- Slides: 47
Companies Act, 2014 and Directors
Overview n n n n Introduction & Context Conversion Company Types – Revisions Corporate Governance Capacity Structures Offences
Background to the 2014 Act n n n 33 previous different laws all merged into one Act Over 1400 sections – the largest piece of legislation ever enacted in Ireland. Planned since 1990, drafting started in 2000, finalised in 2014, given full power of law on June 1 2015
Conversion n 18 Month time period to get companies turned around and fully operating under the new rules – 30 November 2016 Private Companies must take steps to become a Ltd or a DAC. If no action taken they become a Ltd Other companies will not need to change but will have some changes to the rules governing them
Company Types n n n Company Limited by Shares (Ltd) Designated Activity Company (DAC) PLCs Guarantee Company Investment Companies Unlimited Company – three sub types q q q Private Unlimited Company with share capital (ULC) Public Unlimited Company with share capital (PUC) Public unlimited Company without share capital (PULC)
Corporate Governance n n n Default system of rules – Company has a constitution, the previous optional table A now provisions of law Directors Duties codified Directors must ensure Company Secretary can carry out their role AGM – optional for the Ltd and single member companies, can be a paper exercise No requirement for EGM for serious loss of Capital for non PLCs
Capacity n n n Ultra vires effectively gone for the Ltd, unlimited corporate capacity Other company types retain it but results on 3 rd parties dealing with company in good faith no prejudiced Clear and transparent process for delegating corporate authority
Structures n n Reorganisations and Mergers much more straight forward using a summary approval procedure Capital maintance rules relaxed – Court involvement lessened and in some cases removed Place of business requirement removed and replaced by a “branch” system Clarity on group companies and their legality
Other points of note n n Financing and creating charges – two step process with more clarity Provision for the revision of financial statements Audit exemptions, particularly for group companies only involved in intragroup transactions and transfers Easing of old section 60 ban on providing assistance to purchase own shares
Office of the Director of Corporate Enforcement n ODCE has four primary functions; q q Encouraging Compliance with the Companies Acts Uncovering Suspect Breaches of Company Law Prosecuting Detected Breaches of Company Law Sanctioning Improper Conduct relating to Insolvent Companies
Offences n n n Offences split into 4 Categories Cat 1 fines up to € 500, 000, 10 years in Prison. Offences such as false accounting and fraudulent trading Cat 2, fines of € 50, 000, 5 years. Offences such as failure to maintain books, failure to communicate with Auditors Cat 3 lesser offences, € 5000 fine, 6 months Cat 4 – only fines no imprisonment Changes to Restriction & Disqualification
Suggested Reading: n Mc. Cann, “Director’s Duties: To Whom are they Owed? ” (1991) Irish Law times 3 & 30
What are the duties of a Director? n n The duties of a Director are fiduciary in nature. Section 228 of the Companies Act, 2014 sets out, for the first time, the 8 main fiduciary duties of a Director (which had previously been based on common law) q q To act in good faith, in what the director considers to be the best interests of the company To act honestly and responsibly in relation to the company’s affairs…
What are the duties of a Director? q q q To act in accordance with the company’s constitution and to exercise powers only for lawful purposes Not to use company property for their own or others’ personal gain unless approved by the company’s members or agreed to in the company’s constitution Not to fetter discretion unless permitted by the company’s constitution or interest into in the company’s interests To avoid conflicts of interest To exercise care, skill and diligence To have regard to the interests of the company’s members
To Whom are Directors’ Duties Owed? n n n Percival v Wright (1902) 2 Ch. 421 Dawson International plc v Coats Paton plc  BCLC 233 This is now codified in s. 228 of the 2014 Act There is a statutory exception in s. 228 (3) – (4) Section 227 provides that most of these duties should be applied with regard to their common law origins – retaining the relevance of pre-2014 case law
To Whom are Directors’ Duties Owed? n The general principle that Directors owe a duty to the company only has been modified in certain circumstances: n Allen v Hyatt (1914) 30 TLR 444 Coleman v Myers  2 NZLR 223 Securities Trust Ltd v Associated Properties Ltd (High Court, Unreported, Mc. William J, 19 November 1980) Perkins v Anderson  EWCA Civ J 1214 -15 Crindle Investments v Wymes  4 IR 567 n n
To Whom are Directors’ Duties Owed? n Note that in the case of insolvency, the director’s duties are transferred to the creditors. n Re Frederick Inns Ltd  ILRM 287
Protection of the Minority n n Foss v Harbottle (1843) 67 ER 189 Section 205 of the (repealed) Companies Act 1963 is equivalent to s. 212 of the Companies Act 2014. q “(1) Any member of a company who complains that the affairs of the company are being conducted or that the powers of the directors of the company are being exercised (a) in a manner oppressive to him or her or any of the members (including himself or herself) or (b) in disregard of his or her or their interests as members, May apply to the court for an order under this section”
Protection of the Minority n The orders that a court may make in these circumstances include: q “…an order – (a) directing or prohibiting any act or cancelling or varying any transaction; (b) for regulating the conduct of the company’s affairs in future; (c) for the purchase of the shares of any members of the company by other members of the company or by the company, and in the case of a purchase by the company, for the reduction accordingly of the company’s capital; and (d) for the payment of compensation
Protection of the Minority (s. 212) n n n Re Irish Visiting Motorists’ Bureau Ltd. (High Court, Unreported, 22 January 1972) Re Clubman Shirts Ltd  ILRM 323. Re Westwinds Holding Company Ltd (High Court, Unreported, 21 May 1974)
Restriction & Disqualification of Directors
Suggested Reading: n n n Part 14 Companies Act 2014 Annual Reports of the Office of the Director of Corporate Enforcement Dan M. Kahan and Eric A. Posner “Shaming White‐Collar Criminals: A Proposal for Reform of the Federal Sentencing Guidelines” available on Blackboard. Ó Conaill http: //www. examiner. ie/ireland/overhaulwould-aid-complex-cases-150131. html BBC Podcasthttp: //www. bbc. co. uk/programmes/b 0
Prevalence n n n ODCE Report for 2013 shows that a total of 222 restrictions and 34 disqualifications were made in Ireland in 2013. Figures have remained at a stable level over the past decade. Restricted/Disqualified persons appear on a publicly available Register.
