Wednesday, May 20, 2015
There are now 8 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. Each day, we will provide you with a snapshot of key changes to consider in advance of the Act commencing on June 1st.
For the first time in Irish law, the duties of company directors have been codified in the Companies Act 2014 (the Act). Up to now, such duties were largely absent from legislation and derived from UK and Irish case law, in some cases hundreds of years old. This step echoes the codification undertaken in the UK in their 2006 Companies Act.
The general duties of directors are wide-ranging and include:
The Act also codifies directors’ fiduciary duties, meaning duties to act in the interests of the company. These duties arise due to the special relationship between the director and a company, pursuant to which trust and confidence are considered to be essential. The headline fiduciary duties in the Act include:
In addition to general and fiduciary duties set out in the Act, directors also remain subject to various other statutory duties, such as those arising under the Data Protection Acts.
Effect of breach of directors’ duties
Directors who are found to be in breach of their fiduciary duties will be liable to account to the company for any gains accrued, or indemnify the company for losses resulting from such breach. A court may grant relief from liability where it is satisfied that a director acted honestly and reasonably at all times. It is important to note that a breach of a director’s fiduciary duty will not invalidate any contract, or affect the ability of the company to enforce such contract, except that the director in breach may be unable to enforce such contract.
Restriction and disqualification of directors
The Act retains the concepts of restriction and disqualification of directors for failure to comply with company law, introduced in the Companies Act 1990. Of note in relation to restriction, is that it is no longer a sufficient defence that the director acted reasonably and responsibly in his dealings with the company. It must also be demonstrated that a director, when requested to do so by the liquidator, cooperated as far as could reasonably be expected in relation to the winding up of the company. A key innovation in relation to restriction and disqualification is the undertakings procedure. The Director of Corporate Enforcement will now be able to request a director to accept a restriction or disqualification order as an undertaking, enabling the High Court to be bypassed. Another new feature in relation to disqualification is the requirement to notify the Registrar of Companies that a director has been disqualified in another jurisdiction.
The Act streamlines all company law offences by categorising them into Categories 1, 2, 3 and 4, depending on their severity (with Category 1 being reserved for the most serious offences). Penalties and notification requirements have been increased. For example, a director will face up to 10 years’ imprisonment and/or a €500,000 fine if found guilty of a Category 1 offence relating to the keeping of adequate accounting records, an offence which currently carries a significantly lower penalty under the Companies Act 1990. Auditors will have to notify all Category 1 and 2 offences to the Director of Corporate Enforcement, where previously this was only required for indictable offences.
The Act brings in the requirement for compliance statements for directors of PLCs and private companies meeting certain financial thresholds. Such directors will be required to produce a statement confirming compliance with ‘relevant obligations’ in company law and tax law, or explain why they are not providing such a statement. Please see our bulletin on Directors’ Compliance Statements.
The Act has brought about welcome reforms as regards directors’ duties. The codification of duties should provide clarity in the form of a single reference point for company directors considering their duties to the company, and it is hoped the requirement to provide a compliance statement will focus attention on such duties.
It will be interesting to see if the categorisation of offences and the increased penalties and reporting requirements as regards offences will result in an increase in prosecutions for director’s non-compliance with company law. As ever, much will depend on the approach taken by the Director of Corporate Enforcement and the High Court, and their resources. It is to be hoped that the introduction of the undertakings procedure for restriction and disqualification orders will result in a more streamlined process for such orders and shift focus to other areas of company law compliance.
The content of this article is provided for information purposes and does not constitute legal or other advice.