Eligibility to act as a Director under Companies Act 2006

     

Eligibility to act as a Director under Companies Act 2006

There has never been any prior test of competence that must be passed by a person wishing to act as a director of a limited company. Neither is there any expectation that any formal qualification be held by such a person (unlike the eligibility rules that apply to company secretaries). The UK Institute of Directors issues the qualification ‘chartered director’ which aims to equip individuals with the skills needed by directors, especially in the listed company environment, but this has no legal recognition or significance. UK law has always made the limited company format very widely available to businesses of all kinds and sizes and, in keeping with this liberal approach, the law allows persons from all backgrounds to act as directors.

The principal statutory restrictions on acting as director derive from the Company Directors Disqualification Act 1986 (CDDA). Section 11 of that Act provides that persons who are undischarged bankrupts or subject to a bankruptcy restrictions order may not act as directors of limited companies. It is an offence for persons to act in contravention of these provisions. The CDDA lays down a number of other grounds on which directors may be disqualified by law from acting as directors.

The above notwithstanding, however, the CA 2006 introduces two new restrictions on eligibility to act as a company director. The first is that a person must be at least 16 years of age on appointment (section 157 CA 2006). Where a person is under the age of 16 when section 157 comes into force – in October 2008 – he or she will be deemed to cease to be a director as of that date and the company will have to make the necessary amendment to its register of directors. This is the first time that an age restriction has been imposed on directors by UK company law – in a famous case of the early 20th century (the Marquis of Bute case) it was held that it was possible for a six-month old baby to be appointed as director of a limited company. Such absurdities are no longer to be tolerated. That being said, the Act authorises the government to issue regulations under the Act for the purpose of specifying circumstances in which a person under the age of 16 could still validly be appointed as a director: it will be for future governments to consider whether to exercise this power.

The second restriction introduced by the CA 2006 is that, while a company may still act as a director of another company, this will only be possible under the Act if there is at least one other serving director who is a ‘natural person’, ie an individual human being (section 155 CA 2006). This change will have important implications for, eg, company formation agencies and parent companies that have adopted the practice of using nominee companies to act as directors of their newly-formed companies and subsidiaries respectively. With the coming into force of the Act, it will no longer be possible to set up a company with a single director that is another corporate body – where a corporate director is appointed, there must be at least one other director who is a natural person. As is the case with section 157, the Government decided to bring this particular provision into effect later than most of the other provisions of the Act – in October 2008 – so as to give companies more time to make any necessary adjustments.

Individual companies may, in their own articles of association, place additional restrictions on who may and may not act as directors. For example, articles may insist that the company’s directors own shares in their company and may specify what the minimum shareholding is to be.

While the law still places few restrictions on eligibility, it should be borne in mind that the Act makes some significant changes to the law on directors’ duties. In the light of these, and regardless of statutory or constitutional eligibility tests, any person should consider carefully, before accepting appointment as a director, whether they are aware of the standard of conduct that the law expects from them and whether they are confident that they will be able to meet that standard.

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