Pre-2014 Context/New Provisions q q Section 150 of the Companies Act, 1990 (now s. 819 of 2014 Act – any person to whom the Act applies “shall not, for a period of five years, be appointed, or act in any way, whether directly or indirectly, as a director or secretary or be concerned or take part in the promotion or formation of any company” Section 149 (s. 818) provides that the provisions apply to any company that is unable to pay its debts ‘at the date of the commencement of its winding up’ or ‘ at any time during the course of its winding up the liquidator of the company certifies’
Pre-2014 Context/New Provisions q q Section 149 (818) also provides that restriction can be applied to any person who acted as a director, shadow, or otherwise ‘at the date of, or within 12 months prior to, the commencement of its winding up’ Aim of this provision is to combat “phoenix syndrome” – where controllers of a company lead it into insolvency, and then reincorporate into the same field, with the advantages of limited liability, once again.
Pre-2014 Context q q q Companies (No. 2) Bill 1987 had put forward a “drastic solution” of automatic restriction of all directors of an insolvent company. The Mc. Dowell Group Report admitted that it would be unfair to penalise honest business failure. However, although applications for restrictions of directors could be made under the 1990 Act, in practice, they rarely were.
Pre-2014 Context q q q Business Communications Ltd v Baxter and Parsons (High Court, 21 July, 1995) Companies Act 2001 – this was given legislative status. More prominent role of Director of Corporate Enforcement. ODCE established by s. 7 of Company Law Enforcement Act, 2001 Section 12(1) sets out functions – essentially ensuring compliance with and enforcing Companies Acts.
Purpose of Restriction q La Moselle Clothing Ltd v Soualhi  IEHC 66 n q Shanley J remarked that the “primary purpose” of the section was to protect the public from the restricted directors. Re Colm O’Neill Engineering Services Ltd  IEHC 178 n n Geogheghan J. remarked that it was “well-established” that the purpose was to protect the public against those who had shown themselves to be a danger to crditors and others. Purpose was categorically not the punishment of the restricted individuals.
Purpose of Restriction q Courtney expresses cynicism about this viewpoint, and notes that even if punishment is not the purpose it is “almost invariably the effect”.
Scope q q q Restriction provisions encompass all who fall under the broad definition of “director” as set out in the 1963 Act. Re Gasco Ltd  IEHC 20 Re Kelly Technical Services (Ireland) Ltd; Kavanagh v Kelly et al  IEHC 421 Euroking Miracle (Ireland) Ltd; Fennell v Frost et al  IEHC 15 Re Cavan Crystal Group (High Court, 26 April 1996)
Locus Standi q q q Most prominent applicants liquidators of insolvent companies – with legal obligation to bring the application, and the DCE Section 154 of 1990 Act – Receivers could bring applications Re Steamline Ltd  IEHC 102 Amendment inserted s. 150(4 A), allowing onlu liquidators, receivers and the DCE to bring restriction applications Change applied in Re Document Imaging Systems Ltd  IEHC 250
Locus Standi q Section 56(2) of the 2001 Act obliged liquidators of insolvent companies to make applications for the restriction of each director concerned between 3 and 5 months after submitting their reports on the liquidation to the ODCE. This may be avoided if the DCE relieves them of this obligation.
Effects of Restriction q q q The Act provides that restriction under s. 150 (820) “will apply” for a period of 5 years – thus leaving the Court no discretion to reduce the period. Restriction does not, however, prevent a restricted person from playing a role in a company (or even acting as an auditor, liquidator or examiner). Section 819(3) allows a restricted person to circumvent the order – a company with a fully paid up cash capital of at least € 500, 000 for a plc, or of € 100, 000 for a smaller company.
