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Countdown to the Companies Act 2014: Day1


Monday, May 18, 2015

There are now 10 working days until the Companies Act 2014 (the “Act”) comes into force in Ireland. The Act will radically change the existing legal framework for companies in Ireland. Over the next 10 days, we will provide you with a snapshot of 10 key changes to consider in advance of the Act commencing on June 1st.  

 

Day 1:  We take a look at one of the major changes under the Act; the two new company types known as “LTDs” and “DACs” and how the conversion process works.

All existing private companies limited by shares will be required to change to a new company type. The Act introduces a “conversion” process under which all private companies limited by shares must elect whether to opt into the new regime for a private company limited by shares (called an “LTD”) or opt out of that regime by becoming a designated activity company (“DAC”), or some other type of company that the Act permits.

  • LTD – The LTD will be a new form of simplified private company limited by shares and will have a single constitutional document. This single constitutional document will replace the traditional memorandum and articles of association. The LTD will have no objects clause and the concepts of “ultra vires” (an act outside the legal powers of a company) or limited corporate capacity will no longer apply.
  • DAC – The DAC will more closely resemble the existing form of private limited company, will continue to have a memorandum and articles of association, the requirement for at least 2 directors and an objects clause. The doctrine of ultra vires will therefore still apply to this company type.

How to convert?

Following commencement of the Act, there will be an 18 month “transition period”, during which private companies limited by shares can take action to become the type of company they choose. If a private company limited by shares does nothing, then by default it will become an LTD at the end of the transition period.

Converting to an LTD: from 1 June 2015 – 30 November 2016

  1. Conversion by members requires: (i) a special resolution; (ii) a new constitution; and (iii) filing of a form N1 at CRO. This approach provides more flexibility than option 2 below and is therefore the recommended approach.
  2. Conversion by directors requires: (i) new form constitution; and (ii) file form N1 at CRO.

Converting to a DAC: from 1 June 2015 – 31 August 2016

  1. Requirements: (i) a members’ ordinary resolution; (ii) a new constitution; and (iii) filing of a form N2.
  2. Note: Members holding 25% of voting share capital can serve notice on company prior to 31 August 2016 requiring conversion and can apply for court order, if request not complied with.

What if you do nothing? This is not recommended.

  1. Following the transition period, existing private companies limited by shares will become an LTD with a “deemed” single document constitution. This is not recommended as the filed memorandum and articles will not represent the actual constitution leading to confusion and disputes will be possible.
  2. Failure to act by the directors will amount to deemed oppressive behaviour, actionable by members where the remedies include an order to purchase their shares, compensation or such other order as the court sees fit. Creditors will also be able to take court action.
  3. Your company may be missing the opportunity to avail of LTD regime during the transition period.
  4. After the transition period, the LTD model will apply to existing private companies limited by shares – this may not be appropriate for your company.
  5. Credit institution and insurance undertakings would be in breach of company law and regulatory requirements (as they are prohibited from being an LTD).

Comment

The decision to register as LTD or DAC will depend on the circumstances for each company and the purpose for which it is incorporated. It is anticipated that most companies will become LTDs. As the LTD will not have an objects clause in its constitution, it is likely that the DAC model will be preferred by joint venture companies or specific structures that seek to place restrictions on the permitted activities of a DAC via its objects clause. Aside from the issue of an objects clause, there are a variety of issues to consider. These are set out in the table below.

 

LTDDAC
Company Name It must end with Limited/LTD or the Irish equivalent.It must end with Designated Activity Company/DAC or Irish equivalent.
Company TypePrivate company limited by shares.Private company either (a) limited by shares or (b) limited by guarantee, having a share capital.
Memorandum and Articles of Association One single document called a “constitution” will replace the current memorandum & articles of association.The memorandum and articles of association to remain. Will be known as a  “constitution”.
Objects Clause No objects clause. Concept of “ultra vires” will no longer apply and the LTD will have unlimited corporate capacity and the same capacity as a natural person.The objects to remain. Therefore “ultra vires” concept will continue to apply. Note:  third parties dealing with a DAC in good faith will not be prejudiced if the company exceeds its capacity as stated in its objects clause.
Share Capital Will have an issued share capital but does not have to have an authorised share capital.Must have both an authorised and issued share capital.
Directors Can avail of the opportunity to have one single director. Note: the secretary cannot be the same person as the single director.2 director minimum required.
Annual General Meeting (“AGM”)Can dispense with holding an AGM entirely irrespective of the number of shareholders.Can only dispense with holding an AGM if it is a single member company.
Listing of Securities Cannot list, or have admitted to trading, any securities (debt or equity).Possible to list debt securities.
Written ResolutionsMay pass majority written resolutions.May pass majority written resolutions unless the constitution provides otherwise.
Audit ExemptionPossible to claim audit exemption.Possible to claim audit exemption.
Name change and practical knock-on effectsNo name change required.As the DAC will require a name change, companies should consider practical knock-on effects such as the requirement to change stationery and signage, website, company seal etc.

 

The content of this article is provided for information purposes and does not constitute legal or other advice

 


Author

Eoghan Doyle

PARTNER


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