From 1 October, all companies in England and Wales must have at least one “natural person” on their board of directors.

From 1 October, all companies in England and Wales must have at least one “natural person” on their board of directors, writes Matthew Giddings, an associate at law firm Fox Williams.

As the term suggests, a natural person is a living human adult (over 16). Those companies with only other companies on their board as directors (so-called corporate directors), will be in breach of the Companies Act of 2006.

This is no small number. There are currently over 20,000 companies registered at Companies House with solely corporate directors. For them, failure to appoint a natural person to the board before 1 October 2010 could result in fines of up to £5,000. Possibly more damaging are the problems that non-compliant companies may face regarding their legal operation.

The rationale behind the change is to indentify at least one person who can be held accountable for the company’s actions. However, the unintended consequences of the reform could be significant.

Complying with the new rule will be more onerous for groups of companies which should review all the entities within the group (including dormant or non-trading companies) and agree individuals to be appointed to the boards of each.

There are also knock-on effects that companies should consider:

•    Individuals’ liability. Directors can be personally liable for the actions of companies, for instance certain health and safety breaches, trading insolvency and so on. A “natural person” may be reluctant to join the board without appropriate insurance or indemnities being put in place.

•    Bank mandates. Commercial bank mandates generally require the identification of formal authorised signatories (usually directors) who can sign cheques on behalf of the company. Care should be taken that any resignation of corporate directors, or appointment of natural directors, does not result in the company being unable to settle liabilities on a day-to-day basis.

•    Accords with Articles? Companies should check that their Articles of Association permit the appointment of additional persons to the board. If there is, for example, a cap on the number of directors, the extra step of amending the Articles through a shareholder resolution will be necessary.

•    Execution of documents. Companies must comply with specific formalities when entering into agreements. They must ensure that they are able to duly execute contracts and have the required signatories available for execution. For a company to execute certain documents (including deeds) requires either two authorised signatories or one director with his signature witnessed. 

•    Appointment/resignation. Directors’ service agreements should take account of the requirement that, on resignation, they also need to leave the boards of any group companies of which they are a member. 

•    Companies House filings. A company without an eligible natural person as director may not be considered to be in good standing. It would therefore not be possible to file annual accounts at Companies House.