Companies Act 2014

The Companies Act 2014 (the “Act”) was signed in law in December 2014. The Act, which was almost 15 years in the making, is the largest piece of legislation which has even been seen in Ireland. The Act is due to take effect as and from 1 June 2015 after which date more than 30 enactments (which at present form the cornerstone of commercial practice in this jurisdiction) will be repealed. After the commencement of the Act, there will be an onus on all company directors to b...

NEW CHOICE OF PRIVATE LIMITED COMPANY

The Act modernises company law in this jurisdiction and introduces new rules in relation to how companies are formed and how they are administered after incorporation. One of the most notable changes introduced in the new Act is the introduction of a second type of private limited company, the “Designated Activity Company.” After the commencement of the Act therefore, the following private companies limited by shares will be available:

1. Company limited by shares (“LTD”)

Expected to be the most widely used as it will allow for flexibility on the part of the directors and shareholders.
Can have one director, but if there is only one director, a separate person/entity must act as company secretary.
Will have a simplified single-document constitution (as opposed to existed model of having a separate memorandum and articles of association).
Will have unlimited corporate capacity and as such the company's constitution will not include an objects clause.
May dispense with requirement to hold an AGM.
Must use “Limited” or “Ltd” as part of its name.

2. Designated Activity Company (“DAC”)

Similar in many respects to existing model private limited company.
Must have at least 2 directors.
Company's constitution will continue to include an objects clause and the doctrine of ultra vires will continue to apply – although the implications of a company entering into an ultra vires transaction are diluted to a certain extent.
Can only dispense with requirement to hold an AGM where it is a single member company, otherwise, an AGM must be held.
May be suitable in the case of certain joint ventures.
Must include “Designated Activity Company” or “DAC” as part of its name.

Other company types will continue to be available under the new Act. These will include PLCs; Unlimited Companies (which must now include the term “UC” or “Unlimited Company” in its name); and Guarantee Companies (which must include the term “CLG” or “Company Limited by Guarantee” at the end of its name).

The Act provides for an 18 month transition period during which all existing private limited companies must elect to either register as an LTD or a DAC. During this transition period, and until an election is made, the law in relation to DACs will apply. If a company does wish to benefit from the flexibility that an LTD will offer, it should therefore take the necessary steps to do so as soon as possible after the commencement of the Act.

THE NEW FORM CONSTITUTION

One of the most immediate and practical implications of the new Act will be the creation of a new form constitution for all existing and new companies. This will mean the end of the existing memorandum and articles of association which has, to date, largely been the “go to” document when determining what a company can and cannot do.

In the case of an LTD, a company's constitution will take the form of a single-document. In the case of a DAC, plc, unlimited company and company limited by guarantee, the constitution will continue to require a two-document constitution to accommodate the requirement for an objects clause to be included. In either case, it is anticipated that the new form constitution will be shorter in length than most company's current memorandum and articles of association.

Failure to take steps to adequately plan, draft and adopt a suitable constitution will lead to a company being governed by the default provisions contained in the Act. It is strongly advisable that all companies avoid such a scenario insofar as possible, as it will lead to high levels of uncertainty. Many companies may also find that the default provisions included in the Act are not suitable in order to meet their specific corporate governance needs and to achieve their particular commercial objectives.

DIRECTORS DUTIES

Prior to the commencement of the new Act, the fiduciary duties of a director have been developed over time and set out by judges in case law. The Act changes this however by codifying the existing principles found in that case law and by setting out 8 principle fiduciary duties which will apply to all company directors including de facto directors and shadow directors. These codified duties are in addition to all statutory duties which directors must comply with and which are set out in the Act and elsewhere (e.g. under employment law, health & safety legislation etc.).

The Act does allow for certain of the fiduciary duties to be relaxed in some scenarios. It is important therefore for company directors to review the codified duties and consider each one separately when preparing a company's new form constitution.

The Act itself also introduces new statutory duties which will further affect company directors. In particular, directors of larger organisations should make themselves familiar with the new provisions relating to “Directors Compliance Statements”. These provisions of the Act impose new obligations on directors of larger companies to secure the company's compliance with certain company law provisions and tax law. In this regard, directors will be required to draw up a compliance policy statement and to report on what has been done to secure compliance. It is advisable that directors obtain professional advice as to precisely what steps will be required to ensure they comply with this requirement.

IMPORTANCE OF DOCUMENTING DIRECTORS LOANS

The Act introduces new requirements in relation to director's loans – both to and from the company. The Act essentially provides that where a company makes a loan to a director, and that loan is either undocumented or is in writing, but the terms of the loan agreement are ambiguous, there is a presumption that the loan is repayable on demand and bears interest at the prescribed rate.

