The extension of director disqualification laws into sanctions regulations in 2024 represents a relatively new, and further compliance risk for businesses and sanctioned individuals alike. Of particular importance is for businesses to be alive to any indirect role a sanctioned entity or business may have, as having a disqualified director on the board may invalidate board decisions and lead to criminal sanctions. If the sanctions do cause a director to be disqualified and resign, that can cause a cascade of governance issues from the company’s board being inquorate to, where shareholders are designated persons, a question mark over whether replacement directors by shareholder voting without infringing the asset freeze. This article examines the risks and mitigation strategies companies can take where sanctions impact personnel (including management, directors and shareholders).
Indirect Effect of Director Disqualification Sanctions
Director disqualification sanctions, included in UK sanctions regulations and originating from s11A of the Company Directors Disqualification Act 1986 (CDDA) can take effect in subtle ways with serious consequences that stakeholders should be wary of.
Designated persons are prohibited from acting as directors or directly or indirectly, taking part or being concerned in the promotion, formation or management of a company. Whilst it should be relatively simple to establish when a designated person is in office as a director of a company , it can be less simple to establish what constitutes a designated person indirectly taking part in the management of the company, which may be as a director or by simply exercising management functions, which is prohibited by director disqualification sanctions and with criminal sanctions.
It is therefore critical that where sanctions are imposed on a company, its directors, or shareholders, professional advice is taken on any sanctions implications and risk mitigation strategies.
Risk Where Designated Shareholders Appoint Directors
It is common for shareholders to nominate directors to a company’s board to represent their interests, typically by a shareholder’s agreement. Where a shareholder is designated under a sanctions regime (for example a shareholder which is a body corporate), a director appointed to represent that shareholder may be viewed as enabling the designated person to participate in management either directly or indirectly, by proxy through its appointed director. That has the potential to infringe the s11A CDDA director disqualification sanctions.
Whilst every individual case must be subject to detailed analysis, in such circumstances, on a cautious analysis, such directors should likely be treated as disqualified and should resign to avoid ‘tainting’ future board decisions for invalidity (in the company purporting to make board resolutions whilst inquorate and with the vote of a disqualified director).
Board Assessment and Composition
Companies should screen their directors and managers for links to designated persons and specifically for any facts that could lead to the conclusion that a designated person could be seen to be taking part in the management of the company by the individual in question. If risks are identified, treat the director as disqualified for quorum and decision‑making purposes and audit whether, if the individual is to continue to play a role, the individual could be said to be taking part in the “management of the company”.
Quorum and Board Resolution Validity Risks
Disqualification of a director due to director disqualification sanctions may render the board inquorate under the company’s articles of association, the constitutional document setting out a company’s governance rules. Meetings held without a valid quorum cannot pass binding resolutions. Board resolutions purportedly ‘passed’ with participation by a disqualified director may be vulnerable to challenge, leading to further legal risks for the company.
Remediation: Resignations and Independent Replacement Directors
Directors assessed as disqualified by operation of the director disqualification sanctions should resign with immediate effect. If the shareholders appointing the replacements are themselves designated under a sanctions regime, such replacement directors should be demonstrably independent of designated shareholders, with no direct or indirect ties that could be construed as enabling management participation by those shareholders.
Shareholder Resolution Paradox and Licensing
Replacing directors may require shareholder resolutions, particularly where the board is inquorate. A paradox arises where designated shareholders hold frozen shares and their voting rights are attached to those shares. The question is whether they can vote to remedy internal governance or whether a license from the Insolvency Service is required to authorise shareholder voting rights attached to a frozen asset (the shares). While the point has not been determined by the courts of England and Wales, Zaiwalla & Co have provided detailed advice to clients (ranging from private limited companies to PLC’s) in this area applying the reasoning contained within persuasive offshore authorities which suggest that voting strictly to restore internal governance may be permissible. Case‑specific advice is essential. Where the company itself is designated, remuneration of replacement directors will generally require an OFSI license to avoid breaching the asset freeze.
Practical Steps and Record‑Keeping
Undertake a targeted sanctions governance review immediately. If disqualification applies, secure resignations and document the independence of proposed replacements. Structure any shareholder resolutions narrowly to address only the governance fix in appointing new directors and consider notifying OFSI of intentions. Maintain detailed contemporaneous records of analysis and rationale to support each step.
This article is for information purposes only and cannot be relied upon as legal advice. Professional advice must be sought in respect of such issues. For more information, please contact info@zaiwalla.co.uk.
[1] Albeit companies must be aware of the risk of individuals not formally in office as directors being ‘shadow directors’
Author
Senior Associate, Zaiwalla & Co
