Out-Law / Your Daily Need-To-Know

Corporate director rules to be tightened in the UK

Out-Law News | 18 Dec 2020 | 6:12 pm | 2 min. read

Businesses will only be able to operate as corporate directors on the boards of other companies in the UK if all of their directors are real people whose identity has been verified by Companies House, under new plans outlined by the UK government.

Currently, companies can appoint any number of corporate directors – i.e. other companies or legal entities – onto their board providing they have appointed at least one real person onto the board too. However, the government said the current framework is open to abuse.

"Evidence suggests that the use of corporate directors can muddy the waters around ownership and provide a screen behind which to conduct illicit activity," the government said. "More generally the opacity they create can weaken corporate governance by preventing individual accountability."

The corporate director proposals are part of a broader drive to boost corporate transparency and combat company fraud. They follow on from earlier plans outlined by the government in September to introduce a new mandatory identity verification process for company directors.

Garbett Tom Sept_2019

Tom Proverbs-Garbett

Senior Associate

The government intends to change the legislation so that a director is only legally appointed when their identity has been verified and their information added to the public register. This would be a major change to UK company law.

Corporate law expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said: "The government intends to change the legislation so that a director is only legally appointed when their identity has been verified and their information added to the public register".

"The government’s solution to the potential for discrepancies arising between the public register and the company’s own register is to require the register of directors to be held on Companies House only, making it the single, verified source of information with respect to directors. This would be a major change to UK company law, with implications for shareholder access rights, particularly if such an approach was taken to other company registers," he said.

The government's plans in relation to ID verification in the context of corporate directorships are open to consultation until 3 February 2021, as are further consultations it has opened on changing the way financial information is reported to and displayed by Companies House and to the powers of the registrar to check the information provided.

Proverbs-Garbett welcomed the proposals to modernise Companies House.

"Among a number of significant transparency and anti-fraud measures, there is a very practical issue raised that would greatly assist the user experience: a proposal for a revised, dashboard-style presentation of the most valuable information on each company," he said.

"This would, as Companies House acknowledges, make the repository much more user-friendly, information more accessible and speed up searches. Not having to search through a PDF image of a filing would make key information much more obvious.  Ensuring that the information is correctly extracted and easily updated will, however, be a major task," he said.

Herring Andrew

Andrew Herring

Partner

Questions remain about how far these measures will go to prevent individuals from around the world from continuing to use the cloak of respectability created by an English registered company as cover to commit fraud and other criminal activity.

Civil fraud expert Andrew Herring of Pinsent Masons welcomed the proposed measures, although he questioned how effective they would be in practice.

"Any steps to strengthen the counter-fraud capability at Companies House is to be welcomed," he said. "However, questions remain about how far these measures will go to prevent individuals from around the world from continuing to use the cloak of respectability created by an English registered company as cover to commit fraud and other criminal activity. For instance, it will be interesting to see whether these new consultations result in increased due diligence over shadow directors, company formation agents and virtual offices."

"Prevention is always better than cure. However, there remain serious question marks over the capacity of law enforcement with limited resources to take effective action against fraudulent conduct discovered as a result of improved vigilance at Companies House," he said.