Effects of Restriction q q In Re Verit Hotel and Leisure (Ireland) Ltd  IESC 74, Fennelly J criticised this leeway, saying that “the severity of the restrictions mandated by the section is significantly ameliorated by s. 150(3)”. Possible that stigma is the most important effect of the order. Capital requirements mean that restriction impacts most those with the least access to capital Also greater impact on directors of small companies (whose insolvency has least impact on society as a whole).
Defences q q A director can assert that he acted reasonably and responsibly in his dealings with the company Since 2014 Act, he must also show that, when requested by the liquidator, he cooperated as far as could reasonably be expected in relation to the winding up of the insolvent company (s. 820(2)(b)) …and that there is no other reason why it would be just and equitale that he should be subject to restriction. The Application will be brought by the DCE, the liquidator, or receiver, and the defence above may be raised on affidavit by the director.
Disqualification Section 160 (842) of the CA 1990 provided for discretionary disqualification. q. Seen as a more strict provision that of director. q. S. 159 (838) provides that disqualification prevents a person from acting as an “auditor, director, or other officer, receiver, liquidator or examiner or be in any way, directly, or indirectly, concerned or take part in the promotion, formation or management of any company” q
Context - Disqualification q q No capital requirements can be met to allow a restricted party to continue to take part in company dealings. Seen as being a more severe sentence for conduct that is manifestly more blameworthy than merely failing to exercise the appropriate degree of responsibility in their capacity as a director The Act allowed judges to impose disqualification for such a period as they see fit – allowing for periods of longer than 5 years. Origins of the concept may be found in the 1963 Act
Context - Disqualification q q q Very low levels of applications even in the aftermath of the 1990 Act 2001 Act created a role for the Director of Corporate Enforcement in making applications Companies Report 1999 noted only 2 disqualification as of 31 st December 1999, the CRO 2012 Report found 3, 908 disqualified by the end of that year.
Purpose - Disqualification q q q Difficult to define – both punitive and protective Re Kentford Securities – Peart emphasised protectiveness as objective. Re Ro-line Electric Motors Ltd – an English case on the equivalent provisions – did note that ordinary commercial misjudgment in itself deemed insufficient to justify an order on its own. Gross negligence or total incompetence could suffice though
Disqualification –Constitutional Issues? q q q Does Disqualification impact on the right to earn a livelihood? To a good name? Apparently not. Re National Irish Bank Ltd; Director of Corporate Enforcement v Seymour  IEHC 102 n q Murphy J – disqualification is “not penal in nature” but rather “an indication of a lack of commercial probity in relation to the management of a company” Director of Corporate Enforcement v Byrne  IESC 57 n Denham J – court can take such effects into account in determining issue
Disqualification – Effects q q 2 types – discretionary and deemed Discretionary may be set down for such period as the court sees fit. “Deemed” disqualification is mandatory 5 years for persons convicted of fraud or dishonesty UK – Re Sevenoaks Stationers (Retail) Ltd  3 All ER 578 n n n q 10 years + - particularly serious cases 6 -10 years – moderately serious cases 2 – 5 years – least serious cases Ireland used this approach in Re CB Readymix Ltd  1 IR 372, but has not embraced same level of clarity
Discretionary Disqualification q q q Numerous forms of misconduct justify an order including defrauding the members or creditors of a company, or perpetually defaulting on filing obligations. See s. 842(1)(a) – (i) Different from restriction insofar as the onus is on the application to prove that an order is justified. (Re CB Readymix Ltd, Cahill v Grimes) A court may consider the imposition of restriction rather than disqualification if the latter is deemed insufficiently justified.
Fiduciary Duties & Restriction q q q Common law fiduciary duties have played a role in Restriction decisions Re Tralee Beef and Lamb  IEHC 139 – Finlay Geogheghan J gave them a prominent role Re Cooke’s Events Co Ltd (In liquidation); Kavanagh v Cooke  IEHC 21 Re 360 Atlantic (Ireland) Ltd (In Receivership and In Liquidation); O’Ferrall v Coughlan  IEHC 412 BUT – Supreme Court appeal of Re Tralee Beef and Lamb  IESC 1
Fiduciary Duties & Restriction q Now that these fiduciary duties have been codified by the 2014 Act, may indicate a return to emphasis by courts
Fiduciary Duties & Disqualification q q One of the statutory grounds for disqualification is if a person is proven to have been in breach of duty in their capacity as a promoter, officer, auditor, receiver, liquidator or examiner of a company. Re National Irish Bank Ltd; Director of Corporate Enforcement v Brennan  IHEC 132
Acquiescence q q q Chapter 5 of Part 14 of the 2014 Act provides a comprehensive pronouncement of the manner in which directors may “submit” themselves to restriction and disqualification Objective is to save time, money and resources Section 850 provides that the DCE may use discretion to assess period of R/D, s. 851 provides that this discretion should not be exercised where a period of more than 5 years is warranted.