As your business grows and evolves, you may wish to bring new directors onto the board to reward and secure key members of staff or to bring in new skills and contacts from outside your business. In either case, the appointment of a new director to the board of your company is not as straightforward as it may seem.
In order to ensure that such an appointment is valid and in the best interests of the company, it is necessary to review the Companies Act 2006, the articles of association of the company and relevant common law.
‘A failure to validly appoint a new director or to check their eligibility for the role could have serious implications, such as liability for contractual arrangements which have been made without regard to your company’s best interests’, explains Jasvinder Gill, commercial law expert with Pengelly & Rylands in Tenterden. ‘The importance of getting the process right should not be underestimated.’
Who can become a director?
There are a number of fundamental requirements set out by the Companies Act 2006 which must be satisfied before a person can be appointed to the board of your company.
When considering such an appointment, you should therefore ensure that they;
- are over the age of 16;
- are not an undischarged bankrupt;
- have not been disqualified from acting as a director; and
- that they are not prohibited from acting as a director under the articles of association of your company.
There are also practical questions to be asked of any potential new board member. For example, do they hold any other directorships which may conflict with their proposed new role? If a proposed new director already sits on the board of a competitor, it is unlikely that they will be able to consistently act in the best interests of your company.
Procedure for appointing directors
When your company was incorporated, it will have adopted certain rules which govern the way in which it can operate. These rules are known as the articles of association of the company, and they act as safeguards.
Within these rules there may well be express provisions as to how new directors should be appointed. These provisions must be carefully reviewed and complied with.
More often than not, the current board of directors will have the power to appoint a new director at a meeting of the board. Alternatively, a director can be appointed by a resolution of the company’s shareholders.
Usually, it is the current board of directors who will deal with the appointment at a board meeting and it is necessary to prepare written minutes of that meeting in order to record the resolution.
The new director must be prepared to sign a statement indicating that they consent to act as a director and the appointment must be notified to Companies House using a prescribed form.
What is the impact of a defective appointment?
The Companies Act provides that even where a director is found to have been appointed incorrectly or invalidly, their acts may still be considered binding on the company. This could cause problems for your company if the relevant checks and procedures have not been undertaken.
For example, if you were to appoint a new director who was later found to have been disqualified from acting as a director due to a previous finding of fraud, any contracts entered into by that director would likely still be considered binding. This is despite their appointment being invalid.
If that person has continued to act in a way which served their own interests rather than that of the company, considerable financial and reputational damage could occur.
The importance of instructing a lawyer
As specialists in commercial law, we can provide detailed advice to ensure that your company is fully aware of the implications and correct procedures associated with appointing a new director.
In particular, we can ensure that every possible step is taken to ensure that the interests of your company are protected.
We can also ensure that all such appointments are properly documented and filed with Companies House whilst making sure that your company is fully compliant with the law and procedures in this area.
This article is for general information purposes only and does not constitute legal or professional advice. Please note that the law may have changed since the date this article was published.