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Thinking Ahead

05 March 2019 by Elaine Hughes

Thinking ahead

In an uncertain climate failing to plan, even on a contingency basis, can lead to critical governance issues

As Brexit discussions between the UK and the European Union continue in the lead up to 29 March 2019, governance implications are a rolling agenda item for the company secretary and the board of directors of many companies as part of their corporate governance contingency planning and risk.
It is the responsibility of the board of directors to not only identify and rate these risks but to also put controls in place which allows for such risks (or potential risks depending on the final Brexit outcome) to be monitored and mitigated. The onus to implement plans now rather than having to be reactive to what can be described as non-routine governance matters lies with the Board who will certainly require the expertise of the company secretary.

The following key corporate governance factors should now be given consideration as part of Brexit planning for Irish entities.

EEA resident director requirement

The current requirement under Section 137 of the Companies Act 2014 is that all Irish companies are required to appoint a minimum of one EEA resident director to their board of directors.

Where Irish companies have previously appointed a UK resident director who fulfilled this requirement, the board of directors together with the company secretary now need to deliberate its composition requirements to continue to comply with the required legislation. For individual companies, this may be a somewhat more straight forward process as the board of directors can identify any issues associated with changes to the board. However, in terms of a group structure, subsidiary governance and risk will play a significant part in the decision making process of changing the board of directors.

There is the option to appoint an additional director that meets the EEA resident requirements post 29 March 2019. Alternatively, the Company may be able to progress with one of the following options:

Putting a non EEA director insurance bond in place. This can be done for a period of two years and renewed thereafter (Section 137 of the 2014 Act). The Bond insures the company for a sum of €25,000 and its purpose is to ensure that the company completes the required submissions with the Revenue Commissioners, and the Companies Registration Office (‘CRO’). This option can
also be put in place upon the incorporation of an Irish company.

Obtaining a certificate from the CRO which proves that the Company has a real and continuous link with one or more economic activities carried on in the state of Ireland (Section 140 of Companies Act 2014). The Registrar will only grant such a certificate on receipt of proof of such a link from the Irish Revenue Commissioners. It is normally the case that the company needs to be established. for a number of years in Ireland and has financial statements in place which indicate the trading activity of the company and confirm the economic activities that are being carried on in Ireland.

Both of these options will alleviate the requirement to appoint an additional director who is EEA resident and in doing so, provide the company with further time to consider the various operational matters before proceeding to change the board composition.

Filing group financial statements

Where an Irish company is a subsidiary or another holding company established under the laws of an EEA country, the Irish company may be able to avail of a filing exemption in respect to its individual company financial statements which are normally required to be filed at the CRO. Section 357 of the Companies Act 2014 lays down various conditions which must be fulfilled to successfully avail of the filing exemption.

This exemption has proved quite important and popular given that it allows for qualifying Irish companies to restrict the financial information disclosed to the public by filing the consolidated financial statements of the holding company in public rather than individual financial statements for each Irish entity.

“Ongoing compliance obligations will also be amended”

However, as this filing exemption is only available where the holding company is incorporated in an EEA country, the implications for individual Irish companies should be fully analysed in advance of the next filing deadline for relevant companies and a plan put in place, if possible.

Financial year end

Section 288 of the Companies Act 2014 stipulates that an Irish company is restricted in changing its financial year end date to once in every five years. However, this restriction does not apply to a subsidiary or holding company of another EEA company where it needs to align its financial year end with that other EEA company.

In addition, the Companies Act 2014 under Section 228(3) also states that other than where substantial reasons exist, with these reasons required to be disclosed in the notes to the financial statements of the company, the directors of a holding company are required to ensure that the financial year end dates of each of the subsidiary companies included in a consolidation are aligned to the holding company.

Consequently, the need to align financial year ends of relevant existing group companies or new companies joining a group should be effected now so as to avoid setbacks especially in circumstances where the year-end of a company has already been changed in the past five years at the CRO.

Group structures and operations

The structure of a company’s business function has a substantial impact on its profitability and success or failure. Through effective use of subsidiaries, a parent company can achieve greater strategic and operational success and can benefit from more precise performance measurement, control and planning.

The governance around the day-to-day operations of group companies will need to be reviewed in order to alleviate any adverse business consequences for either the parent or subsidiary companies. Financial, legal, logistical, marketing, HR and intellectual property structures are just a few components of a business that will need to be considered to ensure optimised operations in a post Brexit environment.

The group corporate governance framework (policies, procedures, delegations of authority, etc.) may need to be assessed and enhanced to provide for such changes. The implementation of the various amendments on a group wide basis should also be on the governance agenda and steered forward by the company secretary.

Registration of branch (external) companies in Ireland

The registration and compliance process in Ireland for branch companies (external companies) of UK registered companies is currently provided for under the current EEA company requirements as set out in Part 21 of the Companies Act 2014.

As there are some differences between the requirements imposed on a company from an EEA Member State and companies from other countries such as the UK post Brexit, the non-EEA Company requirements will need to be applied for the registration and the ongoing compliance requirements of new and existing branch companies of UK parent companies under Section 1304 of the Companies Act 2014.

Ongoing compliance obligations will also be amended as branch companies of UK registered companies will be subject to filing annual returns with the CRO under the non-EEA country legislation. Sections 1305 and 1306 Companies Act 2014 applies with regards to annual return filing requirements at the CRO. Also, as changes to certain details of the branch company is required to be registered with the CRO, the details of such changes will need to be considered under Section 1304 Companies Act 2014 for a branch company of a non-EEA company.

Forward planning

The implications of failing to plan even on a contingency basis can lead to critical governance issues and in an uncertain climate such as pre and post Brexit, it’s vital for all stakeholders not to lose confidence in the board of directors and their strategies to lead the company.

The governance and compliance implications for companies therefore needs to be at the top of
the board agenda in order to ensure a smooth transition as possible for companies and its
many stakeholders. 

Elaine Hughes is head of company secretarial and compliance at LK Shields

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