In the case of a loan from a director to a company, where such a loan is undocumented, there will be a statutory presumption that the loan is interest-free, unsecured and subordinated to other creditors. These statutory presumptions apply equally in the case of undocumented loans to persons connected with a director.

It is important therefore that properly drafted unambiguous loan agreements are put in place in respect of all loans between a company and a director (or a person connected with that director). In the case of existing loans entered into prior to the commencement of the Act, directors are best advised to obtain professional advice as soon as possible to record all existing directors loans and the terms attaching to those loans so as to avoid the statutory presumptions applying to historic arrangements.

RESTRICTED ACTIVITIES – SUMMARY APPROVAL PROCEDURE

The Act introduces a new “Summary Approval Procedure” as the means by which companies can engage in restricted actions by ensuring that the persons those restrictions are designed to protect, consent to it. This new procedure is similar in many respects to the current “whitewash” procedure used for the purposes of “section 60” (financial assistance for the acquisition of own shares) transactions.

The new Summary Approval procedure will include a special resolution being passed by the shareholders of a company approving the restricted action following the making of a declaration of solvency by a majority of the directors of the company. The restricted actions which the procedure can be used to validate include:

financial assistance for acquisition of own shares
reduction of company capital (which will no longer require an application to be made to the High Court)
variation of capital in reorganisations
loans to directors and connected persons

WHAT SHOULD YOU DO TO PREPARE FOR THE INTRODUCTION OF THE ACT?

Directors of all existing private limited companies should liaise with all shareholders to decide whether you wish to convert to a company limited by shares, or a designated activity company. In this regard, it is important to note that under the Act, some companies are obliged to convert to DACs – we can advise further if required.
The introduction of the Act is an ideal opportunity for directors and shareholders involved with large complex group structures to consider whether that structure can be simplified as part of the transition under the Act.
Review your existing memorandum and articles of association and consider how the new form constitution should be adjusted to best suit your requirements – this may vary on a case by case basis and so it is important that specialist advice is sought so avoid any of the “default” provisions inadvertently applying to a company going forward.
Arrange for proper unambiguous agreements to be put in place to document all directors' loans to or from the company so as to avoid the statutory presumptions relating to directors’ loans from applying.
Check all contracts and agreements to consider whether changing a company's constitution will require consent of any other party (for example, and lender may have included a covenant not to amend a company's constitutional documents in a security document, or a similar covenant may be contained in a shareholders’ agreement which has previously been entered into).
Where a company is required to change its name (for example, in the case in any unlimited company, it will need to change its name to include “UC” or “Unlimited Company” as part of the company name), arrange for a new company seal and updated stationary to be ordered. All issued share certificates should also be re-issued to reflect the new company name.
DO NOT DELAY!! Remember, the rules relating to DACs will apply to private companies limited by shares for the duration of the transition period or until the company opts to convert to an LTD status. In order to avail of the benefits of being an LTD under the Act (e.g. one director, unlimited corporate capacity, dispense with holding an AGM), it is important for directors and shareholders to be pro-active and convert as soon as possible.

OTHER KEY PROVISIONS

A company of any type can be incorporated with a single member.

Shareholders will be able to pass majority written resolutions – at present only unanimous written resolutions are permitted. However, written resolutions which are not unanimous will subject to certain cooling off periods before they can be effective.

Additional responsibility for directors to confirm in directors report that all relevant audit information of which they are aware has been conveyed to the auditors – Will be an offence for a director to knowingly or recklessly make a false statement in this regard.

All company secretaries must have requisite skill or resources necessary to enable them to perform the role. To the extent that there is any doubt in relation to this point, consideration should be given to requiring the company secretary to attend a course to refine their skills.

The rules in relation to registering charges against a company in the CRO will change with effect from 1 June. There will now be a two stage process for registering particulars of a charge.

New arrangements are introduced to make it easier to merge companies or split the business of an Irish company. The success of these provisions will largely depend on the tax treatment of such mergers and divisions.

Strike off procedure for dormant companies with negligible assets or liabilities has been formalised under the Act. In some cases, this may be a much more economic way to dissolve a company compared to engaging a liquidator to wind up a company.

Offences under the Act categorised from 1 to 4 (with 1 being the most serious and carrying a maximum fine of €500,000 and/or up to 10 years in prison).

Remember that this article is for information purposes only and does not constitute legal advice. Specific advice should always be taken in given situations.