The Lifecycle of a Business - Appointing Directors

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune.

But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

Moving on to Directors: Lights, Camera, Action!

Appointing Directors

The board of directors of a company is responsible for setting company strategy and managing the company on a day-to-day basis. Before they can engage in these important tasks, directors need to be appointed correctly, so that they have the necessary authority to act on behalf of the company. This article covers when directors might be appointed, how to appoint them correctly and what happens when directors are appointed incorrectly.

How many directors?

The Companies Act 2006 provides that private companies must have at least one director, while public companies must have at least two and, in both cases, at least one director must be a natural person, i.e. not a body corporate. (Recent case law has complicated the minimum number of directors issue somewhat for private companies and this will be discussed in our next article.)

While the legislation sets out the basic requirements for the number of directors, a company’s articles of association and any shareholders’ agreement must also be checked as these might include further requirements.

Eligibility

There are various eligibility conditions for directors.

• To be a director, you must be at least 16 years old; there is no maximum age for directors
• Any legal person (including, for example, a company or LLP) may become a director (subject to the natural person requirement)
• A person may not be a director if they are an undischarged bankrupt or certain other bankruptcy-related issues apply to them or if a court has disqualified them from acting as such under the Company Director Disqualification Act 1986.

In addition, any person who has been a director of a company within 12 months of that company going into insolvent liquidation may not in the next five years serve as a director of a company with a similar name to the insolvent company.

The Economic Crime and Corporate Transparency Bill includes provisions that a director’s identity must be verified before they can be appointed. Although not yet law, it seems likely that this will come into effect in the not-too-distant future.

When might directors be appointed?

On incorporation

Directors will need to be appointed as part of the company’s incorporation process.

To incorporate a company, a Form IN01 (Register a private or public company) must be submitted to Companies House and this will include the names and particulars of the company’s first directors, who will be deemed to have been appointed from the date of incorporation.

For further detail about incorporating a company, see here.

Post-incorporation

Directors will also need to be appointed during the life of the company. For example, you might want to change the incorporation directors, appoint more directors, replace a retiring director or change the directors following the acquisition of the company.

Subject to the minimum number of directors requirement set out in the Companies Act 2006, the appointment of directors post-incorporation will be governed by the company’s articles of association and any shareholders’ agreement and so these will need to be checked.

Usually, the articles of association will provide that the directors and members have the power to appoint additional directors. They may also include other requirements, for example, by stipulating a minimum or maximum number of directors or providing that a specific member has the right to appoint a certain number of directors.

If the company’s articles of association are silent as to the appointment of directors and there is no shareholders’ agreement or other document containing relevant directions, the members will have to appoint any directors by ordinary resolution.

Notification of any change to the directors of a company should be sent to Companies House within 14 days of the change.

What happens if the appointment of a director goes wrong?

A person’s acts as a director are likely to be valid even if their appointment was not valid, provided that the person was acting in good faith.

Where a person has assumed the responsibility of acting as a director but their appointment was not carried out correctly, the director is likely to be deemed a de facto director. In certain circumstances, a de facto director will be treated as if they were a director validly appointed. For example, the general duties owed by directors under the Companies Act 2006 also apply to de facto directors.

If you are concerned that a director may not have been appointed correctly, the company and the director should take legal advice.

Conclusion

Although appointing a director is not a complex process, it does need to be carried out correctly to avoid potential problems later down the line. It is important to check the company’s articles of association and any shareholders’ agreement to ensure that the correct procedure is followed and ensure that only eligible persons are appointed.

Disclaimer

This note reflects the law as at 14 September 2023. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.