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Non-executive directors and legal entity management

James Eldridge

Non-executive directors are essential to strong board leadership, risk management and good corporate governance. The role, however, is one which exposes the director to considerable personal risk as the Companies Act 2006 does not distinguish between the duties of non-executive and executive directors. 

How can the risks be mitigated?
Historic tax planning, acquisitions or simply organic growth or diversification can result in complex legal entity structures which typically feature dormant or redundant entities, duplicate activities across group companies and complex holding company structures. In some cases, it may be difficult to map the operating model onto the legal entity structure and there is often loss of corporate memory in respect of acquired group companies where a trade has been transferred within the group but where contingent liabilities may remain. 
Transparency and risk management are essential elements of good corporate governance and provide the basis for informed decision making by shareholders, stakeholders and potential investors.   A corporate simplification project combines cost savings with enhanced transparency and a reduced risk of corporate governance failures. 
What are the benefits?
Key benefits of a corporate simplification project relevant to non-executive directors may be:
  • sustainable direct and indirect cost savings
  • improved corporate governance and regulatory compliance
  • enhanced transparency allowing better management of reputational risk;
  • reduction of risk in the group structure through the identification, close out or management of long tail or unknown liabilities;
Non-executive directors should also ensure groups are properly advised when undertaking corporate simplification projects. The voluntary striking off process gives rise to considerable personal risk for directors which cannot be mitigated by an indemnity, as the potential penalty for failure to notify a creditor is imprisonment or a fine. While the strike off process is typically used for dormant companies, where there is loss of corporate memory or the appropriate pre-elimination review is not completed, there is a risk that unknown or contingent creditors are not notified. 
Members’ voluntary liquidations
The members’ voluntary liquidation process is often used as part of corporate simplification. It provides certainty for directors and, although the costs of appointing a liquidator are incurred, these are limited where a number of companies are eliminated together due to economies of scale. Accordingly, it is important that non-executive directors are familiar with the group’s policy for determining which companies are eliminated by strike off and which by liquidation.
In our experience, the costs of a corporate simplification project are outweighed by the resulting cost savings within 12 months. 
Please do not hesitate to contact us if you would like to discuss further any of the issues raised in this article.