2. Appointing a Corporate Director After Formation

• Required Documentation for Appointing a Corporate Director
• Corporate Director Responsibilities
• Corporate Director vs. Individual Director
• Why Appoint a Corporate Director?
• How to Remove a Corporate Director
• The Future of Corporate Directors: New Legal Frameworks
• Conclusion

1. What is a Corporate Director?

A corporate director is a business entity (usually a company or legal firm) that is appointed to act as the director of another company. Unlike individual directors, who are human beings, corporate directors represent a legal entity and carry out all the functions and responsibilities of a director in a corporate capacity. They can be appointed to manage a company’s affairs, make strategic decisions, and ensure that the company operates within the legal boundaries.

While this practice is legitimate, corporate directorships are often subject to scrutiny due to their association with potential misuse, especially in cases where they are used to hide the identity of the true controlling individuals behind a company.

2. Legal Considerations for Corporate Directors

In the UK, as per the Companies Act 2006, a private limited company must have at least one natural person as a director at all times. However, it is permissible for companies to have corporate directors as long as they comply with the rules set by Companies House.

The practice of appointing corporate directors is legal, but it has come under increased regulation. The Economic Crime and Corporate Transparency Bill has moved to ban the use of corporate directors, although its full enforcement is still in the pipeline.

While corporate directors are still allowed, they are not allowed to be the sole directors of a company. The company must have at least one human director in order to comply with UK law.

3. Who Can Be a Corporate Director?

When appointing a corporate director, it’s crucial to ensure that the business entity meets certain criteria. The company must:

• Be legally registered in the UK or abroad.
• Have the necessary governance in place to act as a director.
• Be authorized by its own internal processes to take on this role.
• Not be an undischarged bankrupt or a disqualified director.

Additionally, a corporate director must also have a service address, which must be a physical location for receiving official documents. This ensures accountability and transparency.

4. How to Appoint a Corporate Director

Appointing a Corporate Director During Company Formation

If you are forming a new company and wish to appoint a corporate director, the process starts during the IN01 application, which is the standard form to register a new company. The necessary details about the corporate director must be provided, including:

• The name of the corporate director.
• The company registration number.
• The registered office address of the corporate director.
• Consent from the corporate director entity to take on the role.

When submitting the form to Companies House, make sure you also include at least one individual director, as the law mandates this. The form can be submitted electronically through the Companies House online service or by post.

Appointing a Corporate Director After Formation

If you want to appoint a corporate director after your company is already registered, you must follow a formal internal process before notifying Companies House. The process includes:

• Obtaining consent from the corporate director entity (usually through a formal letter signed by an authorized person from the corporate director).
• Passing a resolution to approve the appointment. The shareholders or, in some cases, the board of directors, will need to vote on this decision.
• Filing the appropriate form with Companies House (AP02 for corporate directors), notifying them within 14 days.

Once the form is filed, Companies House will update the public register to reflect the change.

5. Required Documentation for Appointing a Corporate Director

The necessary documents for appointing a corporate director include:

• Corporate director’s details: This includes the company’s name, registration number, address, country of registration, and legal form.
• Authorization letter: A letter of consent from the corporate director entity, confirming their willingness to serve as a director.
• Resolution: A formal decision passed by the company’s shareholders or board of directors approving the corporate director’s appointment.

6. Corporate Director Responsibilities

A corporate director has the same legal duties as an individual director. These include:

• Compliance with the company’s articles of association.
• Maintaining proper records and filing annual accounts and tax returns on time.
• Ensuring transparency with shareholders regarding any conflicts of interest or transactions that benefit the corporate director.
• Paying taxes and maintaining corporation tax filings.

7. Corporate Director vs. Individual Director

While a corporate director serves the same legal purpose as an individual director, there are key differences:

• Accountability: A corporate director represents a business entity, which may be seen as less accountable than a human director who can be held personally liable for decisions.
• Transparency: Human directors can be more transparent about their decisions and financial interests, whereas corporate directors might obscure the identities of the actual controlling parties behind the company.
• Duties: The duties of a corporate director are identical to those of an individual director. However, the corporate director may delegate some responsibilities to officers within the entity that appoints them.

8. Why Appoint a Corporate Director?

There are several reasons a company may choose to appoint a corporate director:

• Efficiency: In some cases, corporate directors can provide expertise or streamline decision-making processes.
• Professionalism: Some businesses prefer the formal and professional structure that corporate directors bring to their board.
• Risk Mitigation: In certain cases, appointing a corporate director can help reduce personal liability for the company’s management.

9. How to Remove a Corporate Director

Removing a corporate director follows a similar process to appointing one. Depending on the company’s articles of association, the process can involve a shareholder vote or a decision by the board of directors. The key steps include:

1. Notifying Companies House: You must file a notice with Companies House within 14 days of the removal.
2. Updating the Register: The company's internal register of directors must be updated to reflect the removal.
3. Form Filing: You must complete the appropriate form (AP03) to notify Companies House about the removal.

10. The Future of Corporate Directors: New Legal Frameworks

As mentioned earlier, the government is moving to ban the use of corporate directors through the Economic Crime and Corporate Transparency Bill. This bill aims to address concerns regarding the use of corporate directorships to conceal the identities of individuals behind companies, especially in cases involving economic crime and fraud.

The implementation of this ban is postponed, but it’s important to stay informed on any updates and changes to the law, as this will affect how corporate directors can be appointed in the future.

11. Conclusion

Appointing a corporate director can be an effective way to manage a company, especially in cases where expertise and professionalism are needed. However, businesses must remain mindful of legal requirements and ensure that they comply with Companies House regulations. While corporate directors provide many advantages, they are subject to increased scrutiny and potential legal changes, making it essential to stay updated on the evolving landscape of corporate governance.

If you need assistance with appointing a corporate director or read about removing company director, consult with Affotax professionals who can guide you through the process and ensure full legal compliance.