Tuesday, May 19, 2015
There are now 9 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.
Directors Compliance Statements
The concept of a requirement for directors to file a directors’ compliance statement is not new. It was first legislated for in the Companies (Auditing and Accounting) Act 2003 but the section was never commenced due to significant industry lobbying and recommendations from the Company Law Review Group that the requirements were disproportionate and excessively onerous. The approach taken under the Act relaxes some of the requirements under the 2003 Act, including the fact that it is a “comply or explain” requirement.
Who does it apply to?
The Act requires the directors of all PLCs regardless of size (other than investment companies), LTDs, DACs and guarantee companies of a certain size (balance sheet > €12.5m and turnover > €25m) to prepare a statement of compliance, called a Directors’ Compliance Statement. Unlimited companies are not subject to this requirement.
What is required?
Section 225 (2) requires four things to be covered in the directors’ report
What are “relevant obligations”?
“Relevant obligations” in relation to a company, means the obligations under (a) the Act, where failure to comply with any such obligation would (were it to occur) be (i) a category 1 offence or a category 2 offence; (ii) a serious market abuse offence or serious prospectus offence; and (b) “tax law”.
It is worth noting that only two sections create category 1 offences of which there are 11, e.g. s.281 and s.286 – serious failures or breaches relating to the obligation to keep adequate accounting records.
There are 65 sections that create category 2 offences of which there are 95: e.g. s.239 (loans etc. to directors and connected persons).
The offences referred to as a serious market abuse offence or serious prospectus offence will not apply to LTDs but may be relevant to other company types that have listed securities.
What are the consequences of a breach?
A breach of section 225(2) will amount to a “Category 3” offence, which includes the possibility of imprisonment of up to 6 months and a fine of up to €5,000 for directors in default.
Given the very broad scope of “relevant obligations” as defined in the Act and the potential for personal liability, directors would be forgiven for thinking that the requirements in this area represent a daunting challenge.
As noted, the requirement to produce a compliance statement is on the basis of a “comply or explain” rule. In other words, it is not mandatory but where section 225 is applicable to a company, the directors will have to explain in their report why a compliance statement is not in place. Such an approach may not be appreciated by the company’s stakeholders.
Directors can take a degree of comfort from that the fact that section 225 envisages assistance from third parties. The requirement to put in place “appropriate arrangements or structures” includes seeking the advice of persons employed in the company or third party legal or tax advisors and such persons must have the “requisite knowledge and experience to advise the company on compliance with its relevant obligations”. Directors will need to ensure that transactions are closely monitored for legal and tax compliance on an ongoing basis. To do so, directors should ensure that throughout the financial year, accurate board minutes are kept and that transactions (and the advice relating to such transactions) are properly documented.
Finally, it is worth noting that companies in the UK are not obliged to produce a Directors’ Compliance Statement. This is something that may affect Ireland’s competitiveness in future as a place to do business.
The content of this article is provided for information purposes and does not constitute legal or other advice.