Know your obligations

Company secretaries need to revisit the complex layers of legislation in the new Irish Companies Act

The new Irish Companies Act 2014 brings with it detailed layers of legislation that all companies operating in Ireland must adhere to. In particular, the role and obligations of directors have been addressed at length.

The duties of directors are contained in Part 5 of the Act. All directors, including shadow directors and de facto directors (one who occupies the position of director but has not formally been appointed as such), must ensure they comply with the Act. Upon appointment as a director, he or she must sign a declaration acknowledging their legal duties and obligations. A company secretary is also required to do so under the provisions of the new Act. Other general duties contained in Part 5 include:

• The requirement to act in a professional capacity on behalf of the company.
• The requirement to declare interests in any contracts with the company and a copy of the declaration must be entered into a book for that purpose. The company secretary should be aware that this book must be available at all meetings and be open for inspection by a director, auditor or member.
• If a director acts in breach of his or her duties, they will be liable to account for any gain they make and to indemnify the company against any loss arising because of the breach.

A director is also required to act in accordance with the fiduciary duties as set out in section 228:

• To act in good faith in the best interests of the company
• To act honestly and responsibly in relation to the conduct of affairs of the company
• To act in accordance with the company’s constitution
• Not to use the company’s property, information or opportunities for his or her own or anyone else’s benefit unless otherwise agreed by the company
• Not to agree to restrict the director’s power to exercise an independent judgement unless otherwise agreed by the company or its constitution
• To avoid conflicts of interest between a director’s personal interest and the company’s
• To exercise care, skill and diligence
• To have regard to the interests of members as well as employees

The requirement that a director will have to sign a declaration acknowledging his or her duties will place a new statutory emphasis for directors on their obligations and duties to comply with the provisions of the Act. Directors will have signed a similar declaration when signing a Form B10 for filing at the Companies Registration Office (CRO); however it would not have had the same statutory obligations. It is now the sole responsibility of directors to ensure their companies are fully compliant. Directors therefore now carry greater liability than ever before for breaches of compliance and duty.

The LTD model

Under the Act, a private limited company (LTD) must have one director who is at least 18 years of age. If that person is the sole director he or she may not also be the company secretary. Failure to comply can lead to a Category 3 offence. The requirement to have an EEA-resident director or alternatively to put a bond in place or else to have a Real and Continuous Link Certificate remains.

The time period for notification of changes to either a director or of their particulars to the Registrar also remains. Form B10 must be filed with the CRO within 14 days. The maximum number of directorships of private companies remains at 25 per individual with group companies counting as one – appointments in excess of this will be void. The time period for reporting however drops from 10 to five years and contravening this is a Category 4 offence.

Proceedings of directors

Regarding the proceedings of directors, Part 4 Chapter 4 of the Act covers the management of a company by directors, the delegation of powers, the convening of board and committee meetings and the keeping of company minutes. The latter two are usually the responsibility of the company secretary by order of the board.

Section 167 Part 4 Chapter 4 requires the establishment of an audit committee for larger companies whose balance sheet exceeds €25 million and turnover greater than €50 million in the immediate and preceding financial years. It also requires that directors state in their annual report whether an audit committee has been established and if not, the reasons for not doing so. Failure to take all reasonable steps necessary to comply with the requirements will be treated as a Category 3 offence.  Furthermore, audit committees must have at least one independent director of the company.

Disclosure of interests

Directors must also disclose their interests in shares. However, those holding 1% or less in nominal value of the issued share capital of a company, such shares which carry a right to vote at a general meeting, will not be obliged to.

Compliance statement

Directors of companies (other than those of an unlimited company whose balance sheet exceeds €12.5 million and turnover exceeds €25 million) are required to include a compliance statement in accordance with section 326 in their directors’ report. In their report under section 325, the directors must acknowledge their responsibility for securing compliance by a company with its relevant obligations – that is, a company’s obligations under the act and tax law. Failure to comply can lead to a Category 1 or Category 2 offence, serious market abuse offence or serious prospectus offence.

The statement must include a company’s policies regarding compliance with its relevant obligations, as well as the putting in place of appropriate arrangements for ensuring compliance and confirmation that a review of this has been carried out during the financial year. The section also provides that directors may rely on advice from persons employed by the company which could, inter alia, be the company secretary.

Other significant changes

It is worth noting two major changes under the new law regarding directorships:

• Section 148(8) states that a director’s post shall be vacated if the health of the director is such that he/she can no longer be reasonably regarded as having an adequate decision-making capacity.
• Section 150(11) and (12) states that the minister may make regulations of which an exemption may be granted to an office from disclosing his/her usual residential address in circumstances where it is considered the personal safety or security of the person to warrant such an exemption. This will include CRO filings and the Register of Directors and Secretaries. The company secretary should be aware of this.  

Penalties

Conviction of offences under the new Act carries some very heavy penalties:

• Category 1 offences – conviction on indictment which can result in a prison term of up to 10 years or a €500,000 fine, or both
• Category 2 offences – conviction on indictment can result in a prison term of up to five years or a €50,000 fine, or both
• Category 3 offences – summary offence which can result in a prison term of up to six months or a Class A fine up to €5,000, or both
• Category 4 offences – summary offence which can lead to a Class A fine of up to €5,000

Although the Act states that it is the ultimate responsibility of directors to ensure compliance, it also gives directors the power to delegate responsibilities to officers, which includes the company secretary, who will also need to have an expert knowledge of the company’s compliance obligations.

It is fair to say that company secretaries have already spent a huge amount of time looking at, and discussing, the issues raised first in the Bill and then in the final Act. Given the extent of changes however, the Act must be re-read by all a good many more times – especially the parts relating to company secretaries’ obligations and the obligations of company directors.


Brendan O’Connor is Manager, Entity Governance and Compliance at PwC and member of ICSA Irish Region Council